GRANITE FALLS ENERGY, LLC General
We prepared the following discussion and analysis to help readers better
understand our financial condition, changes in our financial condition, and
results of operations for the fiscal year ended
Overview Our business consists primarily of the production and sale of ethanol and its co-products (wet, modified wet and dried distillers' grains, corn oil and corn syrup) locally, and throughout the continentalU.S. Our production operations are carried out at GFE's plant located inGranite Falls, Minnesota and HLBE's ethanol plant nearHeron Lake, Minnesota . The GFE plant has an annual production capacity of approximately 63 million gallons of denatured ethanol, but is currently permitted to produce up to 70 million gallons of undenatured ethanol on a twelve month rolling sum basis. The HLBE plant has an approximate annual production capacity of 65 million gallons of denatured ethanol, but is currently permitted production capacity to produce approximately 72 million gallons of undenatured ethanol on a twelve-month rolling sum basis. We intend to continue working toward increasing production to take advantage of the additional production allowed pursuant to our permits as long as we believe it is profitable to do so. BeginningDecember 11, 2019 , HLBE also owns, indirectly, a 100% interest in Agrinatural, which is a natural gas distribution and sales company located inHeron Lake, Minnesota that owns approximately 190 miles of natural gas pipeline and provides natural gas to HLBE's ethanol plant and other commercial, agricultural and residential customers through a connection with the natural gas pipeline facilities ofNorthern Border Pipeline Company . Agrinatural's revenues are generated through natural gas distribution fees and sales. AtOctober 31, 2019 , HLBE held a 73% controlling interest in Agrinatural. Reportable Operating Segments Our revenues from operations come from three primary sources: sales of fuel ethanol, sales of distillers' grains and sales of corn oil at GFE's ethanol plant and HLBE's ethanol plant. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Therefore, based on the criteria set forth in ASC 280 we have determined that based on the nature of the products and production process and the expected financial results, the Company's operations at its ethanol plant and HLBE's plant, including the production and sale of ethanol and its co-products, are aggregated into one reporting segment. Additionally, we also realize relatively immaterial revenue from natural gas pipeline operations at Agrinatural, HLBE's majority owned subsidiary. The intercompany transactions between HLBE and Agrinatural resulting from the firm natural gas transportation agreement between the two companies are eliminated in consolidation. After intercompany eliminations, revenues from Agrinatural represent less than less than 1% of our consolidated revenues and have little to no impact on the overall performance of the Company. Therefore, our management does not separately review Agrinatural's operating performance information. Rather, management reviews Agrinatural's natural gas pipeline financial data on a consolidated basis with our ethanol production operations segment. Additionally, management believes that the presentation of separate operating performance information for Agrinatural's natural gas pipeline operations would not provide meaningful information to a reader of the Company's audited consolidated financial statements.
We currently do not have or anticipate that we will have any other lines of business or other significant sources of revenue other than the sale of ethanol and its co-products, which include distillers' grains and non-edible corn oil.
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Plan of Operations Through
Over the next year we will continue our focus on operational improvements at our plants. These operational improvements include exploring methods to improve ethanol yield per bushel and increasing production output at our plants, continued emphasis on safety and environmental regulation, reducing our operating costs, and optimizing our margin opportunities through prudent risk-management policies.
The Company, and the ethanol industry as a whole, experienced significant adverse conditions throughout most of 2018 and into 2019 as a result of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels. These factors resulted in prolonged negative operating margins, significantly lower cash flow from operations and substantial net losses. We expect to have sufficient cash generated by continuing operations and availability on our credit facility to fund our operations at our plants. However, should we experience unfavorable operating conditions in the ethanol industry that prevent us from profitably operating our plants, we may need to seek additional funding. In addition, we expect to continue to conduct routine maintenance and repair activities at the ethanol plants to maintain current plant infrastructure, as well as some small capital projects to improve operating efficiency. We anticipate using cash we generate from our operations and our credit facilities for each plant to finance these plant upgrade projects.
Trends and Uncertainties Impacting Our Operations
The principal factors affecting our results of operations and financial conditions are the market prices for corn, ethanol, distillers' grains and natural gas, as well as governmental programs designed to create incentives for the use of corn-based ethanol. Other factors that may affect our future results of operation include those risks and factors discussed in this report at "PART I - Item 1. Business" and "PART I - Item 1A. Risk Factors". Our operations are highly dependent on commodity prices, especially prices for corn, ethanol, distillers' grains and natural gas. As a result, our operating results can fluctuate substantially due to volatility in these commodity markets. The price and availability of corn is subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, yields, domestic and global stocks, weather, federal policy and foreign trade. Natural gas prices are influenced by severe weather in the summer and winter and hurricanes in the spring, summer and fall. Other factors include North American exploration and production, and the amount of natural gas in underground storage during injection and withdrawal seasons. Ethanol prices are sensitive to world crude oil supply and demand, domestic gasoline supply and demand, the price of crude oil, gasoline and corn, the price of substitute fuels and octane enhancers, refining capacity and utilization, government regulation and incentives and consumer demand for alternative fuels. Distillers' grains prices are impacted by livestock numbers on feed, prices for feed alternatives and supply, which is associated with ethanol plant production. We expect our ethanol plants to produce approximately 2.8 gallons of denatured ethanol for each bushel of grain processed in the production cycle. Because the market price of ethanol is not always directly related to corn, at times ethanol prices may lag price movements in corn prices and corn-ethanol price spread (the difference between the price per gallon of ethanol and the price per bushel of grain divided by 2.8) may be tightly compressed or negative. If the corn-ethanol spread is compressed or negative for sustained period, it is possible that our operating margins will decline or become negative and our ethanol plants may not generate adequate cash flow for operations. In such cases, we may reduce or cease production at our ethanol plants in order to minimize our variable costs and optimize cash flow. For the fiscal year endedOctober 31, 2019 compared to fiscal year endedOctober 31, 2018 , our average price per gallon of ethanol sold increased by approximately 2.4%. However, the average price per gallon of ethanol sold for the fiscal year endedOctober 31, 2019 was approximately 9.4% lower than the average price per gallon of ethanol sold for the fiscal year endedOctober 31, 2017 . There has been decreased production of ethanol, and gasoline demand has been flat. Additionally, the increase in approved economic hardship exemptions from the RVOs has recently effectively lowered the RVOs by a significant number of gallons of domestic demand. If this trend continues, it may continue to negatively impact theU.S. ethanol market. Management believes that the ethanol outlook moving into fiscal year 2020 will remain relatively flat and our margins will remain tight due to higher corn prices and relatively flat gasoline demand. In recent years, exports of ethanol have been increasing; however, exports fell slightly during the 2019 fiscal year compared to the 2018 fiscal year. Export demand for ethanol is less consistent compared to domestic demand which can 37
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lead to ethanol price volatility. During 2017,Brazil andChina adopted import quotas and/or tariffs on the importation of ethanol which are expected to continue to negatively impactU.S. exports.China , the number three importer ofU.S. ethanol in 2016, has imported negligible volumes since imposing a 30% tariff onU.S. andBrazil fuel ethanol onJanuary 1, 2017 (which was subsequently increased to 45% inApril 2018 , and then again increased to 70% inJuly 2018 ). OnSeptember 1, 2017 ,Brazil's Chamber of Foreign Trade imposed a 20% tariff onU.S. ethanol imports in excess of 150 million liters, or 39.6 million gallons, per quarter. The tariff was rewnewed inSeptember 2019 , but the import quota was raised to 187.5 million liters, or 49.5 million gallons, per quarter.U.S. exports toBrazil have decreased from our 2018 fiscal year to our 2019 fiscal year. This tariff may continue to have a negative impact on the export market demand and prices for ethanol produced inthe United States . Any decrease inU.S. ethanol exports could adversely impact the market price of ethanol unless domestic demand increases or foreign markets are developed. Corn prices trended upward during fiscal year 2019, but began trending slightly downward during the fourth quarter of fiscal year 2019. The latest estimates of supply and demand provided by theU.S. Department of Agriculture ("USDA") estimate the 2018-19 ending corn stocks at approximately 2.1 billion bushels, and project the 2019-2020 corn supply at approximately 15.8 billion bushels, which is less than the 2018-2019 supply, with corn consumption for ethanol and co-products steady at approximately 5.3 billion bushels, suggesting higher corn prices into the first half of fiscal 2020. Weather, world supply and demand, current and anticipated stocks, agricultural policy and other factors can contribute to volatility in corn prices. If corn prices rise, it will have a negative effect on our operating margins unless the price of ethanol and distillers grains out paces rising corn prices. Distillers' grains prices increased in 2019 over 2018, due to decreased supply as a result of decreased production. Top export markets includeMexico ,Japan ,Canada ,Colombia ,China , andSouth Korea . Of note, however, is that export demand fromChina , historically one of the largest importers ofU.S. produced distillers grains, has significantly declined. In 2017,China imposed significant anti-dumping and anti-subsidies on distillers' grains imported from theU.S. which resulted in significant declines in exports ofU.S. distillers' grains toChina . The anti-dumping tariffs range from 42.2% to 53.7% and the anti-subsidy tariffs range from 11.2% to 12%. The imposition of these duties has resulted in a significant decline in demand from this top importer requiringU.S. producers to seek out alternative markets. Exports toChina are substantially below the pre-tariff export levels. There is no guarantee that distillers' grains exports toChina will return to pre-tariff levels. Management anticipates distillers' grains prices will remain steady during our 2020 fiscal year, unless additional domestic demand or other foreign markets develop. Domestic demand for distillers' grains could remain low if corn prices decline and end-users switch to lower priced alternatives. Although our corn oil prices improved slightly year over year, corn oil prices as a whole have been adversely impacted during the last few years by oversupply of corn oil due to the substantial increase in corn oil production. Additionally, corn oil prices have been impacted by the oversupply of soybeans and the resulting lower price of soybean oil which competes with corn oil for biodiesel production. InDecember 2019 , legislation was signed extending the$1.00 per-gallon biodiesel blender tax credit retroactively toJanuary 1, 2018 , and throughDecember 31, 2022 . Given the inherent volatility in ethanol, distillers' grains, non-food grade corn oil, grain and natural gas prices, we cannot predict the likelihood that the spread between ethanol, distillers' grains, non-food grade corn oil and grain prices in future periods will be consistent compared to historical periods. 38 Table of Contents
Results of Operations for the Fiscal Years Ended
The following table shows the results of our operations and the percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our audited consolidated statements of operations for the fiscal years endedOctober 31, 2019 and 2018 (amounts in thousands): Fiscal Year Ended October 31, 2019 2018 Statement of Operations Data Amount % Amount % Revenue$ 208,777 100.0 %$ 210,312 100.0 % Cost of Goods Sold 212,560 101.8 % 200,727 95.4 % Gross Profit (Loss) (3,783) (1.8) % 9,585 4.6 % Operating Expenses 6,493 3.1 % 6,284 3.0 % Operating Income (Loss) (10,276) (4.9) % 3,301 1.6 % Other Income (Expense), net (745) (0.4) %
75 - %
Net Income (Loss) (11,021) (5.3) %
3,376 1.6 %
Less: Net (Income) Loss Attributable
to Non-controlling Interest 2,630 1.3 %
(512) (0.2) %
Net Income (Loss) Attributable to
Granite Falls Energy, LLC$ (8,391) (4.0) %$ 2,864 1.4 % Revenues
Our revenues from operations come from three primary sources: sales of fuel
ethanol, sales of distillers' grains and sales of corn oil. Our remaining
consolidated revenues are attributable to miscellaneous other revenue from
incidental sales of corn syrup at HLBE's plant and revenues generated from
natural gas pipeline operations at Agrinatural, of which HLBE owned a 73.0%
controlling interest at
The following table shows the sources of our consolidated revenue and the
approximate percentage of revenues from those sources to total revenues in our
audited consolidated statements of operations for the fiscal year ended
Fiscal Year Ended October 31, 2019
Revenue Sources Sales Revenue % of Total Revenues
Ethanol sales $ 161,590 77.4 %
Distillers' grains sales 37,046 17.8 %
Corn oil sales 7,586 3.6 %
Miscellaneous other 2,555 1.2 %
Total Revenues $ 208,777 100.0 %
The following table shows the sources of our consolidated revenue and the
approximate percentage of revenues from those sources to total revenues in our
audited consolidated statements of operations for the fiscal year ended
Fiscal Year Ended October 31, 2018
Revenue Sources Sales Revenue % of Total Revenues
Ethanol sales $ 159,945 76.0 %
Distillers' grains sales 39,861 19.0 %
Corn oil sales 8,240 3.9 %
Miscellaneous other 2,266 1.1 %
Total Revenues $ 210,312 100.0 %
Our total consolidated revenues decreased by approximately 0.7% for the fiscal
year ended October 31, 2019 , as compared to the fiscal year 2018, primarily due
to decreases in production of ethanol, distillers' grains, and corn oil and a
decrease in average price received for our distillers' grains, which were
partially mitigated by an increase in average price received for our ethanol and
corn oil.
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The following table reflects quantities of our three primary products sold and
the average net prices received for the fiscal years ended October 31, 2019 and
2018 (quantities in thousands):
Fiscal Year Fiscal Year
Ended October 31, 2019 Ended October 31, 2018
Product Quantity Sold Avg. Net Price Quantity Sold Avg. Net Price
Ethanol (gallons) 128,262 $ 1.26 129,935 $ 1.23
Distillers' grains 289 $ 128.25 309 $ 129.14
(tons)
Corn oil (pounds) 30,907 $ 0.25 34,606 $ 0.24
Ethanol
Total revenues from sales of ethanol increased by approximately 1.0% for fiscal
year 2019 compared to the fiscal year 2018 due primarily to an approximately
2.4% increase in the average price per gallon we received for our ethanol,
mitigated slightly by an approximately 1.3% decrease in the volumes sold from
period to period. We sold fewer ethanol gallons during fiscal year 2019 as
compared to fiscal year 2018 primarily due to decreases in ethanol production at
the GFE and HLBE plants. Ethanol production was lower at our plants compared to
the prior year as a result of slight production slowdowns due to lower corn
supply availability. We are currently operating our plants above their
respective nameplate capacities. Management anticipates relatively stable
ethanol production and sales during our 2020 fiscal year.
The increase in the price of ethanol was due to decreased ethanol stocks
compared to the fiscal year ended
We occasionally engage in hedging activities with respect to our ethanol sales. We recognize the gains or losses that result from the changes in the value of these derivative instruments in revenues as the changes occur. AtOctober 31, 2019 , GFE had fixed and basis contracts for forward ethanol sales for various delivery periods throughDecember 2019 valued at approximately$14.9 million , and HLBE had fixed and basis contracts for forward ethanol sales for various delivery periods throughDecember 2019 valued at approximately$13.5 million . Separately, ethanol derivative instruments resulted in a gain of approximately$220,000 during the fiscal year endedOctober 31, 2019 , and a gain of approximately$108,000 during the fiscal year endedOctober 31, 2018 . Distillers' Grains Total revenues from sales of distillers' grains decreased approximately 7.1% for fiscal year 2019 compared to fiscal year 2018. The decrease in distillers' grains revenues is primarily attributable to an approximately 6.5% decrease in the tons of distillers' grains sold during fiscal year 2019 compared to fiscal year 2018, coupled with an approximately 0.7% decrease in the average price per ton we received for our distillers' grains from period to period. The decrease in the market price of distillers' grains is due to decreased demand and lower prices in soybean meal, which is a competitive product to distillers' grains. The decrease in total tons of distillers' grains sold during fiscal year 2019 compared to the fiscal year 2018 was due to an approximately 10.6% decrease in distillers' grains produced at HLBE's plant and an approximately 2.0% decrease in distillers' grain production at the GFE plant. The decreases in tons produced at both the GFE and HLBE plants was due to overall decreased production at both plants, in addition to improved efficiencies of the conversion of corn into ethanol, leading to less production of co-products such as distillers' grains at the GFE plant. Management anticipates relatively stable distillers' grains production going forward. AtOctober 31, 2019 , GFE had forward contracts to sell approximately$972,000 of distillers' grains for delivery throughNovember 2019 , and HLBE had forward contracts to sell approximately$1.3 million of distillers' grains for delivery throughJanuary 2020 . Corn Oil Separating the corn oil from our distillers' grains decreases the total tons of distillers' grains that we sell; however, our corn oil has a higher per ton value than our distillers' grains. Total revenues from sales of corn oil decreased by approximately 7.9% for fiscal year 2019 compared to the fiscal year 2018. This decrease is attributable to an approximately 10.7% decrease in pounds sold from period to period, mitigated slightly by an approximately 3.1% increase in the average price per pound of corn oil sold from period to period. 40 Table of Contents Management attributes the decrease in corn oil sales during fiscal year 2019 as compared to 2018 primarily to decreased production at the plants. Management expects our corn oil production will be relatively stable going forward. Although management believes that corn oil prices will remain relatively steady, prices may decrease if there is an oversupply of corn oil production resulting from increased production rates at ethanol plants or if biodiesel producers begin to utilize lower-priced alternatives such as soybean oil or if biodiesel blenders' tax credit is not renewed and biodiesel production declines. AtOctober 31, 2019 , GFE had forward corn oil sales contracts to sell approximately$333,000 for delivery throughNovember 2019 , and HLBE had forward corn oil sales contracts to sell approximately$468,000 for delivery throughDecember 2019 . Cost of Goods Sold Our cost of goods sold increased by approximately 5.9% for the fiscal year endedOctober 31, 2019 , as compared to the fiscal year endedOctober 31, 2018 . Cost of goods sold, as a percentage of revenues, also increased to approximately 101.8% for the fiscal year endedOctober 31, 2019 , as compared to approximately 95.4% for the 2018 fiscal year due to a narrower margin between the price of ethanol and the price of corn. Approximately 90% of our total costs of goods sold is attributable to ethanol production. As a result, the cost of goods sold per gallon of ethanol produced for the fiscal year endedOctober 31, 2019 was approximately$1.49 per gallon of ethanol sold compared to approximately$1.39 per gallon of ethanol produced for the fiscal year endedOctober 31, 2018 . The following table shows the costs of corn and natural gas (our two largest single components of costs of goods sold), as well as all other components of cost of goods sold, which includes processing ingredients, electricity, and wages, salaries and benefits of production personnel, and the approximate percentage of costs of those components to total costs of goods sold in our audited consolidated statements of operations for the fiscal year endedOctober 31, 2019 (amounts in thousands): Fiscal Year Ended October 31, 2019 % of Cost of Cost Goods Sold (in thousands) Corn costs $ 156,120 73.4 % Natural gas costs 11,867 5.6 % All other components of costs of goods sold 44,573 21.0 % Total Cost of Goods Sold $ 212,560 100.0 % The following table shows the costs of corn, natural gas and all other components of cost of goods sold and the approximate percentage of costs of those components to total costs of goods sold in our audited consolidated statements of operations for the fiscal year endedOctober 31, 2018 (amounts in thousands): Fiscal Year Ended October 31, 2018 % of Cost of Cost Goods Sold (in thousands) Corn costs $ 143,401 71.4 % Natural gas costs 12,028 6.0 % All other components of costs of goods sold 45,298 22.6 % Total Cost of Goods Sold $ 200,727 100.0 % Corn Costs Our cost of goods sold related to corn increased approximately 8.9% for our 2019 fiscal year compared to our 2018 fiscal year, due primarily to an approximately 12.6% increase in the average price per bushel paid for corn from period to period, which was slightly offset by an approximately 3.3% decrease in the number of bushels of corn processed from period to period. The corn-ethanol price spread (the difference between the price per gallon of ethanol and the price per bushel of grain divided by 2.8) for our 2019 fiscal year was approximately$0.12 less than the corn-ethanol price spread we experienced for same period of 2018. 41 Table of Contents The increase in our cost per bushel of corn was primarily related to higher market corn prices due to adverse weather conditions and strong demand. Due to projected decreased corn stocks and strong demand, management anticipates that corn prices will remain steady during our first half of the 2020 fiscal year.
For our fiscal years ended
From time to time we enter into forward purchase contracts for our corn purchases. AtOctober 31, 2019 , GFE had forward corn purchase contracts for approximately 3.3 million bushels for deliveries throughDecember 2022 and HLBE had forward corn purchase contracts for approximately 740,000 bushels for deliveries throughDecember 2021 . Comparatively, atOctober 31, 2018 , GFE had forward corn purchase contracts for approximately 3.2 million bushels for various delivery periods throughDecember 2021 , and HLBE had forward corn purchase contracts for approximately 2.3 million bushels for various delivery periods throughOctober 2019 . Our corn derivative positions resulted in gains of approximately$1.1 million and$2.1 million for the fiscal years endedOctober 31, 2019 and 2018, respectively, which decreased cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur. As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged. Natural Gas Costs For our 2019 fiscal year, we experienced a decrease of approximately 1.3% in our overall natural gas costs compared to our 2018 fiscal year. Management attributes the slight decrease in price to increased natural gas supply. However, management also anticipates higher natural gas prices during the winter months due to the typical seasonal natural gas cost increases experienced during the winter months. From time to time we enter into forward purchase contracts for our natural gas purchases. Our natural gas derivative positions resulted in no gain or loss for the fiscal year endedOctober 31, 2019 and a loss of approximately$1,600 for the fiscal year endedOctober 31, 2018 , which had no effect on costs of goods sold and increased cost of goods sold, respectively. We recognize the gains or losses that result from the changes in the value of our derivative instruments from natural gas in cost of goods sold as the changes occur. Operating Expense Operating expenses include wages, salaries and benefits of administrative employees at the plants, insurance, professional fees and similar costs. Operating expenses as a percentage of revenues rose slightly to 3.1% of revenues for our fiscal year endedOctober 31, 2019 compared to 3.0% of revenues for our fiscal year endedOctober 31, 2018 . This increase is primarily due to lower revenues. Our efforts to optimize efficiencies and maximize production may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses generally do not vary with the level of production at the plant, we expect our operating expenses to remain relatively steady throughout the 2020 fiscal year. Operating Income (Loss) Our operating income decreased by approximately$13.6 million for our fiscal year endedOctober 31, 2019 compared to fiscal year 2018. This decrease resulted largely from increased prices for corn and and the narrowing of margins of our ethanol production. 42 Table of Contents
Other Income (Expense), Net
We had net other expense for our fiscal year endedOctober 31, 2019 of approximately$745,000 compared to net other income of approximately$75,000 for our fiscal year endedOctober 31, 2018 . We had less other income during fiscal year 2019 compared to fiscal year 2018 due primarily to an approximately$672,000 net loss on investments, increased interest expense, and less patronage received during the 2019 fiscal year compared to the 2018 fiscal year.
Results of Operations for the Fiscal Years Ended
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our audited consolidated statements of operations for the fiscal years endedOctober 31, 2018 and 2017 (amounts in thousands): Fiscal Year Ended October 31, 2018 2017 Statement of Operations Data Amount % Amount % Revenue$ 210,312 100.0 %$ 215,782 100.0 % Cost of Goods Sold 200,727 95.4 % 194,683 90.2 % Gross Profit 9,585 4.6 % 21,099 9.8 % Operating Expenses 6,284 3.0 % 6,168 2.9 % Operating Income 3,301 1.6 % 14,931 6.9 % Other Income, net 75 - % 190 0.1 % Net Income 3,376 1.6 % 15,121 7.0 %
Less: Net Income Attributable to
Non-controlling Interest (512) (0.2) %
(3,636) (1.7) %
Net Income Attributable to Granite
Falls Energy, LLC$ 2,864 1.4 %$ 11,485 5.3 % Revenues
The following table shows the sources of our consolidated revenue and the
approximate percentage of revenues from those sources to total revenues in our
audited consolidated statements of operations for the fiscal year ended
Fiscal Year Ended October 31, 2018
Revenue Sources Sales Revenue % of Total Revenues
Ethanol sales $ 159,945 76.0 %
Distillers' grains sales 39,861 19.0 %
Corn oil sales 8,240 3.9 %
Miscellaneous other 2,266 1.1 %
Total Revenues $ 210,312 100.0 %
The following table shows the sources of our consolidated revenue and the
approximate percentage of revenues from those sources to total revenues in our
audited consolidated statements of operations for the fiscal year ended
Fiscal Year Ended October 31, 2017
Revenue Sources Sales Revenue % of Total Revenues
Ethanol sales $ 175,073 81.1 %
Distillers' grains sales 29,238 13.6 %
Corn oil sales 9,702 4.5 %
Miscellaneous other 1,769 0.8 %
Total Revenues $ 215,782 100.0 %
Our total consolidated revenues decreased by approximately 2.5% for the fiscal
year ended October 31, 2018 , as compared to the fiscal year 2017, primarily due
to decreases in the average price realized for our ethanol and corn oil, which
were partially mitigated by increases in average price realized for our
distillers' grains.
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The following table reflects quantities of our three primary products sold and
the average net prices received for the fiscal years ended October 31, 2018 and
2017 (quantities in thousands):
Fiscal Year Fiscal Year
Ended October 31, 2018 Ended October 31, 2017
Product Quantity Sold Avg. Net Price Quantity Sold Avg. Net Price
Ethanol (gallons) 129,935 $ 1.23 126,421 $ 1.39
Distillers' grains 309 $ 129.14 306 $ 95.57
(tons)
Corn oil (pounds) 34,606 $ 0.24 35,240 $ 0.28
Ethanol
Total revenues from sales of ethanol decreased by approximately 8.6% for fiscal
year 2018 compared to the fiscal year 2017 due primarily to an approximately
11.1% decrease in the average price per gallon we received for our ethanol,
mitigated slightly by an approximately 2.8% increase in the volumes sold from
period to period. We sold more ethanol gallons during fiscal year 2018 as
compared to fiscal year 2017 primarily due to the timing of ethanol shipments
and increases in ethanol production at the GFE and HLBE plants. Ethanol
production was higher at our plants compared to the prior year due to capital
improvements we are making at our plants designed to increase ethanol
production.
Our ethanol derivative instruments resulted in a gain of approximately
Distillers' Grains Total revenues from sales of distillers' grains increased approximately 36.3% for fiscal year 2018 compared to fiscal year 2017. The decline in distillers' grains revenues is primarily attributable to an approximately 35.1% increase in the average price per ton we received for our distillers' grains from period to period, coupled with an approximately 0.9% increase in the tons of distillers' grains sold during fiscal year 2018 compared to fiscal year 2017. The increase in the market price of distillers' grains was due to higher demand, particularly fromVietnam , theEuropean Union ,Thailand , andSouth Korea . The increase in total tons of distillers' grains sold during fiscal year 2018 compared to the fiscal year 2017 was due to an approximately 1.4% increase in distillers' grains produced at HLBE's plant, offset by an approximately 1.0% decrease in distillers' grains production at the GFE plant. The decrease in tons produced at the GFE plant was due primarily to improved efficiencies of converting corn into ethanol which leads to less production of co-products such as distillers' grains. GFE also increased the amount of corn oil it was extracting from our distillers' grains during our 2018 fiscal year which reduced the total tons of distillers' grains we had available for sale. The increase in tons produced at the HLBE plant was due primarily to an increase in distillers' grains yield from period to period. Corn Oil Total revenues from sales of corn oil decreased by approximately 15.1% for fiscal year 2018 compared to the fiscal year 2017. This decrease is attributable to an approximately 13.5% decrease in the average price we received per pound of corn oil sold during fiscal year 2018 compared to fiscal year 2017, coupled with an approximately 1.8% decrease in pounds sold from period to period. Cost of Goods Sold Our cost of goods sold increased by approximately 3.1% for the fiscal year endedOctober 31, 2018 , as compared to the fiscal year endedOctober 31, 2017 . Our cost of goods sold as a percentage of revenues also increased to approximately 95.4% for the fiscal year endedOctober 31, 2018 , as compared to approximately 90.2% for the 2017 fiscal year due to a wider margin between the price of ethanol and the price of corn. Approximately 90% of our total costs of goods sold is attributable to ethanol production. As a result, the cost of goods sold per gallon of ethanol produced for the fiscal years endedOctober 31, 2018 and 2017 was approximately$1.39 per gallon of ethanol sold. 44 Table of Contents The following table shows the costs of corn and natural gas (our two largest single components of costs of goods sold), as well as all other components of cost of goods sold, which includes processing ingredients, electricity, and wages, salaries and benefits of production personnel, and the approximate percentage of costs of those components to total costs of goods sold in our audited consolidated statements of operations for the fiscal year endedOctober 31, 2018 (amounts in thousands): Fiscal Year Ended October 31, 2018 % of Cost of Cost Goods Sold (in thousands) Corn costs $ 143,401 71.4 % Natural gas costs 12,028 6.0 % All other components of costs of goods sold 45,298 22.6 % Total Cost of Goods Sold $ 200,727 100.0 % The following table shows the costs of corn, natural gas, and all other components of cost of goods sold and the approximate percentage of costs of those components to total costs of goods sold in our audited consolidated statements of operations for the fiscal year endedOctober 31, 2017 (amounts in thousands): Fiscal Year Ended October 31, 2017 % of Cost of Cost Goods Sold (in thousands) Corn costs $ 140,623 72.2 % Natural gas costs 12,209 6.3 % All other components of costs of goods sold 41,851 21.5 % Total Cost of Goods Sold $ 194,683 100.0 % Corn Costs Our cost of goods sold related to corn increased approximately 2.1% for our 2018 fiscal year compared to our 2017 fiscal year, due primarily to an approximate 1.4% increase in the number of bushels of corn processed, coupled with an approximate 0.6% increase in the average price per bushel paid for corn from period to period. The corn-ethanol price spread (the difference between the price per gallon of ethanol and the price per bushel of grain divided by 2.8) for our 2018 fiscal year was approximately$0.16 less than the corn-ethanol price spread we experienced for same period of 2017.
The increase in our cost per bushel of corn was primarily related to strong demand, both domestically and internationally.
For our fiscal years ended
AtOctober 31, 2018 , GFE had forward corn purchase contracts for approximately 3.2 million bushels for various delivery periods throughDecember 2021 and HLBE had forward corn purchase contracts for approximately 2.3 million bushels for various delivery periods throughOctober 2019 . Comparatively, atOctober 31, 2017 , GFE had forward corn purchase contracts for approximately 3.0 million bushels for various delivery periods throughDecember 2018 and HLBE had forward corn purchase contracts for approximately 1.8 million bushels for various delivery periods throughOctober 2018 .
Our corn derivative positions resulted in gains of approximately
Natural Gas Costs
For our 2018 fiscal year, we experienced a decrease of approximately 1.5% in our overall natural gas costs compared to our 2017 fiscal year.
Our natural gas derivative positions resulted in losses of approximately$1,600 and$15,000 for the fiscal years endedOctober 31, 2018 and 2017, respectively, which increased cost of goods sold. 45 Table of Contents Operating Expense Operating expenses as a percentage of revenues rose slightly to 3.0% of revenues for our fiscal year endedOctober 31, 2018 compared to 2.9% of revenues for our fiscal year endedOctober 31, 2017 . Operating Income Our operating income decreased by approximately$11.6 million for our fiscal year endedOctober 31, 2018 compared to fiscal year 2017. This decrease resulted largely from decreased prices for our ethanol relative to the price of corn and the narrowing of margins in our ethanol production segment. Other Income, Net We had net other income for our fiscal year endedOctober 31, 2018 of approximately$75,000 compared to net other income of approximately$190,000 for our fiscal year endedOctober 31, 2017 . We had less other income during fiscal year 2018 compared to fiscal year 2017 due primarily to increased interest expense during the 2018 fiscal year as a result of a full year of interest incurred on GFE's credit arrangements.
Changes in Financial Condition at
The following table highlights the changes in our financial condition at
October 31, 2019 October 31, 2018
Current Assets $ 36,163 $ 38,608
Total Assets $ 106,055 $ 116,861
Current Liabilities $ 13,355 $ 12,132
Long-Term Debt, less current portion $ 6,639 $ 7,799
Other Long-Term Liabilities $ 1,376 $ - Members' Equity attributable toGranite Falls Energy, LLC $ 65,469 $ 75,084 Non-controlling Interest $ 19,216 $ 21,846 The decrease in total assets atOctober 31, 2019 compared to the prior year is primarily due to an approximately$8.4 million decrease in property and equipment and an approximately$2.4 million decrease in current assets, which was primarily due to an approximately$1.4 million decrease in cash on hand and an approximately$1.1 million decrease in inventory. Total current liabilities increased by approximately$1.2 million atOctober 31, 2019 compared toOctober 31, 2018 . This increase was mainly due to increases in current maturities of long-term debt of approximately$746,000 and accounts payable of approximately$1.1 million . These increases were partially offset by a decrease in accrued expenses of approximately$607,000 . Long-term debt totaled approximately$6.6 million atOctober 31, 2019 , which is approximately$1.2 million less than our long-term debt atOctober 31, 2018 . The decrease is primarily due to scheduled payments of the Company's outstanding debt obligations and timing of future scheduled payments.
Our other long-term liabilities increased by approximately
Members' equity attributable to
Non-controlling interest totaled approximately
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Liquidity and Capital Resources
Our principal sources of liquidity consist of cash provided by operations, cash on hand, and available borrowings under our credit facility with AgCountry and Compeer. Our principal uses of cash are to purchase raw materials necessary to operate the ethanol plants and capital expenditures to maintain and upgrade our plants, and to make distribution payments to our members. GFE's grain storage expansion project and HLBE's RTO replacement projects were funded from current earnings from operations. We do not currently anticipate any significant purchases of property and equipment that would require us to secure additional capital in the next twelve months. For our 2020 fiscal year, we anticipate completion of several small capital projects to maintain current plant infrastructure and improve operating efficiency. We expect to have sufficient cash generated by continuing operations and current lines of credit to fund our operations and complete our capital expenditures during our 2020 fiscal year and beyond.
Management continues to evaluate conditions in the ethanol industry and explore opportunities to improve the efficiency and profitability of our operations which may require additional capital to supplement cash generated from operations and our current lines of credit.
Year Ended Compared
The following table summarizes our sources and uses of cash and equivalents from our audited consolidated statements of cash flows for the fiscal years endedOctober 31, 2019 and 2018 (amounts in thousands): 2019 2018
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Net decrease in cash and restricted cash
Operating Cash Flows During the fiscal year endedOctober 31, 2019 , net cash provided by operating activities decreased by approximately$13.4 million compared to the fiscal year endedOctober 31, 2018 . This decrease was due primarily to an approximately$14.4 million decrease in net income.This was partially offset by changes in working capital items that had an approximate$1.0 million positive impact on comparative operating cash flows. Investing Cash Flows Cash used in investing activities was approximately$4.0 million less during fiscal year 2019 as compared to fiscal year 2018. During fiscal year 2019, we used approximately$500,000 of cash related to GFE's subscription for its additional Ringneck investment, approximately$930,000 for capital expenditures at the GFE and HLBE plants, and approximately$225,000 for non-controlling interest redemption deposit. Comparatively, during fiscal year 2018, we used approximately$2.0 million of cash related to GFE's subscription for its Harvestone investment, approximately$3.8 million for capital expenditures at the GFE and HLBE plants, and received proceeds from the disposal of assets totaling approximately$97,000 . Financing Cash Flows We used approximately$14.9 million less for financing activities during fiscal year 2019 as compared to fiscal year 2018. For fiscal year 2019, we used cash to make distributions of approximately$1.2 million to our unit holders and to make payments on our-long term debt of approximately$414,000 . In comparison, for fiscal year 2018, we used cash to make distributions of approximately$11.8 million to our unit holders, distributions of approximately$4.3 million to non-controlling interests, and payments of approximately$438,000 on HLBE's long-term debt. 47 Table of Contents
Year Ended
The following table summarizes our sources and uses of cash and equivalents from our consolidated statements of cash flows for the fiscal years endedOctober 31, 2018 and 2017 (amounts in thousands): 2018 2017
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Net increase (decrease) in cash $ (6,832) $ 7,860
Operating Cash Flows
During the fiscal year ended October 31, 2018 , net cash provided by operating
activities decreased by approximately $8.5 million compared to the fiscal year
ended October 31, 2017 . This decrease was due primarily to an approximately
$11.7 million decrease in net income, as well as decreases of approximately $3.3
million from period to period in various working capital items.
Investing Cash Flows
Cash used in investing activities was approximately $4.1 million less during
fiscal year 2018, compared to fiscal year 2017. During fiscal year 2018, we used
$2.0 million of cash related to GFE's subscription for its Harvestone
investment, approximately $3.8 million for capital expenditures at the GFE and
HLBE plants, and received proceeds from the disposal of assets totaling
approximately $97,000 . Comparatively, during fiscal year 2017, we used
approximately $7.5 million of cash related to GFE's subscription for its
Ringneck investment and approximately $2.3 million for capital expenditures at
the GFE and HLBE plants.
Financing Cash Flows
We used approximately $10.5 million more for financing activities during fiscal
year 2018 as compared to fiscal year 2017. For fiscal year 2018, we used cash to
make distributions of approximately $11.8 million to our unit holders,
distributions of approximately $4.3 million to non-controlling interests, and
payments of approximately $438,000 on HLBE's long-term debt. In comparison, for
fiscal year 2017, we used cash to make distributions of approximately $11.2
million to our unit holders, payments of approximately $1.9 million on checks
drawn in excess of bank balances, payments of approximately $486,000 on HLBE's
long-term debt, and purchased approximately $47,000 of units in HLBE, which were
offset by approximately $7.5 million in proceeds from GFE's Project Hawkeye
loan.
Credit Arrangements
Granite Falls Energy
Credit Arrangements with AgCountry
GFE has a credit facility with AgCountry Farm Credit Services, PCA ("AgCountry")
for which Co-Bank serves as the administrative agent. The credit facility
originally consisted of a long-term revolving term loan, with an aggregate
principal commitment amount of $18,000,000 that reduced by $2,000,000
semi-annually beginning September 1, 2014 , until final payment at maturity on
March 1, 2018 . However, on September 8, 2017 , GFE entered into amendment to the
master loan agreement with AgCountry to amend the AgCountry credit facility to
replace our long-term revolving loan with a seasonal revolving loan. In
connection therewith, our revolving term loan was terminated, and we executed a
revolving credit supplement to establish the seasonal revolving loan. GFE had no
outstanding balance on the revolving term loan at its termination on September
8, 2017 .
Under the seasonal revolving loan, GFE may borrow, repay, and re-borrow up to
the aggregate principal commitment of $6.0 million until its maturity on October
1, 2020 . GFE had no outstanding balance on the seasonal revolving loan at
October 31, 2019 . The aggregate principal amount available to GFE for additional
borrowing was $6.0 million at October 31, 2019 .
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The seasonal revolving loan bears interest from the date funds are first
advanced on the loan through maturity, at a rate per annum equal to the sum of
(x) the One Month LIBOR Index Rate plus (y) 2.75% per annum. The interest rate
was 4.52% at October 31, 2019 .
GFE pays an unused commitment fee on the unused portion of the seasonal revolving loan commitment at the rate of 0.250% per annum. The credit facility with AgCountry is secured by substantially all of GFE's assets.
GFE's credit facility with AgCountry is subject to numerous financial and non-financial covenants that limit distributions and debt and require minimum working capital, minimum local net worth, and debt service coverage ratio, including the following:
· GFE may not create or incur any indebtedness except for debt to AgCountry,
accounts payable to trade creditors, subordinated debt owed to Project Hawkeye,
or debt to other lenders in an aggregate amount not exceed
consent of Co-Bank or AgCountry.
· GFE may not make loans or advances or purchase capital stock, obligations or
other securities, or make any capital contribution to or otherwise invest in
any entity, other than trade credit in ordinary course of business, investments
of GFE in HLBE as of the date of the amendment of the credit facility, or
investments in Ringneck of up to
· GFE may not create or incur any obligation as a lessee under operating leases
except leases with
date of the amendment of the credit facility, rail car leases provided such
rail car leases may not exceed an initial or extended term of 120 months, and
other leases which do not require GFE to make scheduled payments in any fiscal
year in excess of
· GFE must maintain working capital of at least
calculated as GFE's current assets, less GFE's current liabilities.
· GFE must maintain a debt service coverage ratio of at least 1.5 to 1.0. The
debt service coverage ratio is calculated as GFE's net income (after taxes),
plus depreciation and amortization, minus extraordinary gains (plus losses),
minus gain (plus loss) on asset sales and divided by
· GFE may make member distributions of up to 75% of GFE's net income without the
consent of AgCountry provided GFE remains in compliance with its loan covenants
following the distribution. Any member distributions in excess of 75% of GFE's
net income must be pre-approved by AgCountry.
For the fiscal year ended October 31, 2019 , GFE had an event of non-compliance
with the debt service coverage ratio as defined in the credit facility. In
December 2019 , GFE received a waiver from its lender waiving this event of
non-compliance. If market conditions deteriorate in the future, circumstances
may develop which could result in us violating the financial covenants or other
terms of GFE's credit facility. If we fail to comply with the terms of our
credit agreement with AgCountry, and AgCountry refuses to waive the
non-compliance, AgCountry could terminate the credit facility and any
commitment to loan funds to GFE.
Credit Arrangements with Fagen Energy and Project Hawkeye
In connection with GFE's subscription for investment in Ringneck inNovember 2016 , GFE entered into a credit facility withFagen Energy, LLC ("Fagen Energy"), an affiliate ofFagen, Inc. , which is a member of GFE. The Fagen Energy credit facility would have allowed GFE to borrow up to$7.5 million of variable-rate, amortizing non-recourse debt from Fagen Energy using the Ringneck investment as collateral. OnAugust 2, 2017 , GFE executed a termination and replacement agreement with Fagen Energy and Project Hawkeye, also an affiliate ofFagen, Inc. , to terminate the Fagen Energy credit facility and the loan agreements entered into in connection with the Fagen Energy credit facility, and secure a replacement credit facility with Project Hawkeye on substantially the same as the terms under the terminated credit facility with Fagen Energy. OnAugust 2, 2017 , the Fagen Energy credit facility was terminated and there were no amounts outstanding at termination. Simultaneously with the termination of the Fagen Energy credit facility, GFE entered into a replacement credit facility with Project Hawkeye. The terms of the replacement credit facility allow GFE to borrow up to$7.5 million of variable-rate, amortizing non-recourse debt from Project Hawkeye using the Ringneck investment as collateral. OnAugust 2, 2017 , GFE borrowed$7.5 million under the Project Hawkeye credit facility to finance the balance of its investment in Ringneck. The outstanding balance on this loan was approximately$7,411,000 atOctober 31, 2019 . 49 Table of Contents The Project Hawkeye loan bears interest from the date funds are first advanced on the loan through maturity, at a rate per annum equal to the sum of (x) the One Month LIBOR Index Rate plus (y) 3.05% per annum, with an interest rate floor of 3.55%. The interest rate was 4.82% and 5.36% atOctober 31, 2019 and 2018, respectively. The Project Hawkeye loan requires annual interest payments only for the first two years of the loan and monthly principal and interest payments for years 3 through 9 based on a 7-year amortization period. The monthly amortized payments will be re-amortized following any change in interest rate. The entire outstanding principal balance of the loan, plus any accrued and unpaid interest thereon, is due and payable in full onAugust 2, 2026 . GFE is permitted to voluntarily prepay all or any portion of the outstanding balance of this loan at any time without premium or penalty. Pursuant to a pledge agreement entered into in connection with the Project Hawkeye loan, GFE's obligations are secured by all of its right, title, and interest in its investment in Ringneck, including the 1,500 units subscribed for by GFE. The loan is non-recourse to all of GFE's other assets, meaning that in the event of default, the only remedy available to Project Hawkeye will be to foreclose and seize all of GFE's right, title and interest in its investment in Ringneck.Heron Lake BioEnergy Revolving Term Note HLBE had a revolving term note payable to Compeer Financial, formerly known asAgStar Financial Services , FCLA ("Compeer") under which we could borrow, repay, and re-borrow in an amount up to the original aggregate principal commitment at any time prior to maturity atMarch 1, 2022 . The original aggregate principal commitment was$28,000,000 , which reduced by$3,500,000 annually, startingMarch 1, 2015 and continuing each anniversary thereafter until maturity. InDecember 2017 , HLBE and Compeer orally agreed to reduce the aggregate principal commitment of the revolving term loan to$8,000,000 . OnApril 6, 2018 , HLBE finalized loan agreements with an effective date ofMarch 29, 2018 for an amended credit facility with Compeer (the "2018 Credit Facility"). OnJanuary 7, 2020 , the Company finalized loan agreements for an amended credit facility with its lender (the "2020 Credit Facility").
2018 Credit Facility with Compeer
The 2018 Credit Facility includes an amended and restated revolving term loan with a$4.0 million principal commitment and a revolving seasonal line of credit with a$4.0 million principal commitment. CoBank, ACP ("CoBank") will continue to act as Compeer's administrative agent with respect to HLBE's 2018 Credit Facility and has a participation interest in the loans. HLBE agreed to pay CoBank an annual fee of$2,500 for its services as administrative agent. Under the terms of the amended revolving term loan, HLBE may borrow, repay, and reborrow up to the aggregate principal commitment amount of$4.0 million . Final payment of amounts borrowed under amended revolving term loan is dueDecember 1, 2021 . Interest on the amended revolving term loan accrues at a variable weekly rate equal to 3.10% above the One-Month London Interbank Offered Rate ("LIBOR") Index rate, which was 4.87% atOctober 31, 2019 .
HLBE agreed to pay an unused commitment fee on the unused available portion of the amended revolving term loan commitment at the rate of 0.500% per annum, payable monthly in arrears.
The aggregate principal amount available to HLBE for borrowing under the
revolving term loan at
Under the terms of the seasonal revolving loan, HLBE may borrow, repay, and reborrow up to the aggregate principal commitment amount of$4.0 million until its maturing onMay 1, 2020 . Amounts borrowed under the seasonal revolving loan bear interest at a variable weekly rate equal to 2.85% above the LIBOR Index rate, which was 4.62% atOctober 31, 2019 .
HLBE also agreed to pay an unused commitment fee on the unused portion of the seasonal revolving loan commitment at the rate of 0.250% per annum.
The amended revolving term loan and seasonal revolving loan are secured by substantially all of HLBE's assets, including a subsidiary guarantee.
50Table of Contents
Under the 2018 Credit Facility, HLBE is subject to certain financial and non-financial covenants that limit HLBE's distributions and debt and require minimum working capital, minimum local net worth, and debt service coverage ratio. HLBE agreed to a debt service coverage ratio of 1.15 to 1.0, to maintain minimum working capital$8.0 million throughSeptember 30, 2018 and$10.0 million thereafter, and to maintain net worth of$32.0 million . HLBE is permitted to pay distributions to its members up to 75% of its net income for the year in which the distributions are paid provided that immediately prior to the distribution and after giving effect to the distribution, no default exists and HLBE is in compliance with all of its loan covenants. Further, HLBE agreed not to make loans or advances to Agrinatural that exceed an aggregate principal amount of approximately$6.6 million without the consent of Compeer. InOctober 2018 , HLBE had an event of non-compliance related to the debt service coverage ratio as defined in the 2018 Credit Facility. InDecember 2018 , HLBE received a waiver from its lender waiving this event of noncompliance. InOctober 2019 , HLBE had an event of non-compliance related to the debt service coverage ratio as defined in the 2018 Credit Facility. InDecember 2019 , HLBE received a waiver from its lender waiving this event of noncompliance. If market conditions deteriorate in the future, circumstances may develop which could result in HLBE violating the financial covenants or other terms of its credit facility. Should unfavorable market conditions result in HLBE's violation of the terms or covenants of the credit facility and HLBE fails to obtain a waiver of any such term or covenant, Compeer could deem HLBE in default, impose fees, charges and penalties, terminate any commitment to loan funds and require HLBE to immediately repay a significant portion or possibly the entire outstanding balance of the revolving term loan. In the event of a default, Compeer could also elect to proceed with a foreclosure action on HLBE's plant.
2020 Credit Facility with Compeer
The 2020 Credit Facility includes an amended and restated revolving term loan with an$8,000,000 principal commitment. The loans are secured by substantially all of the Company's assets, including a subsidiary guarantee. The 2020 Credit Facility contains customary covenants, including restrictions on the payment of dividends and loans and advances to Agrinatural, and maintenance of certain financial ratios including minimum working capital, minimum net worth and a debt service coverage ratio as defined by the credit facility. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the revolving term loan and/or the imposition of fees, charges, or penalties. Under the terms of the amended and restated revolving term loan, the Company may borrow, repay, and reborrow up to the aggregate principal commitment amount of$8.0 million . Final payment of amounts borrowed under amended revolving term loan is dueDecember 1, 2022 . Interest on the amended and restated revolving term loan accrues at a variable weekly rate equal to 3.10% above the LIBOR Index rate, which was 4.87% atOctober 31, 2019 . We agreed to pay an unused commitment fee on the unused available portion of the amended revolving term loan commitment at the rate of 0.500% per annum, payable monthly in arrears. As part of the 2020 Credit Facility closing, the Company entered into an amended administrative agency agreement with CoBank. As a result, CoBank will continue act as the agent for the lender with respect to the 2020 Credit Facility. The Company agreed to pay CoBank an annual fee of$2,500 for its services as administrative agent.
Other HLBE Credit Arrangements
In addition to its primary credit arrangement with Compeer, HLBE has other material credit arrangements and debt obligations.
InOctober 2003 , HLBE entered into an industrial water supply development and distribution agreement with theCity of Heron Lake ,Jackson County , andMinnesota Soybean Processors , an unrelated company. In consideration of this agreement, HLBE andMinnesota Soybean Processors are allocated equally the debt service on$735,000 in water revenue bonds that were issued by the City to support this project that mature inFebruary 2019 . OnSeptember 30, 2019 , HLBE finalized a new industrial water supply development and distribution agreement with theCity of Heron Lake , effective as ofFebruary 1, 2019 . Under this agreement, HLBE pays flow charges and fixed monthly charges to theCity of Heron Lake , in addition to certain excess maintenance costs. The term of this agreement expiresFebruary 1, 2029 . InMay 2006 , HLBE entered into an industrial water supply treatment agreement with theCity of Heron Lake andJackson County . Under this agreement, HLBE pays monthly installments over 24 months startingJanuary 1, 2007 51
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equal to one years' debt service on approximately$3.6 million in water revenue bonds, which will be returned to HLBE if any funds remain after final payment in full on the bonds and assuming HLBE complies with all payment obligations under the agreement. As ofOctober 31, 2019 and 2018, there was a total of approximately$634,000 and$947,000 in outstanding water revenue bonds, respectively. HLBE classifies its obligations under these bonds as assessments payable. The interest rates on the bonds range from 0.50% to 8.73%. To fund the purchase of the distribution system and substation for the HLBE plant, HLBE entered into a loan agreement withFederated Rural Electric Association pursuant to which it borrowed$600,000 by a secured promissory note. Under the note, HLBE was required to make monthly payments toFederated Rural Electric Association of$6,250 consisting of principal and an annual maintenance fee of 1% beginning onOctober 10, 2009 . The balances of this loan was paid in full inSeptember 2017 . HLBE also has a note payable to the minority owner ofAgrinatural Gas, LLC in the amount of$100,000 atOctober 31, 2017 . HLBE paid the balance of this loan in full inJanuary 2018 . HLBE Loans to Agrinatural
Original Agrinatural Credit Facility
OnJuly 29, 2014 , HLBE entered into an intercompany loan agreement and related loan documents with Agrinatural (the "Original Agrinatural Credit Facility"). Under the Original Agrinatural Credit Facility, HLBE agreed to make a five-year term loan in the principal amount of$3.05 million to Agrinatural for use by Agrinatural to repay approximately$1.4 million of its outstanding debt and provide approximately$1.6 million of working capital to Agrinatural. The Original Agrinatural Credit Facility contains customary financial and non-financial affirmative covenants and negative covenants for loans of this type and size. OnMarch 30, 2015 , HLBE entered into an allonge (the "Allonge") to theJuly 29, 2014 note with Agrinatural. Under the terms of the Allonge, HLBE and Agrinatural agreed to increase the principal amount of the Original Agrinatural Credit Facility to approximately$3.06 million , defer commencement of repayment of principal untilMay 1, 2015 , decrease the monthly principal payment to$36,000 per month and shorten maturity of the Original Agrinatural Credit Facility toMay 1, 2019 . Interest on the Original Agrinatural Credit Facility was not amended and accrues at a variable rate equal to the One-Month LIBOR rate plus 4.0%, with the interest rate capped and not to exceed 6.0% per annum. Accrued interest is due and payable on a monthly basis. Except as otherwise provided in the Allonge, all of the terms and conditions contained in the Original Agrinatural Credit Facility remain in full force and effect. In exchange for the Loan Agreement, the Agrinatural executed a security agreement granting HLBE a first lien security interest in all of Agrinatural's equipment and assets and a collateral assignment assigning HLBE all of Agrinatural's interests in its contracts, leases, easements and other agreements. In addition, RES, the former minority owner of Agrinatural, executed a guarantee under which RES guaranteed full payment and performance of 27% of Agrinatural's obligations to HLBE. Upon the passage of theMay 1, 2019 maturity date, Agrinatural went into default on the Original Agrinatural Credit Facility. As noted, HLBE has a security interest in all of Agrinatural's assets. No interruption in the service of natural gas to its ethanol production facility occurred as a result of the default. The balance of this loan was approximately$1.1 million and$1.5 million atOctober 31, 2019 andOctober 31, 2018 , respectively. Subsequent to the closing of HLBE's indirect acquisition of Agrinatural's non-controlling interest inDecember 2019 , the parties agreed to forgive the debt related to the Original Agrinatural Credit Facility. 52 Table of Contents
Additional Agrinatural Credit Facility
OnMarch 30, 2015 , HLBE entered into a second intercompany loan agreement and related loan documents (the "Additional Agrinatural Credit Facility") with Agrinatural. Under the Additional Agrinatural Credit Facility, HLBE agreed to make a four-year term loan in the principal amount of$3.5 million to Agrinatural for use by Agrinatural to repay its outstanding trade debt and provide working capital. The Additional Agrinatural Credit Facility contains customary financial and non-financial affirmative covenants and negative covenants for loans of this type and size. Interest on the additional term loan accrues at a variable rate equal to the One-Month LIBOR rate plus 4.0%, with the interest rate capped and not to exceed 6.0% per annum. Prior toMay 1, 2015 , Agrinatural is required to pay only monthly interest on the term loan. CommencingMay 1, 2015 , Agrinatural is required to make monthly installments of principal plus accrued interest. The entire principal balance and accrued and unpaid interest on the term loan was due and payable in full onMay 1, 2019 . OnMay 19, 2016 , HLBE and Agrinatural amended the Additional Agrinatural Credit Facility, entering into amendment to the loan agreement datedMarch 30, 2015 (the "Amendment"). Additionally, HLBE and Agrinatural entered into an allonge to the negotiable promissory note datedMarch 30, 2015 issued by Agrinatural to HLBE (the "Additional Allonge") to increase the amount of the capital expenditures allowed by Agrinatural during the term of the facility and deferred a portion of the principal payments required for 2016. The Amendment provides that the portion of principal payments deferred in calendar year 2016 to continue to accrue interest at the rate set forth in the loan agreement and become a part of the balloon payment due at maturity. Additionally, for calendar years, 2017, 2018 and 2019, the Amendment provides that Agrinatural may, without consent of HLBE, proceed with and pay for capital expenditures in an amount up to$100,000 plus the amount of contributions in aid of construction received by Agrinatural from customers for capital improvements ("CIAC"), less a reserve for distribution to the Agrinatural members to cover the income or other taxes imposed as a result of receipt of CIAC in an amount equal to 40% of CIAC. Prior to the Amendment, Agrinatural's capital expenditures were restricted to$100,000 per year. In exchange for the Additional Agrinatural Credit Facility, Agrinatural executed a security agreement granting HLBE a first lien security interest in all of Agrinatural's equipment and assets and a collateral assignment assigning HLBE all of Agrinatural's interests in its contracts, leases, easements and other agreements. In addition, RES executed a guarantee under which RES guaranteed full payment and performance of 27% of Agrinatural's obligations to HLBE under the Additional Agrinatural Credit Facility. Upon the passage of theMay 1, 2019 maturity date, Agrinatural went into default on the Additional Agrinatural Credit Facility. As noted, HLBE has a security interest in all of Agrinatural's assets. No interruption in the service of natural gas to its ethanol production facility occurred as a result of the default. The balance of this loan was approximately$1.5 million atOctober 31, 2019 and$2.0 million atOctober 31, 2018 . Subsequent to the closing of HLBE's indirect acquisition of Agrinatural's non-controlling interest inDecember 2019 , the parties agreed to forgive the debt related to the Additional Agrinatural Credit Facility. Contractual Obligations
The following table provides information regarding the contractual obligations
of the Company as of
Less than One to Three to Greater Than
Total One Year Three Years Five Years Five Years
Long-Term Debt Obligations (1) $ 9,308 $ 1,812 $ 3,066 $ 2,463 $ 1,967
Operating Lease Obligations (2) 26,663 4,539 8,782 7,564 5,778
Purchase Obligations (3) 16,445 13,266 3,138 41 -
Total Contractual Obligations $ 52,416 $ 19,617 $ 14,986 $ 10,068 $ 7,745 --------------------------------------------------------------------------------
(1) Long-term debt obligations include principal and estimated interest under our
credit facilities based on the interest rates in effect as of
2019, assuming contractual maturities. (See Note 9 to the accompanying
audited consolidated financial statements).
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(2) Operating lease obligations include GFE's and HLBE's rail car leases (See
Note 11 to the accompanying audited consolidated financial statements).
(3) Purchase obligations consist of GFE's and HLBE's forward contracted corn
deliveries. The amounts were determined assuming prices, including freight
costs, at current market prices as of
that had not yet been fixed. (See Note 15 to the accompanying audited
consolidated financial statements).
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Critical Accounting Estimates Note 1 to our consolidated financial statements contains a summary of our significant accounting policies, many of which require management to use estimates and assumptions. Accounting estimates are an integral part of the preparation of financial statements and are based upon management's current judgment. We use our knowledge and experience about past events and certain future assumptions to make estimates and judgments involving matters that are inherently uncertain and that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. We believe that of our significant accounting policies, the following are most noteworthy because changes in these estimates or assumptions could materially affect our financial position and results of operations: Revenue Recognition Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Our contracts primarily consist of agreements with marketing companies and other customers as described above. Our performance obligations consist of the delivery of ethanol, distillers' grains, and corn oil to our customers. Our customers primarily consist of two distinct marketing companies as described above. The consideration we receive for these products is fixed or determinable based on current observable market prices at theChicago Mercantile Exchange , generally, and adjusted for local market differentials. Our contracts have specific delivery modes, rail or truck, and dates. Revenue is recognized when the Company delivers the products to the mode of transportation specified in the contract, at the transaction price established in the contract, net of commissions, fees, and freight. We sell each of the products via different marketing channels as described above. Agrinatural recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration Agrinatural expects to receive in exchange for those products or services. Derivative Instruments From time to time, we enter into forward sales contracts for ethanol, distillers and corn oil, and purchase contracts for corn and natural gas to hedge our exposure to commodity price fluctuations. These contracts provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Accordingly, we classify these sales and purchase contracts as normal sales and purchase contracts and as a result, these contracts are not marked to market in our consolidated financial statements. On occasion, in order to reduce the risks caused by market fluctuations, the Company hedges its anticipated corn, natural gas, and denaturant purchases and ethanol sales by entering into options and futures contracts. These contracts are used with the intention to fix the purchase price of anticipated requirements for corn in the Company's ethanol production activities and the related sales price of ethanol. The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter market conditions. Although the Company believes its commodity derivative positions are economic hedges, none have been formally designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings or losses. The Company does not enter into financial instruments for trading or speculative purposes. 54 Table of Contents Inventory We value our inventory at the lower of cost or net realizable value using the first in first out method or net realized value. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management's assumptions which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider future corn costs and ethanol prices, break-even points for our plants and our risk management strategies in place through our use of derivative instruments. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the valuation of the lower of cost or net realized value on inventory to be a critical accounting estimate. Property and Equipment Management's estimate of the depreciable lives of property and equipment is based on the estimated useful lives. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment testing for assets requires various estimates and assumptions, including an allocation of cash flows to those assets and, if required, an estimate of the fair value of those assets. The Company tests for impairment at the asset group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management's assumptions, which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider future corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our derivative instruments and forward contracts. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of impairment of our long-lived assets to be a critical accounting estimate.
Rail Car Rehabilitation Costs
GFE leases 75 hopper rail cars under a multi-year agreement, which endsNovember 2025 . HLBE leases 50 hopper rail cars under a multi-year agreement, which ends inMay 2027 . Under the agreements, the Company is required to pay to rehabilitate each car for "damage" that is considered to be other than normal wear and tear upon turn in of the car(s) at the termination of the lease. Prior to the year endingOctober 31, 2019 , the Company believed ongoing repairs resulted in an insignificant future rehabilitation expense. During the year endingOctober 31, 2019 , based on new information, we re-evaluated our assumptions and believe that it is probable that we may be assessed for damages incurred. Company management has estimated total costs to rehabilitate the cars atOctober 31, 2019 to be approximately$852,000 and$551,000 at GFE and HLBE, respectively. During the year endedOctober 31, 2019 , GFE has recorded an expense in cost of goods and a corresponding estimated long-term liability totaling$852,000 . HLBE has recorded an expense in cost of goods and a corresponding estimated long-term liability totaling$551,000 . The Company accrues the estimated cost of railcar damages over the term of the leases as the damages are incurred. Because the actual cost is not finalized until termination of the leases, it is reasonably possible that there will be a change in estimate in the future.
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