We prepared the following discussion and analysis to help readers better
understand our financial condition, changes in our financial condition, and
results of operations for the three and six months ended April 30, 2021 and
2020. This section should be read in conjunction with the condensed
consolidated unaudited financial statements and related notes in PART I - Item 1
of this report and the information contained in the Company's quarterly report
on Form 10-Q for the three months ended January 31, 2021, and the Company's
annual report on Form 10-K for the fiscal year ended October 31, 2020.
Disclosure Regarding Forward-Looking Statements
The Securities and Exchange Commission ("SEC") encourages companies to disclose
forward-looking information so investors can better understand future prospects
and make informed investment decisions. As such, we have historical information,
as well as forward-looking statements regarding our business, financial
condition, results of operations, performance and prospects in this report. All
statements that are not historical or current facts are forward-looking
statements. In some cases, you can identify forward-looking statements by terms
such as "anticipates," "believes," "could," "estimates," "expects," "intends,"
"may," "plans," "potential," "predicts," "projects," "should," "will," "would,"
and similar expressions.
Forward-looking statements are subject to a number of known and unknown risks,
uncertainties and other factors, many of which may be beyond our control, and
may cause actual results, performance or achievements to differ materially from
those projected in, expressed or implied by forward-looking statements. While it
is impossible to identify all such factors, factors that could cause actual
results to differ materially from those estimated by us are described more
particularly in the "Risk Factors" sections of our annual report on Form 10-K
for the year ended October 31, 2020, and our quarterly report on Form 10-Q for
the three months ended January 31, 2021. These risks and uncertainties include,
but are not limited to, the following:
Fluctuations in the price of ethanol as a result of a number of factors,
? including: the price and availability of competing fuels; the overall supply
and demand for ethanol and corn; the price of gasoline, crude oil and corn; and
? Fluctuations in the price of crude oil and gasoline and the impact of lower oil
and gasoline prices on ethanol prices and demand;
Fluctuations in the availability and price of corn, resulting from factors such
as domestic stocks, demand from corn-consuming industries, such as the ethanol
? industry, prices for alternative crops, increasing input costs, changes in
government policies, shifts in global markets or damaging growing conditions,
such as plant disease or adverse weather, including drought;
Fluctuations in the availability and price of natural gas, which may be
? affected by factors such as weather, drilling economics, overall economic
conditions, and government regulations;
? Negative operating margins which may result from lower ethanol and/or high corn
? Changes in general economic conditions or the occurrence of certain events
causing an economic impact in the agriculture, oil or automobile industries;
? Overcapacity and oversupply in the ethanol industry;
Ethanol trading at a premium to gasoline at times, which may act as a
? disincentive for discretionary blending of ethanol beyond Renewable Fuel
Standard ("RFS") requirements and consequently negatively impacting ethanol
prices and demand;
Changes in federal and/or state laws and environmental regulations including
? elimination, waiver or reduction of corn-based ethanol volume obligations under
the RFS and legislative acts taken by state governments such as California
related to low-carbon fuels, may have an adverse effect on our business;
? Any impairment of the transportation, storage and blending infrastructure that
prevents ethanol from reaching markets;
? Any effect on prices and demand for our products resulting from actions in
international markets, particularly imposition of tariffs;
? Changes in our business strategy, capital improvements or development plans;
? Effect of our risk mitigation strategies and hedging activities on our
financial performance and cash flows;
? Competition from alternative fuels and alternative fuel additives;
? Changes or advances in plant production capacity or technical difficulties in
operating the plant;
Table of Contents
? Our reliance on key management personnel;
A slowdown in global and regional economic activity, demand for our products
? and the potential for labor shortages and shipping disruptions resulting from
The election of President Joe Biden and the transition to a new presidential
? administration may result in new or different regulations and policies that may
adversely affect our business; and
Our CEO and General Manager retired effective May 26, 2021, and as a result our
? Company may face challenges that arise from a transition in leadership, which
may adversely affect our business.
We believe our expectations regarding future events are based on reasonable
assumptions; however, these assumptions may not be accurate or account for all
risks and uncertainties. Consequently, forward-looking statements are not
guaranteed. Actual results may vary materially from those expressed or implied
in our forward-looking statements. In addition, we are not obligated and do not
intend to update our forward-looking statements as a result of new information
unless it is required by applicable securities laws. We caution investors not to
place undue reliance on forward-looking statements, which represent management's
views as of the date of this report. We qualify all of our forward-looking
statements by these cautionary statements.
Our website address is www.granitefallsenergy.com. Our annual report on Form
10-K, periodic reports on Form 10-Q, current reports on Form 8-K, and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, are available, free of charge, on our website
under the link "SEC Compliance," as soon as reasonably practicable after we
electronically file such materials with, or furnish such materials to, the
Securities and Exchange Commission. The contents of our website are not
incorporated by reference in this report on Form 10-Q.
Industry and Market Data
Much of the information in this report regarding the ethanol industry, including
government regulation relevant to the industry is from information published by
the Renewable Fuels Association ("RFA"), a national trade association for the
United States ("U.S.") ethanol industry, and information about the market for
our products and competition is derived from publicly available information from
governmental agencies or publications and other published independent sources.
Although we believe our third-party sources are reliable, we have not
independently verified the information.
Granite Falls Energy, LLC ("Granite Falls Energy" or "GFE") is a Minnesota
limited liability company that owns and operates a dry mill corn-based, natural
gas fired ethanol plant in Granite Falls, Minnesota. Additionally, through
Project Viking, L.L.C., a wholly owned subsidiary ("Project Viking"), GFE owns
an approximately 50.7% controlling interest of Heron Lake BioEnergy, LLC ("Heron
Lake BioEnergy" or "HLBE"). HLBE is a Minnesota limited liability company that
owns and operates a dry mill corn-based, natural gas fired ethanol plant near
Heron Lake, Minnesota. Additionally, through its wholly owned subsidiary, HLBE
Pipeline Company, LLC ("HLBE Pipeline Company"), HLBE is the sole owner of
Agrinatural Gas, LLC ("Agrinatural"), which operates a natural gas pipeline.
Our CEO is Jeffrey Oestmann. We hired Oestmann effective May 26, 2021, pursuant
to a letter of employment dated May 20, 2021 (the "Employment Agreement").
Oestmann replaced Steve Christensen, who had served as CEO of the Company since
2014 and who resigned pursuant to a separation agreement between Christensen and
the Company (the "Separation Agreement"). Oestmann also serves as the CEO of
HLBE pursuant to a management services agreement between the Company and HLBE
(the "Management Services Agreement"). The Employment Agreement is available on
the Company's Form 8-K filed with the SEC May 25, 2021 and is hereby
incorporated by reference. The Management Services Agreement and Separation
Agreement are available on the Company's Form 8-K filed with the SEC February
22, 2021 and are hereby incorporated by reference.
Our business consists primarily of the production and sale of ethanol and its
co-products (wet, modified wet and dried distillers' grains, corn oil and corn
syrup) locally, and throughout the continental U.S. Our production operations
are carried out at GFE's ethanol plant located in Granite Falls, Minnesota and
at HLBE's ethanol plant near Heron Lake, Minnesota.
Table of Contents
GFE's ethanol plant has an approximate annual production capacity of 60 million
gallons of denatured ethanol, but has obtained EPA pathway approval and permits
from the Minnesota Pollution Control Authority ("MPCA") to increase its
production capacity to approximately 70 million gallons of undenatured ethanol
on a twelve-month rolling sum basis. HLBE's plant has an approximate annual
production capacity of 60 million gallons of denatured ethanol, but has obtained
EPA pathway approval and permits from the MPCA to increase its production
capacity to approximately 72 million gallons of undenatured ethanol on a twelve
month rolling sum basis. We intend to continue working toward increasing
production at plants to take advantage of the additional production allowed
pursuant to their respective permits so long as we believe it is profitable to
We market and sell the products produced at our plants primarily using third
party marketers. The markets in which our products are sold may be local,
regional, national, and international and depend primarily upon the efforts of
third party marketers. We have contracted with Eco-Energy, Inc. to market all of
the ethanol produced at our ethanol plants. GFE also independently markets a
small portion of the ethanol production at its plant as E-85 to local retailers.
We do not have any long-term, fixed price exclusive supply contracts for the
purchase of corn for either the GFE or HLBE plants. Both GFE and HLBE purchase
the corn necessary for operating directly from grain elevators, farmers, and
local dealers within approximately 80 miles of their respective plants. Neither
GFE's nor HLBE's members are obligated to deliver corn to our plants.
Plan of Operations for the Next Twelve Months
The Company, and the ethanol industry as a whole, experienced significant
adverse conditions throughout most of 2020 and in early 2021 as a result of
industry-wide record low ethanol prices due to reduced demand and high industry
inventory levels, exacerbated by the COVID-19 pandemic. These factors resulted
in prolonged negative operating margins, lower cash flow from operations and
substantial net losses. Demand for ethanol and ethanol prices have largely
rebounded from the onset of the COVID-19 pandemic, and we expect to have
sufficient cash generated by continuing operations, availability on our credit
facility, and additional debt with the Company's current lenders to fund our
operations. However, should unfavorable operating conditions occur that prevent
us from profitably operating our plant, we may need to seek additional funding
or further idle ethanol production altogether.
Over the next twelve months, we will continue our focus on operational
improvements at our plants. These operational improvements include exploring
methods to improve ethanol yield per bushel and increasing production output at
our plants to take full advantage of our permitted production capacities,
reducing our operating costs, and optimizing our margin opportunities through
prudent risk-management policies. Additionally, we expect to continue to conduct
routine maintenance and repair activities at our ethanol plants to maintain
current plant infrastructure, as well as small capital projects to improve
operating efficiency. We anticipate using cash from our revolving term loans to
finance these plant upgrade projects.
Proposed Merger with Heron Lake BioEnergy, LLC
During the three months ended April 30, 2021, the Company developed plans to
engage in a merger with HLBE. Specifically, on March 24, 2021, the Company and
HLBE, executed a Merger Agreement (the "Merger Agreement"), pursuant to which
the Company will acquire the minority-owned interest of HLBE (the "Merger"). The
structure of the proposed transaction is a merger in which Granite Heron Merger
Sub, LLC, ("Merger Sub") a wholly owned subsidiary of the Company, will merge
with and into HLBE, with HLBE surviving the transaction as a wholly owned
subsidiary of the Company.
The Company currently owns approximately 50.7% of HLBE's units. Pursuant to the
Merger Agreement, the Company will acquire the remainder of HLBE's issued and
outstanding units (the "Minority Ownership Interest"). The purchase price for
the entire Minority Ownership Interest is approximately $14,000,000 in cash
payable at the closing of the Merger. Each issued and outstanding unit of the
Minority Ownership Interest will be canceled and converted into the right to
receive $0.36405 per Unit. (the "Merger Consideration"). Upon the completion of
the merger, Minority Ownership Interest unitholders will no longer own any units
of HLBE and will no longer have any rights as a member or owner of HLBE.
Table of Contents
The units of HLBE held by the Company immediately prior closing of Merger shall
be cancelled with no consideration issued to the Company. The Company will
emerge from the transaction as the sole owner of HLBE.
At the time the Merger becomes effective, 100 percent of the membership interest
in the Merger Sub shall be converted into and become 100 percent of the
membership interests in HLBE, as the surviving company in the Merger.
The Merger is subject to approval by the Minority Ownership Interest. A Special
Meeting of the members of HLBE is expected to be held in summer 2021 to vote on
the proposed Merger. If approved by the Minority Ownership Interest, the Merger
is expected to close following the special meeting.
Upon closing of the Merger, HLBE will file a Certification and Notice of
Termination of Registration with the SEC, which will allow HLBE to operate
without being registered with the SEC. Upon termination of HLBE's SEC
registration, we expect HLBE will no longer be required to file quarterly and
annual reports with the SEC. The Company, which will be HLBE's sole owner upon
closing of the Merger, will continue to be registered with the SEC and will
continue to file required SEC reports after completion of the Merger.
A complete description of the Merger and the Merger Agreement is available in
HLBE's preliminary proxy statement filed with the SEC on May 21, 2021, and is
hereby incorporated by reference. Copies of the Merger Agreement, a Plan of
Merger and associated voting agreements were published with our Form 8-K filed
with SEC on March 25, 2021 and are herein incorporated by reference.
Effect if the Merger is Not Completed
If the Merger is not completed, HLBE's unitholders will not receive the Merger
Consideration or any other payment for their units of the Company. Instead, HLBE
will remain a majority-owned subsidiary of the Company.
Further, HLBE has experienced significant net losses due to several factors,
including elevated corn prices, the breakdown of our ethanol plant's boiler, and
reduced demand for ethanol due to several factors, including the COVID-19
pandemic. As a result, HLBE has experienced instances of noncompliance with
certain loan covenants related to HLBE's working capital and net worth ratio,
for which HLBE has obtained waivers from its lender. Although HLBE was in
compliance with its financial covenants as of April 30, 2021, the impact of the
COVID19 pandemic could have an adverse impact on HLBE's operating results, which
could result in HLBE's inability to comply with certain of these financial
covenants and require HLBE's lenders to waive compliance with, or agree to
amend, any such covenant to avoid a default.
While HLBE believes the replacement of the boiler has improved the operating
performance of the HLBE plant, and led to lower operating costs, market
conditions have resulted in losses. If the Merger is not completed, HLBE intends
to source other capital sources, which may include re-negotiating its debt
agreements and terms or seek potential equity solutions. At this time, there are
no commitments to do so and HLBE may not be successful in doing so.
Trends and Uncertainties Impacting Our Operations
The principal factors affecting our results of operations and financial
conditions are the market prices for corn, ethanol, distillers' grains and
natural gas, as well as governmental programs designed to create incentives for
the use of corn-based ethanol. Other factors that may affect our future results
of operation include those risks discussed below and in "PART II - Item 1A. Risk
Factors" of this report, "PART II - Item 1A. Risk Factors" of our quarterly
report on Form 10-Q for the three months ended January 31, 2021, and "PART I -
Item 1A. Risk Factors" of our annual report on Form 10-K for the fiscal year
ended October 31, 2020.
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.
Table of Contents
Ethanol prices are sensitive to world crude oil supply and demand, domestic
gasoline supply and demand, the price of crude oil, gasoline and corn, the price
of substitute fuels and octane enhancers, refining capacity and utilization,
government regulation and incentives and consumer demand for alternative fuels.
Distillers' grains prices are impacted by livestock numbers on feed, prices for
feed alternatives and supply, which is associated with ethanol plant production.
Because the market price of ethanol is not always directly related to corn, at
times ethanol prices may lag price movements in corn prices and corn-ethanol
price spread may be tightly compressed or negative. If the corn-ethanol spread
is compressed or negative for sustained period, it is possible that our
operating margins will decline or become negative and our plants may not
generate adequate cash flow for operations. In such cases, we may reduce or
cease production at our plants to minimize our variable costs and optimize cash
Management believes that the ethanol outlook in the fiscal year 2021 will remain
relatively consistent with this quarter. The widespread distribution of COVID-19
vaccines and the loosening of restrictions related to the pandemic have improved
the overall economic outlook and the demand for fuel, including the ethanol we
produce. However, lingering effects of the COVID-19 pandemic and other factors
could continue to negatively affect our profitability. Additionally, continued
large corn supplies and increases in ethanol production capacity could
negatively affect our profitability. This negative impact could worsen if
domestic ethanol inventories increase, or if U.S. exports of ethanol decline.
Ethanol production largely rebounded and remained steady in late 2020 after
briefly and significantly declining during the second fiscal quarter of 2020 at
the onset of the COVID-19 pandemic. In the three months ended April 30, 2021,
ethanol production briefly and significantly declined again due to severe
weather incidents. Unusually cold weather affecting much of the United States in
February 2021 disrupted the supply of natural gas and as a result natural gas
spot prices approached record-high levels. Many ethanol production facilities,
including our plants, rely on natural gas to process corn into ethanol. In
February 2021, estimated fuel ethanol margins fell to negative levels due in
part to the elevated natural gas prices and as a result many fuel ethanol
producers reduced production rates. U.S. weekly fuel ethanol production fell to
an average of 658,000 barrels per day (b/d) during the week of February 21,
2021, which was the lowest weekly production level since May 11, 2020, and 38%
lower than at the same time last year, according to the U.S. Energy Information
Administration ("EIA"). Production rates have since returned to average levels,
but fuel ethanol inventories remain lower than their typical seasonal averages
heading into the summer driving season. While the reduction in ethanol inventory
may result in higher prices for ethanol and higher operating margins for the
Company, management expects ethanol production and inventories to rebound
industrywide and margins for our Company to remain tight.
Additionally, decreasing exports could reduce demand for biofuel including the
ethanol we produce. Annual U.S. fuel ethanol exports decreased by 9% in 2020,
marking the second consecutive annual drop in U.S. fuel ethanol exports and the
lowest level for such exports since 2015, according to the EIA. Exports of U.S.
fuel ethanol to Brazil, the world's second largest consumer of fuel ethanol,
decreased significantly in 2020. All U.S. fuel ethanol exports to Brazil now
face a 20% Brazilian tariff since a tariff-free fuel ethanol quota expired in
December 2020. The new tariff will likely lower U.S. fuel ethanol export volumes
to Brazil in the near term, according to the EIA. As a result, demand for
biofuel, including our ethanol, could decrease.
Further, management believes that the continued issuance of waivers of small
refiner renewable volume obligations ("RVOs") by the U.S. Environmental
Protection Agency ("EPA"), as well as uncertainty regarding the RFS reset, could
contribute to the projected negative or low margins.
Changes in the price for crude oil and unleaded gasoline could have a negative
impact on the demand for gasoline and impact the market price of ethanol, which
could adversely impact our profitability. According to the EIA May 2021 Short
Term Energy Outlook, EIA estimates that U.S. gasoline consumption will average
9.0 million barrels per day this summer (April through September), up from 7.8
million barrels per day during the summer of 2021 but down from 0.6 million
barrels per day from summer 2019. In addition, EIA forecasts relatively stable
prices for crude oil, projecting Brent crude oil prices to average $65 per
barrel in the second quarter of 2021, $61 per barrel for the remainder of the
year, and $61 per barrel in 2022. Decreases in the price for crude oil generally
have a negative impact on the demand for ethanol.
Continued ethanol production capacity increases could also have a negative
impact on the market price of ethanol, which could be further exacerbated if
domestic ethanol inventories remain high or grow, or if U.S. exports of ethanol
decline. Throughout 2020, some U.S. ethanol plants temporarily suspended
production due to negative margins, largely resulting from the COVID-19
pandemic, and stagnant export projections caused by trade barriers and decreased
global demand in connection with the COVID-19 pandemic.
Table of Contents
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
Impact of COVID-19 on the Company
The Company, and the ethanol industry as a whole, experienced significant
adverse conditions throughout 2020 and into 2021, as the COVID-19 pandemic
significantly reduced travel and demand for fuel, including the ethanol we
produce. Reduced demand and high industry inventory levels resulted in record
low ethanol prices in the second and third fiscal quarters of 2020. As a result,
we experienced negative operating margins, significantly lower cash flow from
operations and substantial net losses. In response to these adverse market
conditions, HLBE idled its ethanol production from on or about March 30, 2020
through approximately May 31, 2020 and GFE temporarily idled its operations from
on or about April 3, 2020 through approximately May 18, 2020. Fuel prices
generally, and ethanol prices specifically, have rebounded since the spring of
2020 and remained largely steady during the three months ended April 30, 2021,
and management believes there is potential for fuel demand to increase as
COVID-19 related restrictions are lifted and travel increases. However, it is
possible that unforeseen consequences of the pandemic will cause fuel demand and
ethanol prices to remain flat or decrease, thus negatively affecting our
business. The Company continues to monitor COVID-19 developments to determine if
adjustments to production are warranted.
The Company has enacted appropriate safety measures to protect the health and
safety of our employees, customers, partners and suppliers, and we may take
further actions as government authorities require or recommend or as we
determine to be in the best interests of our employees, customers, partners and
Management believes that various factors, including unemployment benefits
offered in response to the COVID-19 pandemic, have contributed to a labor
shortage. While we currently have sufficient employees to operate our production
facility, it is possible that a shortage of qualified, available workers could
result in higher labor costs and could negatively affect our ability to
efficiently operate our production facility.
Supply and Demand
Although we continue to regularly monitor the financial health of companies in
our supply chain, financial hardship on our suppliers caused by the COVID-19
pandemic could cause a disruption in our ability to obtain raw materials or
components required to produce our products, adversely affecting our operations.
Various factors, including disruptions caused by the COVID-19 pandemic, have
resulted in significant increases in the costs of raw materials, including the
corn we rely on to produce ethanol. Additionally, restrictions or disruptions of
transportation, such as reduced availability of truck, rail or air transport,
port closures and increased border controls or closures, may result in higher
costs and delays, both with respect to obtaining raw materials and shipping
finished products to customers, which could harm our profitability, make our
products less competitive, or cause our customers to seek alternative suppliers.
Additionally, the COVID-19 pandemic has significantly increased economic and
demand uncertainty. The pandemic has caused a global economic slowdown, and it
is possible that it could cause a global recession. In the event of a recession,
demand for our products would decline further and our business would be further
Table of Contents
On April 17, 2020, the Company received a loan in the amount of $703,900 through
the Paycheck Protection Program, which was forgiven in full during February
2021. Additionally, on April 18, 2020 HLBE received a loan in the amount of
$595,693 through the Paycheck Protection Program, which was forgiven in full
during March 2021.
The Company received a second Paycheck Protection Program loan in February 2021
the amount of $703,900. Management expects the entire loan will be used for
payroll, utilities and interest; therefore, management anticipates that the loan
will be substantially forgiven. To the extent it is not forgiven, the Company
would be required to repay that portion at an interest rate of 1% with principal
repayment installments beginning in June 2022 with a final installment in
HLBE received a second Paycheck Protection Program loan in February 2021 in the
amount of $595,693. Management expects the entire loan will be used for payroll,
utilities and interest; therefore, management anticipates that the loan will be
substantially forgiven. To the extent it is not forgiven, HLBE would be required
to repay that portion at an interest rate of 1% with principal repayment
installments beginning in March 2022 with a final installment in February 2026.
The adverse conditions created by the COVID-19 pandemic caused the Company to
experience negative operating margins, significantly lower cash flow from
operations and substantial net losses. Although there is uncertainty related to
the ongoing impact of the COVID-19 pandemic on our future results, we believe
our current cash reserves, cash generated from our operations, our Paycheck
Protection Program loans and the available cash under our revolving loans leave
us well-positioned to manage our business.
While the lifting of restrictions related to the COVID-19 pandemic have improved
the overall economic outlook, the pandemic is ongoing, and its dynamic nature
makes it difficult to forecast the long-term effects on our industry as a whole
and our Company specifically. New variants of the virus that causes COVID-19 may
prolong the pandemic, create additional waves of infections, or impose other
unforeseen challenges. It is possible that even after the pandemic has subsided,
there will be permanent changes to social and economic patterns, such as an
increase remote working, that will limit travel and thereby suppress demand for
fuel, including the ethanol we produce.
Despite the economic uncertainty resulting from the COVID-19 pandemic, we intend
to continue to focus on strategic initiatives designed to improve on our
operational efficiencies, which is critical in order to drive positive results
in a low-margin environment.
Government Supports and Regulation
The Renewable Fuels Standard
The ethanol industry is dependent on several economic incentives to produce
ethanol, the most significant of which is the federal RFS. The RFS has been,
and we expect will continue to be, a significant factor impacting ethanol usage.
Opponents of the RFS have sought to restrict or eliminate the standard through
various litigation and legislative actions. Any adverse ruling on, or
legislation affecting, the RFS could have an adverse impact on ethanol prices
and our financial performance in the future.
The Biden administration has indicated support for RFS blending rules and energy
policies that could be beneficial to the ethanol industry and our business.
Specifically, the EPA under the Biden administration has announced it supports
the interpretation of the RFS's small-refinery provisions made by U.S. Court of
Appeals for the Tenth Circuit in a 2020 decision. In the case, Renewable Fuels
Association et al. v. EPA, various agriculture and biofuel groups challenged the
EPA's grant of waivers to three specific refineries. The waived gallons were not
redistributed to obligated parties, and thus reduced the aggregate RVOs under
the RFS. In January 2020, the court struck down the exemptions as improperly
issued by the EPA. The court interpreted the RFS statute to require that any
exemption granted to a small refinery after 2010 must take the form of an
"extension." In February 2021, the EPA announced it supported the 10th Circuit's
interpretation of the RFS, reversing the position the EPA took under the
previous administration. Nonetheless, it is uncertain whether the 10th Circuit's
interpretation will be upheld or whether the Biden administration will continue
Table of Contents
support energy policies that benefit the ethanol industry and our business. The
case was appealed to the U.S. Supreme Court, which heard arguments in the case
in April 2021. The Supreme Court's decision in the case is expected in the
summer of 2021.
Additional legal actions related to the RFS are underway. These include lawsuits
challenging fuel volume waivers based on "inadequate domestic supply,"
challenging the EPA's lower threshold for granting small refinery exemptions,
seeking broader, forward-looking remedy to account for the collective lost
volumes caused by recent small refinery exemptions, alleging that the EPA and
U.S. Department of Energy have improperly denied access to public records
request by RFA, and challenging the Final 2019 Rule over the EPA's failure to
address small refinery exemptions in the rulemaking. If these legal actions,
which general seek to require the EPA to enforce the renewable fuel blending
requirements of the RFS, are unsuccessful, there may negative impacts on the
ethanol industry and our financial performance.
The prices of renewable identification number ("RIN") credits-the compliance
mechanisms for the RFS program administered by the EPA-increased during the
three months ended April 30, 2021, briefly approaching their highest nominal
levels in the history of the program. The corn ethanol (D6) RIN price reached
more than $1.00 per gallon in late January and early February 2021, the highest
price since 2013, when the D6 RIN price reached an all-time high. The price of
RIN credits reflect compliance and trading activity related to the RFS and can
either be used to comply with the RFS or traded in the secondary market to
buyers seeking to comply with the RFS. Increases in RIN prices can encourage
increased biofuel consumption, according to the EIA.
In response to the COVID-19 pandemic, Congress passed the Coronavirus Aid,
Relief and Economic Security Act (the "CARES Act") in March 2020 in an attempt
to offset some of the economic damage arising from the COVID-19 pandemic. The
CARES Act created and funded multiple programs that have impacted or could
impact our industry. The USDA was given additional resources for the Commodity
Credit Corporation (CCC), which it is using to provide direct payments to
farmers, including corn farmers from whom we purchase most of our feedstock for
ethanol production. Similar to the trade aid payments made by the USDA over the
past two years, this cash injection for farmers could cause them to delay
marketing decisions and increase the price we have to pay to purchase the corn.
The CARES Act also provided for the Small Business Administration to assist
companies that constitute small business and keep them from laying off workers.
The Paycheck Protection Program (the "PPP") was created and quickly paid out all
of the funds appropriated, including some to farmers and to ethanol plants.
Although we received our first PPP Loan under the CARES Act, as discussed above,
the receipt of PPP funds by farmers could, like the CCC funds, incentivize them
to delay marketing corn which could increase the price of corn.
On December 27, 2020, the federal government enacted Consolidated Appropriations
Act, 2021, a second COVID-19 relief package. Among other things, the legislation
authorized additional PPP loans. In February 2021, GFE received a second
Paycheck Protection Program loan in the amount of $703,900 and HLBE received a
second Paycheck Protection Program loan in the amount of $595,693. Management
expects the entirety of both loans will be used for payroll, utilities and
interest; therefore, management anticipates that the loan will be substantially
On March 11, 2021, the federal government enacted the American Rescue Plan Act
of 2021, which provided $1.9 trillion in economic stimulus through various
programs intended to accelerate the nation's recovery from the COVID-19
pandemic. The American Rescue Plan primarily provided additional funding for
programs created in previous COVID-19 legislation, such as increased
unemployment benefits, direct payments to households, expanded paid sick leave,
increased food stamp benefits, rental assistance, and small business grants.
Management believes the legislation could contribute to inflation, including
increases in the costs of labor and the raw materials we require to produce
ethanol, and thus could negatively affect our operating margins.
Table of Contents
Results of Operations for the Three Months Ended April 30, 2021 and 2020
The following table shows summary information from the results of our operations
and the approximate percentage of revenues, costs of goods sold, operating
expenses and other items to total revenues in our unaudited condensed
consolidated statements of operations for the three months ended April 30, 2021
and 2020 (amounts in thousands).
© Edgar Online, source Glimpses