Form 10-Q Green Plains Partners For: Sep 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
(Mark One)
For the Quarterly Period Ended September 30, 2022
OR
For the transition period from ______ to ______
Commission File Number 001-37469
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
( | |||||
| (Address of principal executive offices, including zip code) | (Registrant’s telephone number, including area code) | ||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o | |||||
Non-Accelerated Filer ¨ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
The registrant had 23,246,822 common units outstanding as of October 28, 2022.
TABLE OF CONTENTS
| Page | ||||||||
2
Commonly Used Defined Terms
The abbreviations, acronyms and industry terminology used in this quarterly report are defined as follows:
| Green Plains Partners LP, Subsidiaries, and Partners: | |||||
| Green Plains Operating Company | Green Plains Operating Company LLC | ||||
| Green Plains Partners; the partnership | Green Plains Partners LP and its subsidiaries | ||||
| NLR | NLR Energy Logistics LLC | ||||
| Green Plains Inc. and Subsidiaries: | |||||
| Green Plains; the parent or sponsor | Green Plains Inc. and its subsidiaries | ||||
| Green Plains Holdings, the general partner | Green Plains Holdings LLC | ||||
| Green Plains Trade | Green Plains Trade Group LLC | ||||
| Other Defined Terms: | |||||
| 2021 annual report | The partnership’s annual report on Form 10-K for the year ended December 31, 2021, filed February 18, 2022 | ||||
| ARO | Asset retirement obligation | ||||
| ASC | Accounting Standards Codification | ||||
| Bgy | Billion gallons per year | ||||
| BlackRock | Funds and accounts managed by BlackRock | ||||
| Conflicts committee | The partnership’s committee responsible for reviewing situations involving certain transactions with affiliates or other potential conflicts of interest | ||||
| COVID-19 | Coronavirus Disease 2019 | ||||
| D.C. | District of Columbia | ||||
| DOE | Department of Energy | ||||
| E10 | Gasoline blended with up to 10% ethanol by volume | ||||
| E15 | Gasoline blended with up to 15% ethanol by volume | ||||
| E85 | Gasoline blended with up to 85% ethanol by volume | ||||
| EBITDA | Earnings before interest, taxes, depreciation and amortization | ||||
| EIA | U.S. Energy Information Administration | ||||
| EPA | U.S. Environmental Protection Agency | ||||
| Exchange Act | Securities Exchange Act of 1934, as amended | ||||
| FASB | Financial Accounting Standards Board | ||||
| FFV | Flexible-fuel vehicle | ||||
| GAAP | U.S. Generally Accepted Accounting Principles | ||||
| LIBOR | London Interbank Offered Rate | ||||
| LTIP | Green Plains Partners LP 2015 Long-Term Incentive Plan | ||||
MSCTM | Maximized Stillage Coproducts produced using process technology developed by Fluid Quip Technologies LLC | ||||
| Mmg | Million gallons | ||||
| MTBE | Methyl tertiary-butyl ether | ||||
| Partnership agreement | First Amended and Restated Agreement of Limited Partnership of Green Plains Partners LP, dated as of July 1, 2015, between Green Plains Holdings LLC and Green Plains Inc. | ||||
| RFS | Renewable Fuels Standard | ||||
| RIN | Renewable identification number | ||||
| RVO | Renewable volume obligation | ||||
| SEC | Securities and Exchange Commission | ||||
| SRE | Small refinery exemption | ||||
| USDA | U.S. Department of Agriculture | ||||
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
GREEN PLAINS PARTNERS LP
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit amounts)
| September 30, 2022 | December 31, 2021 | ||||||||||
| (unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable | |||||||||||
| Accounts receivable from affiliates | |||||||||||
| Prepaid expenses and other | |||||||||||
| Total current assets | |||||||||||
Property and equipment, net of accumulated depreciation and amortization of $ | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Investment in equity method investee | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND PARTNERS' EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accounts payable to affiliates | |||||||||||
| Accrued and other liabilities | |||||||||||
| Asset retirement obligations | |||||||||||
| Operating lease current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Asset retirement obligations | |||||||||||
| Operating lease long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 9) | |||||||||||
| Partners' equity | |||||||||||
Common unitholders - public ( | |||||||||||
Common unitholders - Green Plains ( | ( | ( | |||||||||
| General partner interests | |||||||||||
| Total partners' equity | |||||||||||
| Total liabilities and partners' equity | $ | $ | |||||||||
See accompanying notes to the consolidated financial statements.
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GREEN PLAINS PARTNERS LP
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per unit amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Affiliate | $ | $ | $ | $ | |||||||||||||||||||
| Non-affiliate | |||||||||||||||||||||||
| Total revenues | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Operations and maintenance (excluding depreciation and amortization reflected below) | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Income before income taxes and income from equity method investee | |||||||||||||||||||||||
| Income tax expense | ( | ( | ( | ( | |||||||||||||||||||
| Income from equity method investee | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Net income attributable to partners' ownership interests: | |||||||||||||||||||||||
| General partner | $ | $ | $ | $ | |||||||||||||||||||
| Limited partners - common unitholders | |||||||||||||||||||||||
| Earnings per limited partner unit (basic and diluted): | |||||||||||||||||||||||
| Common units | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average limited partner units outstanding (basic and diluted): | |||||||||||||||||||||||
| Common units | |||||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
5
GREEN PLAINS PARTNERS LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Accretion | ( | ||||||||||
| Amortization of debt issuance costs | |||||||||||
| Loss on extinguishment of debt | |||||||||||
| Unit-based compensation | |||||||||||
| Income from equity method investee | ( | ( | |||||||||
| Other | ( | ||||||||||
| Changes in operating assets and liabilities before effects of asset dispositions: | |||||||||||
| Accounts receivable | |||||||||||
| Accounts receivable from affiliates | ( | ||||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Accounts payable and accrued liabilities | ( | ( | |||||||||
| Accounts payable to affiliates | ( | ( | |||||||||
| Operating lease liabilities and right-of-use assets | |||||||||||
| Other | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Disposition of assets | |||||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Payments of distributions | ( | ( | |||||||||
| Proceeds from revolving credit facility | |||||||||||
| Payments on revolving credit facility | ( | ||||||||||
| Proceeds from issuance of long-term debt | |||||||||||
| Principal payments on long-term debt | ( | ( | |||||||||
| Payments of loan fees | ( | ||||||||||
| Other | |||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net change in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Supplemental disclosures of cash flow: | |||||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Cash paid for interest | $ | $ | |||||||||
| Non-cash investing activities: | |||||||||||
| Assets disposed of in sale | $ | $ | |||||||||
See accompanying notes to the consolidated financial statements.
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GREEN PLAINS PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
References to “we,” “our,” “us” or “the partnership” in the consolidated financial statements and notes to the consolidated financial statements refer to Green Plains Partners LP and its subsidiaries.
Green Plains Holdings LLC, a wholly owned subsidiary of Green Plains Inc., serves as the general partner of the partnership. References to (i) “the general partner” and “Green Plains Holdings” refer to Green Plains Holdings LLC; (ii) “the parent,” “the sponsor” and “Green Plains” refer to Green Plains Inc.; and (iii) “Green Plains Trade” refers to Green Plains Trade Group LLC, a wholly owned subsidiary of Green Plains.
Consolidated Financial Statements
The consolidated financial statements include the accounts of the partnership and its controlled subsidiaries. All significant intercompany balances and transactions are eliminated on a consolidated basis for reporting purposes. Results for the interim periods presented are not necessarily indicative of the expected results for the entire year.
The accompanying unaudited consolidated financial statements are prepared in accordance with GAAP for interim financial information and instructions to Form 10-Q and Article 10 of Regulation S-X. Because they do not include all of the information and footnotes required by GAAP, the consolidated financial statements should be read in conjunction with the partnership’s 2021 annual report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 18, 2022.
Use of Estimates in the Preparation of Consolidated Financial Statements
Preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period. The partnership bases its estimates on historical experience and assumptions it believes are proper and reasonable under the circumstances. The partnership regularly evaluates the appropriateness of these estimates and assumptions. Actual results could differ from those estimates. Key accounting policies, including, but not limited to, those related to leases, depreciation of property and equipment, asset retirement obligations, and impairment of long-lived assets and goodwill are impacted by judgments, assumptions and estimates used to prepare the consolidated financial statements.
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Revenue Recognition
The partnership recognizes revenue when obligations under the terms of a contract with a customer are satisfied. Generally, this occurs with the completion of services or the transfer of control of products to the customer or another specified third party. For contracts with customers in which a take-or-pay commitment exists, any minimum volume deficiency charges are recognized as revenue in the period incurred and are not allowed to be credited towards excess volumes in future periods.
Please refer to Note 2 - Revenue to the consolidated financial statements for further details.
Operations and Maintenance Expenses
The partnership’s operations and maintenance expenses consist primarily of lease expenses related to the transportation assets, labor expenses, outside contractor expenses, insurance premiums, repairs and maintenance expenses, and utility costs. These expenses also include fees for certain management, maintenance and operational services to support the storage and terminal facilities, trucks, and leased railcar fleet allocated by Green Plains under the operational services and secondment agreement.
Impairment of Long-Lived Assets and Goodwill
The partnership reviews its long-lived assets, currently consisting primarily of property and equipment and operating lease right-of-use assets, for impairment when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. No
Leases
The partnership leases certain facilities, parcels of land, and railcars. These leases are accounted for as operating leases, with lease expense recognized on a straight-line basis over the lease term. The term of the lease may include options to extend or terminate the lease when it is reasonably certain that such options will be exercised. For leases with initial terms greater than 12 months, the partnership records operating lease right-of-use assets and corresponding operating lease liabilities. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet. The partnership had $0.1 no
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Operating lease right-of-use assets represent the right to control an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the partnership’s leases do not provide an implicit rate, the incremental borrowing rate is used based on information available at the commencement date to determine the present value of future payments.
The partnership utilizes a portfolio approach for lease classification, which allows for an entity to group together leases with similar characteristics, provided that its application does not create a material difference when compared to accounting for the leases at a contract level. For the partnership’s railcar leases, the partnership combines the railcars within each contract rider and accounts for each contract rider as an individual lease.
From a lessee perspective, the partnership combines both the lease and non-lease components and accounts for them as one lease component. Certain of the partnership’s railcar agreements provide for maintenance costs to be the responsibility of the partnership as incurred or charged by the lessor. This maintenance cost is a non-lease component that the partnership combines with the monthly rental payment and accounts for the total cost as operating lease expense. In addition, the partnership has a land lease that contains a non-lease component for the handling and unloading services the landlord provides. The partnership combines the cost of services with the land lease cost and accounts for the total as operating lease expense.
The partnership records operating lease revenue as part of its operating lease agreements for storage and throughput services, rail transportation services, and certain terminal services. In addition, the partnership may sublease certain of its railcars to third parties on a short-term basis. These subleases are classified as operating leases, with the associated sublease revenue recognized on a straight-line basis over the sublease lease term.
From a lessor perspective, the partnership classifies certain costs as lease costs for accounting purposes, which may differ from a tax or legal perspective. The partnership combines both the lease and non-lease components and accounts for them as one lease component. The storage and throughput agreement consists of costs paid by Green Plains Trade for the rental of the terminal facilities, which for accounting purposes are treated as lease costs, as well as other costs for the throughput services provided by the partnership, which are treated as non-lease costs. For this agreement, the partnership combines the facility rental revenue and the service revenue and accounts for the total as leasing revenue. Similarly, the railcar transportation services agreement consists of costs paid by Green Plains Trade for the use of the partnership’s railcar assets, which are treated as lease costs for accounting purposes, as well as costs for logistical operations management and other services, which are treated as non-lease costs. For this agreement, the partnership combines the railcar rental revenue and the service revenue and accounts for the total as leasing revenue.
Please refer to Note 9 – Commitments and Contingencies to the consolidated financial statements for further details on operating lease expense and revenue. Please refer to Note 2 - Revenue to the consolidated financial statements for further details on the operating lease agreements in which the partnership is a lessor.
Segment Reporting
The partnership accounts for segment reporting in accordance with ASC 280, Segment Reporting, which establishes standards for entities reporting information about the operating segments and geographic areas in which they operate. Management evaluated how its chief operating decision maker has organized the partnership for purposes of making operating decisions and assessing performance, and concluded it has one reportable segment.
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Recent Accounting Pronouncements
In March 2020, the FASB issued amended guidance in ASC 848, Reference Rate Reform, and subsequent updates in January 2021 and October 2022, which provide optional expedients and exceptions to U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. The expedients and exceptions provided by the amended guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2024, except for hedging relationships existing as of December 31, 2024, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The guidance is effective upon issuance and to be applied prospectively from any date beginning March 12, 2020, through December 31, 2024. The partnership does not have any hedges and the amended guidance is not expected to have a material impact on the partnership’s consolidated financial statements.
2. REVENUE
Revenue Recognition
The partnership recognizes revenue when obligations under the terms of a contract with a customer are satisfied. Generally, this occurs with the completion of services or the transfer of control of products to the customer or another specified third party. Revenue is measured as the amount of consideration expected to be received in exchange for providing services.
Revenue by Source
The following table disaggregates our revenue by major source (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Service revenues | |||||||||||||||||||||||
| Terminal services | $ | $ | $ | $ | |||||||||||||||||||
| Trucking and other | |||||||||||||||||||||||
| Total service revenues | |||||||||||||||||||||||
Leasing revenues (1) | |||||||||||||||||||||||
| Storage and throughput services | |||||||||||||||||||||||
| Railcar transportation services | |||||||||||||||||||||||
| Terminal services | |||||||||||||||||||||||
| Total leasing revenues | |||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | |||||||||||||||||||
(1) Leasing revenues do not represent revenues recognized from contracts with customers under ASC 606, Revenue from Contracts with Customers, and are accounted for under ASC 842, Leases.
Terminal Services Revenue
The partnership provides terminal services and logistics solutions to Green Plains Trade, and other customers, through its fuel terminal facilities under various terminal service agreements, some of which have minimum volume commitments. Revenue generated by these terminals is disaggregated between service revenue and leasing revenue. If Green Plains Trade, or other customers, fail to meet their minimum volume commitments during the applicable term, a deficiency payment equal to the deficient volume multiplied by the applicable fee is charged. Deficiency payments related to the partnership’s terminal services revenue may not be utilized as credits toward future volumes. At terminals where customers have shared use of terminal and tank storage assets, revenue is generated from contracts with customers and accounted for as service revenue. This service revenue is recognized at the point in time when product is withdrawn from tank storage.
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At terminals where a customer is predominantly provided exclusive use of the terminal or tank storage assets, the partnership is considered a lessor as part of an operating lease agreement. Revenue is recognized over the term of the lease based on the minimum volume commitment or total actual throughput if in excess of the minimum volume commitment.
Trucking and Other Revenue
The partnership transports ethanol, natural gasoline, other refined fuels and feedstocks by truck from identified receipt points to various delivery points. Trucking revenue is recognized over time based on the percentage of total miles traveled, which is on average less than 100 miles.
Railcar Transportation Services Revenue
Under the rail transportation services agreement, Green Plains Trade is obligated to use the partnership to transport ethanol and other fuels from receipt points identified by Green Plains Trade to nominated delivery points. Green Plains Trade is required to pay the partnership fees for the minimum railcar volumetric capacity provided, regardless of utilization of that capacity. However, Green Plains Trade is not charged for railcar volumetric capacity that is not available for use due to inspections, upgrades or routine repairs and maintenance. Revenue associated with the rail transportation services fee is considered leasing revenue and is recognized over the term of the lease based on the actual average daily railcar volumetric capacity provided. The partnership may also charge Green Plains Trade a related services fee for logistical operations management of railcar volumetric capacity utilized by Green Plains Trade which is not provided by the partnership. Revenue associated with the related services fee is also considered leasing revenue and recognized over the term of the lease based on the average volumetric capacity for which services are provided.
Storage and Throughput Revenue
The partnership generates leasing revenue from its storage and throughput agreement with Green Plains Trade based on contractual rates charged for the handling, storage and throughput of ethanol. Under this agreement, Green Plains Trade is required to pay the partnership a fee for a minimum volume commitment regardless of the actual volume delivered. If Green Plains Trade fails to meet its minimum volume commitment during any quarter, the partnership charges Green Plains Trade a deficiency payment equal to the deficient volume multiplied by the applicable fee. The deficiency payment may be applied as a credit toward volumes delivered by Green Plains Trade in excess of the minimum volume commitment during the following four quarters, after which time any unused credits will expire. Revenue is recognized over the term of the lease based on the minimum volume commitment or total actual throughput if in excess of the minimum volume commitment.
Payment Terms
The partnership has standard payment terms, which vary depending on the nature of the services provided, with the majority of terms falling within 10 to 30 days after transfer of control or completion of services. Contracts generally do not include a significant financing component in instances where the timing of revenue recognition differs from the timing of invoicing.
Major Customers
Revenue from Green Plains Trade Group was $19.0 million and $55.9 million for the three and nine months ended September 30, 2022, respectively, and $18.3 million and $56.1 million for the three and nine months ended September 30, 2021, respectively, which exceeds 10
Contract Liabilities
The partnership records unearned revenue when consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of service and lease agreements. Unearned revenue from service agreements, which represents a contract liability, is recorded for fees that have been charged to the customer prior to the completion of performance obligations, and is generally recognized in the subsequent quarter.
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The following table reflects the changes in our unearned revenue from service agreements, which is recorded in accrued and other liabilities on the consolidated balance sheets, for the three and nine months ended September 30, 2022 (in thousands):
| Amount | |||||
| Balance at January 1, 2022 | $ | ||||
| Revenue recognized included in beginning balance | ( | ||||
| Net additions | |||||
| Balance at March 31, 2022 | |||||
| Revenue recognized included in beginning balance | ( | ||||
| Net additions | |||||
| Balance at June 30, 2022 | |||||
| Revenue recognized included in beginning balance | ( | ||||
| Net additions | |||||
| Balance at September 30, 2022 | $ | ||||
The partnership expects to recognize all of the unearned revenue associated with service agreements from contracts with customers as of September 30, 2022, in the subsequent quarter when the product is withdrawn from tank storage.
3. DEBT
Term Loan Facility
Green Plains Operating Company has a term loan to fund working capital, capital expenditures and other general partnership purposes. On July 20, 2021, the credit facility was amended, decreasing the total amount available to $60.0 million, extending the maturity from December 31, 2021 to July 20, 2026, and converting the credit facility to a term loan. Under the terms of the amended agreement, BlackRock purchased the outstanding balance of the prior credit facility from the previous lenders. On February 11, 2022, the Amended Credit Facility was modified to allow Green Plains Partners and its affiliates to repurchase outstanding notes and in conjunction, the partnership repurchased $1.0 million of the outstanding notes and subsequently retired the notes. Interest on the term loan is based on three-month LIBOR plus 8.00 %, with a 0 % LIBOR floor. Interest is payable on the 15th day of each March, June, September and December during the term, which commenced September 15, 2021. The amended term loan does not require any principal payments; however, the partnership has the option to prepay $1.5 million per quarter beginning twelve months after the closing date. During the nine months ended September 30, 2021, the partnership made $50.0 million in principal payments on the term loan, including $19.5 million of scheduled repayments, $27.5 million related to the sale of the storage assets located adjacent to the Ord, Nebraska ethanol plant, and a $3.0 million prepayment made with excess cash. As of September 30, 2022, the term loan had an outstanding balance of $59.0 million and an interest rate of 11.19 %.
The partnership’s obligations under the term loan are secured by a first priority lien on (i) the equity interests of the partnership’s present and future subsidiaries, (ii) all of the partnership’s present and future personal property, such as investment property, general intangibles and contract rights, including rights under any agreements with Green Plains Trade, (iii) all proceeds and products of the equity interests of the partnership’s present and future subsidiaries and its personal property and (iv) substantially all of the partnership’s real property and material leases of real property. The terms impose affirmative and negative covenants, including restrictions on the partnership’s ability to incur additional debt, acquire and sell assets, create liens, invest capital, pay distributions and materially amend the partnership’s commercial agreements with Green Plains Trade. The term loan also requires the partnership to maintain a maximum consolidated leverage ratio and a minimum consolidated debt service coverage ratio, each of which is calculated on a pro forma basis with respect to acquisitions and divestitures occurring during the applicable period. As of the end of any fiscal quarter, the maximum consolidated leverage ratio required is no more than 2.50 x and the minimum debt service coverage ratio required is no less 1.10 x. The consolidated leverage ratio is calculated by dividing total funded indebtedness by the sum of the four preceding fiscal quarters’ consolidated EBITDA. The consolidated debt service coverage ratio is calculated by taking the sum of the four preceding fiscal quarters’ consolidated EBITDA minus income taxes and consolidated capital expenditures for such period divided by the sum of the four preceding fiscal quarters’ consolidated interest charges plus consolidated scheduled funded debt payments for such period. Under the amended terms of the loan, the partnership has no restrictions on the amount of quarterly distribution payments, so long as (i) no default has occurred and is continuing, or would result
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from payment of the distribution, and (ii) the partnership and its subsidiaries are in compliance with its financial covenants and remain in compliance after payment of the distribution.
The partnership had $59.0 million and $60.0 million of borrowings outstanding as of September 30, 2022, and December 31, 2021, respectively. In addition, the partnership had $0.5
Covenant Compliance
The partnership, including all of its subsidiaries, was in compliance with its debt covenants as of September 30, 2022.
4. DISPOSITIONS
Ord Disposition
On March 22, 2021, Green Plains completed the sale of its ethanol plant located in Ord, Nebraska to GreenAmerica Biofuels Ord LLC. Correspondingly, the partnership’s storage assets located adjacent to the Ord plant were sold to Green Plains for $27.5 million, along with the transfer of associated railcar operating leases.
This transaction was accounted for as a transfer between entities under common control and was approved by the conflicts committee. There were no material transaction costs recorded for the disposition.
The following is a summary of assets and liabilities disposed of or assumed (in thousands):
| Total consideration | $ | ||||
| Identifiable assets and liabilities disposed of: | |||||
| Property and equipment, net | |||||
| Operating lease right-of-use assets | |||||
| Operating lease current liabilities | ( | ||||
| Operating lease long-term liabilities | ( | ||||
| Total identifiable net assets | |||||
| Partners' equity effect | $ | ||||
In conjunction with the disposition, the partnership amended the 1) operational services agreement, 2) ethanol storage and throughput agreement, and 3) rail transportation services agreement. Please refer to Note 10 – Related Party Transactions to the consolidated financial statements for additional information.
5. UNIT-BASED COMPENSATION
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The non-vested unit-based award activity for the nine months ended September 30, 2022, is as follows:
| Non-Vested Units | Weighted-Average Grant-Date Fair Value | Weighted-Average Remaining Vesting Term (in years) | |||||||||||||||
| Non-vested at December 31, 2021 | $ | ||||||||||||||||
| Granted | |||||||||||||||||
| Vested | ( | ||||||||||||||||
| Non-vested at September 30, 2022 | $ | ||||||||||||||||
Compensation costs related to the unit-based awards of $61 thousand and $180 thousand were recognized during the three and nine months ended September 30, 2022, respectively. Compensation costs related to the unit-based awards of $60 thousand and $219 thousand were recognized during the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, there was $180 thousand of unrecognized compensation costs from unit-based compensation awards.
6. PARTNERS’ EQUITY
Changes in partners’ equity are as follows (in thousands):
| Limited Partners | General Partner | Total | |||||||||||||||||||||
| Common Units- Public | Common Units- Green Plains | ||||||||||||||||||||||
Balance, December 31, 2021 | $ | $ | ( | $ | $ | ||||||||||||||||||
Quarterly cash distributions to unitholders ($ | ( | ( | ( | ( | |||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Unit-based compensation, including general partner net contributions | |||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | ( | $ | $ | ||||||||||||||||||
Quarterly cash distributions to unitholders ($ | ( | ( | ( | ( | |||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Unit-based compensation, including general partner net contributions | |||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | ( | $ | $ | ||||||||||||||||||
Quarterly cash distributions to unitholders ($ | ( | ( | ( | ( | |||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Unit-based compensation, including general partner net contributions | |||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | ( | $ | $ | ||||||||||||||||||
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| Limited Partners | General Partner | Total | |||||||||||||||||||||
| Common Units- Public | Common Units- Green Plains | ||||||||||||||||||||||
Balance, December 31, 2020 | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
Quarterly cash distributions to unitholders ($ | ( | ( | ( | ( | |||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Ord disposition | |||||||||||||||||||||||
| Unit-based compensation, including general partner net contributions | |||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
Quarterly cash distributions to unitholders ($ | ( | ( | ( | ( | |||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Unit-based compensation, including general partner net contributions | |||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
Quarterly cash distributions to unitholders ($ | ( | ( | ( | ( | |||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Unit-based compensation, including general partner net contributions | |||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | ( | $ | $ | ||||||||||||||||||
A roll forward of the number of common limited partner units outstanding is as follows:
| Common Units- Public | Common Units- Green Plains | Total | |||||||||||||||
| Units, December 31, 2021 | |||||||||||||||||
| Units issued under the LTIP | |||||||||||||||||
| Units surrendered for tax purposes | ( | ( | |||||||||||||||
| Units, September 30, 2022 | |||||||||||||||||
Issuance of Additional Securities
The partnership agreement authorizes the partnership to issue unlimited additional partnership interests on the terms and conditions determined by the general partner without unitholder approval.
Cash Distribution Policy
Quarterly distributions are made from available cash within 45 days after the end of each calendar quarter, assuming the partnership has available cash. Available cash generally means all cash and cash equivalents on hand at the end of that quarter less cash reserves established by the general partner, including those for future capital expenditures, future acquisitions and anticipated future debt service requirements, plus all or any portion of the cash on hand resulting from working capital borrowings made subsequent to the end of that quarter.
The general partner also holds incentive distribution rights that entitle it to receive increasing percentages, up to 48 %, of available cash distributed from operating surplus, as defined in the partnership agreement, in excess of $0.46 per unit per quarter. The maximum distribution of 48 % does not include any distributions the general partner or its affiliates may receive on its general partner interest or common units.
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On February 11, 2022, the partnership distributed $10.4 million to unitholders of record as of February 4, 2022, related to the quarterly cash distribution of $0.44 per unit that was declared on January 20, 2022, for the quarter ended December 31, 2021.
On May 13, 2022, the partnership distributed $10.5 million to unitholders of record as of May 6, 2022, related to the quarterly cash distribution of $0.445 per unit that was declared on April 21, 2022, for the quarter ended March 31, 2022.
On August 12, 2022, the partnership distributed $10.7 million to unitholders of record as of August 5, 2022, related to the quarterly cash distribution of $0.45 per unit that was declared on July 21, 2022, for the quarter ended June 30, 2022.
On October 20, 2022, the board of directors of the general partner declared a quarterly cash distribution of $0.455 per unit, or approximately $10.8 million, for the quarter ended September 30, 2022. The distribution is payable on November 14, 2022, to unitholders of record at the close of business on November 4, 2022.
The total cash distributions declared for the three and nine months ended September 30, 2022 and 2021, are as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| General partner distributions | $ | $ | $ | $ | |||||||||||||||||||
| Limited partner common units - public | |||||||||||||||||||||||
| Limited partner common units - Green Plains | |||||||||||||||||||||||
| Total distributions to limited partners | |||||||||||||||||||||||
| Total distributions declared | $ | $ | $ | $ | |||||||||||||||||||
7. EARNINGS PER UNIT
The partnership computes earnings per unit using the two-class method. Earnings per unit applicable to common units is calculated by dividing the respective limited partners’ interest in net income by the weighted average number of common units outstanding during the period, adjusted for the dilutive effect of any outstanding dilutive securities. Diluted earnings per limited partner unit was the same as basic earnings per limited partner unit as there were no potentially dilutive common units outstanding as of September 30, 2022.
The following tables show the calculation of earnings per limited partner unit – basic and diluted (in thousands, except for per unit data):
| Three Months Ended September 30, 2022 | |||||||||||||||||
Limited Partner Common Units | General Partner | Total | |||||||||||||||
| Net income: | |||||||||||||||||
| Distributions declared | $ | $ | $ | ||||||||||||||
| Earnings less than distributions | ( | ( | ( | ||||||||||||||
| Total net income | $ | $ | $ | ||||||||||||||
| Weighted-average units outstanding - basic and diluted | |||||||||||||||||
| Earnings per limited partner unit - basic and diluted | $ | ||||||||||||||||
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| Nine Months Ended September 30, 2022 | |||||||||||||||||
Limited Partner Common Units | General Partner | Total | |||||||||||||||
| Net income: | |||||||||||||||||
| Distributions declared | $ | $ | $ | ||||||||||||||
| Earnings less than distributions | ( | ( | ( | ||||||||||||||
| Total net income | $ | $ | $ | ||||||||||||||
| Weighted-average units outstanding - basic and diluted | |||||||||||||||||
| Earnings per limited partner unit - basic and diluted | $ | ||||||||||||||||
| Three Months Ended September 30, 2021 | |||||||||||||||||
Limited Partner Common Units | General Partner | Total | |||||||||||||||
| Net income: | |||||||||||||||||
| Distributions declared | $ | $ | $ | ||||||||||||||
Earnings less than distributions | ( | ( | ( | ||||||||||||||
| Total net income | $ | $ | $ | ||||||||||||||
| Weighted-average units outstanding - basic and diluted | |||||||||||||||||
| Earnings per limited partner unit - basic and diluted | $ | ||||||||||||||||
| Nine Months Ended September 30, 2021 | |||||||||||||||||
Limited Partner Common Units | General Partner | Total | |||||||||||||||
| Net income: | |||||||||||||||||
| Distributions declared | $ | $ | $ | ||||||||||||||
| Earnings in excess of distributions | |||||||||||||||||
| Total net income | $ | $ | $ | ||||||||||||||
| Weighted-average units outstanding - basic and diluted | |||||||||||||||||
| Earnings per limited partner unit - basic and diluted | $ | ||||||||||||||||
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8. INCOME TAXES
The partnership is a limited partnership, which is not subject to federal income taxes. However, the partnership is subject to state income taxes in certain states. As a result, the financial statements reflect a provision or benefit for such income taxes. The general partner and the unitholders are responsible for paying federal and state income taxes on their share of the partnership’s taxable income. The partnership’s income tax balances did not have a material impact on the financial statements.
The partnership recognizes uncertainties in income taxes based upon the technical merits of the position, and measures the maximum benefit and degree of likelihood to determine the tax liability in the financial statements. The partnership does not have any material uncertain tax positions as of September 30, 2022.
9. COMMITMENTS AND CONTINGENCIES
Operating Lease Expense
The partnership leases certain facilities, parcels of land, and railcars with remaining terms ranging from less than one year to approximately 9.1 years, including renewal options reasonably certain to be exercised for the land and facility leases. Railcar agreement renewals are not considered reasonably certain to be exercised as they typically renew with different underlying terms.
The components of lease expense for the three and nine months ended September 30, 2022 and 2021, are as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Lease expense | |||||||||||||||||||||||
| Operating lease expense | $ | $ | $ | $ | |||||||||||||||||||
Variable lease expense (benefit) (1) | ( | ||||||||||||||||||||||
| Total lease expense | $ | $ | $ | $ | |||||||||||||||||||
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Supplemental cash flow information related to operating leases is as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||||||||||||||
| Operating cash flows from operating leases | $ | $ | $ | $ | |||||||||||||||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||||||||||||||
| Operating leases | |||||||||||||||||||||||
| Right-of-use assets and lease obligations derecognized due to lease modifications: | |||||||||||||||||||||||
| Operating leases | |||||||||||||||||||||||
Supplemental balance sheet information related to operating leases is as follows:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Weighted average remaining lease term | |||||||||||
| Weighted average discount rate | % | % | |||||||||
Aggregate minimum lease payments under the operating lease agreements for the remainder of 2022 and in future years are as follows (in thousands):
Year Ending December 31, | Amount | ||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
Thereafter | |||||
Total | |||||
| Less: Present value discount | ( | ||||
| Operating lease liabilities | $ | ||||
The partnership has additional railcar operating leases that will commence within the next twelve months, with undiscounted future lease payments of approximately $4.4 million and lease terms of five years . This amount is not included in the tables above.
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Lease Revenue
The components of lease revenue for the three and nine months ended September 30, 2022 and 2021, are as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Lease revenue | |||||||||||||||||||||||
| Operating lease revenue | $ | $ | $ | $ | |||||||||||||||||||
Variable lease revenue (1) | |||||||||||||||||||||||
| Total lease revenue | $ | $ | $ | $ | |||||||||||||||||||
In accordance with the amended storage and throughput agreement, Green Plains Trade is obligated to deliver a minimum volume of 217.7 mmg per calendar quarter to the partnership’s storage facilities and pay $0.05312 per gallon on all volume it throughputs associated with the agreement. The minimum volume commitment decreased from 232.5 mmg per calendar quarter to 217.7 mmg per calendar quarter as of March 22, 2021, in conjunction with the Ord disposition.
The remaining lease term for the storage and throughput agreement is 6.8 years with automatic one year renewal periods in which either party has the right to terminate the contract. Due to the unilateral right to termination during the renewal period, the lease contract would no longer contain enforceable rights or obligations. Therefore, the lease term does not include the successive one year renewal periods. Anticipated minimum operating lease revenue under this agreement assuming a consistent rate of $0.05312 per gallon for the remainder of 2022 and in future years, is as follows (in thousands):
Year Ending December 31, | Amount | ||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total | $ | ||||
In accordance with the amended rail transportation services agreement with Green Plains Trade, Green Plains Trade is required to pay the rail transportation services fee for railcar volumetric capacity provided by the partnership. The remaining lease term for this agreement is 6.8 years, with automatic one year renewal periods in which either party has the right to terminate the contract. Due to the unilateral right to termination during the renewal period, the lease contract would no longer contain enforceable rights or obligations. Therefore, the lease term does not include the successive one year renewal periods. Under the terms of the agreement, Green Plains Trade is not required to pay for volumetric capacity that is not available due to inspections, upgrades, or routine repairs and maintenance. As a result, the actual volumetric capacity billed may be reduced based on the amount of volumetric capacity available for use during any applicable period.
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Anticipated minimum operating lease revenue under this agreement for the remainder of 2022 and in future years is as follows (in thousands):
Year Ending December 31, | Amount | ||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total | $ | ||||
Other Commitments and Contingencies
The partnership has agreements for contracted services with certain vendors that require the partnership to pay minimum monthly amounts, which expire on various dates. These agreements do not contain an identified asset and therefore are not considered operating leases. The partnership satisfied the minimum commitments under these agreements during the three and nine months ended September 30, 2022 and 2021. Aggregate minimum payments under these agreements for the remainder of 2022 and in future years are as follows (in thousands):
Year Ending December 31, | Amount | ||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total | $ | ||||
Legal
The partnership may be involved in litigation that arises during the ordinary course of business. Currently, the partnership is not a party to any material litigation.
10. RELATED PARTY TRANSACTIONS
The partnership engages in various related party transactions with Green Plains and subsidiaries of Green Plains. Green Plains provides a variety of shared services to the partnership, including general management, accounting and finance, payroll and human resources, information technology, legal, communications and treasury activities. These costs are proportionally allocated by Green Plains to its subsidiaries based on common financial metrics management believes are reasonable. The partnership recorded expenses related to these shared services of $0.8 2.5 million for the three and nine months ended September 30, 2022, respectively, and $0.8 2.4 million for the three and nine months ended September 30, 2021, respectively. In addition, the partnership reimburses Green Plains for wages and benefit costs of employees directly performing services on its behalf. Green Plains may also pay certain direct costs on behalf of the partnership, which are reimbursed by the partnership. The partnership believes the consolidated financial statements reflect all material costs of doing business related to its operations, including expenses incurred by other entities on its behalf.
Omnibus Agreement
The partnership has entered into an omnibus agreement, as amended, with Green Plains and its affiliates which, among other terms and conditions, addresses the partnership’s obligation to reimburse Green Plains for direct or allocated costs and expenses incurred by Green Plains for general and administrative services; the prohibition of Green Plains and its subsidiaries from owning, operating or investing in any business that owns or operates fuel terminals or fuel transportation
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assets; the partnership’s right of first offer to acquire assets if Green Plains decides to sell them; a nontransferable, nonexclusive, royalty-free license to use the Green Plains trademark and name; the allocation of taxes among the parent, the partnership and its affiliates and the parent’s preparation and filing of tax returns; and an indemnity by Green Plains for certain environmental and other liabilities.
If Green Plains or its affiliates cease to control the general partner, then either Green Plains or the partnership may terminate the omnibus agreement, provided that (i) the indemnification obligations of the parties survive according to their respective terms; and (ii) Green Plains’ obligation to reimburse the partnership for operational failures survives according to its terms.
Operating Services and Secondment Agreement
The general partner has entered into an operational services and secondment agreement, as amended, with Green Plains. Under the terms of the agreement, Green Plains seconds employees to the general partner to provide management, maintenance and operational functions for the partnership, including regulatory matters, health, environment, safety and security programs, operational services, emergency response, employee training, finance and administration, human resources, business operations and planning. The seconded personnel are under the direct management and supervision of the general partner who reimburses the parent for the cost of the seconded employees, including wages and benefits. If a seconded employee does not devote 100% of his or her time providing services to the general partner, the general partner reimburses the parent for a prorated portion of the employee’s overall wages and benefits based on the percentage of time the employee spent working for the general partner.
Under the operational services and secondment agreement, Green Plains will indemnify the partnership from any claims, losses or liabilities incurred by the partnership, including third-party claims, arising from their performance of the operational services secondment agreement; provided, however, that Green Plains will not be obligated to indemnify the partnership for any claims, losses or liabilities arising out of the partnership’s gross negligence, willful misconduct or bad faith with respect to any services provided under the operational services and secondment agreement.
Commercial Agreements
The partnership has various fee-based commercial agreements with Green Plains Trade, including:
•Storage and throughput agreement, expiring on June 30, 2029;
•Rail transportation services agreement, expiring on June 30, 2029;
•Trucking transportation agreement, expiring on May 31, 2023;
•Terminal services agreement for the Birmingham, Alabama unit train terminal, expiring on December 31, 2023; and
•Terminal services agreement for the Collins, Mississippi terminal, expiring on December 31, 2023.
The storage and throughput, rail transportation services, and trucking transportation agreements have various automatic renewal terms if not cancelled by either party within specified timeframes. Refer to Item 15 - Exhibits, Financial Statement Schedules in our 2021 annual report for further details.
The storage and throughput agreement and terminal services agreements are supported by minimum volume commitments. The rail transportation services agreement is supported by minimum take-or-pay volumetric capacity commitments.
Under the storage and throughput agreement, as amended, Green Plains Trade is obligated to deliver a minimum volume of 217.7 mmg of product per calendar quarter to the partnership’s storage facilities and pay $0.05312 per gallon on all volume it throughputs associated with the agreement. The minimum volume commitment decreased from 232.5 mmg per calendar quarter to 217.7 mmg per calendar quarter as of March 22, 2021, in conjunction with the Ord disposition. In addition, the storage and throughput agreement with Green Plains Trade was extended an additional year to June 30, 2029 as part of this transaction.
If Green Plains Trade fails to meet its minimum volume commitment during any quarter, Green Plains Trade will pay the partnership a deficiency payment equal to the deficient volume multiplied by the applicable fee. The deficiency
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payment may be applied as a credit toward payments due on future volumes delivered by Green Plains Trade in excess of the minimum volume commitment during the following four quarters, after which time this option will expire.
For the three months ended September 30, 2022, Green Plains Trade exceeded the minimum volume commitment and utilized a prior period deficiency credit of $0.1 million toward the excess volume. Prior year credits of $1.8 million expired unused, leaving a cumulative balance of minimum volume deficiency credits available to Green Plains Trade of $1.9 million. These credits expire, if unused, as follows:
• $0.8 million, expiring on December 31, 2022; and
• $1.1 million, expiring on March 31, 2023.
The above credits have been previously recognized as revenue by the partnership, and as such, future volumes throughput by Green Plains Trade in excess of the quarterly minimum volume commitment, up to the amount of these credits, will not be recognized in revenue in future periods prior to expiration.
Under the rail transportation services agreement, Green Plains Trade is obligated to use the partnership to transport ethanol and other fuels from receipt points identified by Green Plains Trade to nominated delivery points. The average daily railcar volumetric capacity provided by the partnership was 74.7 mmg and 73.0 mmg, respectively, and the associated average monthly fee was approximately $0.0250 and $0.0236 per gallon, respectively, during the three and nine months ended September 30, 2022. The average daily railcar volumetric capacity provided by the partnership was 68.6 mmg and 70.3 mmg, respectively, and the associated monthly fee was approximately $0.0228 and $0.0230 per gallon, respectively, during the three and nine months ended September 30, 2021. The partnership’s leased railcar fleet consisted of approximately 2,500 and 2,300 railcars as of September 30, 2022 and 2021, respectively.
Green Plains Trade is also obligated to use the partnership for logistical operations management and other services related to average daily railcar volumetric capacity provided by Green Plains Trade, which was approximately 0.7 0.0013 per gallon for these services. In addition, Green Plains Trade reimburses the partnership for costs related to: (1) railcar switching and unloading fees; (2) increased costs related to changes in law or governmental regulation related to the specification, operation or maintenance of railcars; (3) demurrage charges, except when the charges are due to the partnership’s gross negligence or willful misconduct; and (4) fees related to rail transportation services under transportation contracts with third-party common carriers. As needed, Green Plains Trade contracts with the partnership for additional railcar volumetric capacity during the normal course of business at comparable margins.
Under the trucking transportation agreement, Green Plains Trade pays the partnership to transport ethanol and other fuels by truck from identified receipt points to various delivery points. Green Plains Trade is obligated to pay a monthly trucking transportation services fee equal to the aggregate volume transported in a calendar month by the partnership’s trucks, multiplied by the applicable rate for each truck lane. A truck lane is defined as a specific and routine route of travel between a point of origin and point of destination. Rates for each truck lane are negotiated based on product, location, mileage and other factors. Green Plains Trade reimburses the partnership for costs related to: (1) truck switching and unloading fees; (2) increased costs related to changes in law or governmental regulation related to the specification, operation and maintenance of trucks; and (3) fees related to trucking transportation services under transportation contracts with third-party common carriers.
Under the existing Birmingham terminal services agreement, effective through December 31, 2023, Green Plains Trade is obligated to throughput a minimum volume commitment of approximately 8.3 mmg per month and pay associated throughput fees, as well as fees for ancillary services.
The partnership recorded revenues from Green Plains Trade under the storage and throughput agreement and rail transportation services agreement of $17.2 million and $50.1 million for the three and nine months ended September 30, 2022, respectively, and $16.2 million and $49.9 million for the three and nine months ended September 30, 2021, respectively. In addition, the partnership recorded revenues from Green Plains Trade and other Green Plains subsidiaries related to trucking and terminal services of $1.9 million and $5.8 million for the three and nine months ended September 30, 2022, respectively, and $2.0 million and $6.2 million for the three and nine months ended September 30, 2021, respectively.
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Cash Distributions
The partnership distributed $5.4 million and $16.1 million to Green Plains related to the quarterly cash distribution paid for the three and nine months ended September 30, 2022, respectively, and $1.4 million and $4.3 million for the three and nine months ended September 30, 2021, respectively.
11. EQUITY METHOD INVESTMENT
NLR Energy Logistics LLC
The partnership and Delek Renewables LLC have a 50 /50 joint venture, NLR Energy Logistics LLC, which operates a unit train terminal in the Little Rock, Arkansas area with capacity to unload 110 -car unit trains and provide approximately 100,000 barrels of storage. As of September 30, 2022, the partnership’s investment balance in the joint venture was $3.6 million.
The partnership does not consolidate any part of the assets or liabilities or operating results of its equity method investee. The partnership’s share of net income or loss in the investee increases or decreases, as applicable, the carrying value of the investment. With respect to NLR, the partnership determined that this entity does not represent a variable interest entity and consolidation is not required. In addition, although the partnership has the ability to exercise significant influence over the joint venture through board representation and voting rights, all significant decisions require the consent of the other investor without regard to economic interest.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis provides information we believe is relevant to understand our consolidated financial condition and results of operations. This discussion should be read in conjunction with our unaudited consolidated financial statements and accompanying notes contained in this report together with our 2021 annual report. The results of operations for the three and nine months ended September 30, 2022, are not necessarily indicative of the results we expect for the full year.
Cautionary Information Regarding Forward-Looking Statements
Forward-looking statements are made in accordance with safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations that involve a number of risks and uncertainties and do not relate strictly to historical or current facts, but rather to plans and objectives for future operations. These statements may be identified by words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “outlook,” “plan,” “predict,” “may,” “could,” “should,” “will” and similar expressions, as well as statements regarding future operating or financial performance or guidance, business strategy, environment, key trends and benefits of actual or planned acquisitions.
Factors that could cause actual results to differ from those expressed or implied in the forward-looking statements include those discussed in Part I, Item 1A, “Risk Factors,” of our 2021 annual report and in Part II, Item 1A, “Risk Factors,” in this report, or incorporated by reference. Specifically, we may experience fluctuations in future operating results due to disruption caused by health epidemics, such as the COVID-19 outbreak; changes in general economic, market or business conditions; foreign imports of ethanol; fluctuations in demand for ethanol and other fuels; risks of accidents or other unscheduled shutdowns affecting our assets, including mechanical breakdown of equipment or infrastructure; risks associated with changes to federal policy or regulation; ability to comply with changing government usage mandates and regulations affecting the ethanol industry; price, availability and acceptance of alternative fuels and alternative fuel vehicles, and laws mandating such fuels or vehicles; changes in operational costs at our facilities and for our railcars; failure to realize the benefits projected for capital projects; competition; inability to successfully implement growth strategies; the supply of corn and other feedstocks; unusual or severe weather conditions and natural disasters; ability and willingness of parties with whom we have material relationships, including Green Plains Trade, to fulfill their obligations; labor and material shortages; changes in the availability of unsecured credit and changes affecting the credit markets in general; risks related to acquisition and disposition activities; and other risk factors detailed in our reports filed with the SEC.
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 nor do we 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 or documents incorporated by reference.
Overview
Green Plains Partners provides fuel storage and transportation services by owning, operating, developing and acquiring ethanol and fuel storage facilities, terminals, transportation assets and other related assets and businesses. We are Green Plains’ primary downstream logistics provider and generate a substantial portion of our revenues under fee-based commercial agreements with Green Plains Trade for receiving, storing, transferring and transporting ethanol and other fuels, which are supported by minimum volume or take-or-pay capacity commitments.
Recent Developments
Amendment to the Rail Transportation Services Agreement
On August 16, 2022, we amended the Rail Transportation Services Agreement with Green Plains Trade to extend the term of the agreement to June 30, 2029, with automatic renewals for successive twelve month terms thereafter until terminated by either party providing 360 days written notice of termination.
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Results of Operations
During the third quarter of 2022, our parent maintained an average utilization rate of approximately 90.9% of capacity. Ethanol throughput was 219.7 mmg, which exceeded the contracted minimum volume commitment per quarter. As a result, Green Plains Trade utilized prior period credits in the amount of $0.1 million for the third quarter 2022. Prior year credits totaling of $1.8 million expired unused, leaving a cumulative balance of minimum volume deficiency credits available to Green Plains Trade of $1.9 million. These credits expire, if unused, as follows:
•$0.8 million, expiring on December 31, 2022; and
•$1.1 million, expiring on March 31, 2023.
The above credits have been previously recognized as revenue by the partnership, and as such, future volumes throughput by Green Plains Trade in excess of the quarterly minimum volume commitment, up to the amount of these credits, will not be recognized in revenue in future periods prior to expiration.
Our parent’s operating strategy is to transform to a value-added agricultural technology company creating sustainable high value ingredients. Depending on the margin environment, our parent may exercise operational discretion that results in reductions in throughput volumes. It is possible that throughput volumes could be below minimum volume commitments in the future, depending on various factors that drive each of our parent's biorefineries variable contribution margin, including future driving and gasoline demand for the industry and the availability and price of renewable feedstocks. As part of this strategy, our parent is deploying MSCTM technology, to help meet growing global demand for protein feed ingredients and low-carbon renewable corn oil, which could lead to our parent having more consistent margins and operating throughput rates over time.
Adjusted EBITDA and Distributable Cash Flow
Adjusted EBITDA is defined as earnings before interest expense, income tax expense, depreciation and amortization excluding the amortization of right-of-use assets, plus adjustments for transaction costs related to acquisitions or financing transactions, unit-based compensation expense, net gains or losses on asset sales, and our proportional share of EBITDA adjustments of our equity method investee.
Distributable cash flow is defined as adjusted EBITDA less interest paid or payable, income taxes paid or payable, maintenance capital expenditures, which are defined under our partnership agreement as cash expenditures (including expenditures for the construction or development of new capital assets or the replacement, improvement or expansion of existing capital assets) made to maintain our operating capacity or operating income, and our proportional share of distributable cash flow adjustments of our equity method investee.
Adjusted EBITDA and distributable cash flow are supplemental financial measures that we use to assess our financial performance. We believe their presentation provides useful information to investors in assessing our financial condition and results of operations. However, these presentations are not made in accordance with GAAP. The GAAP measure most directly comparable to adjusted EBITDA and distributable cash flow is net income. Since adjusted EBITDA and distributable cash flow may be defined differently by other companies in our industry, our definitions of adjusted EBITDA and distributable cash flow may not be comparable to similarly titled measures of other companies, diminishing their utility. Adjusted EBITDA and distributable cash flow should not be considered in isolation or as alternatives to net income or any other measure of financial performance presented in accordance with GAAP to analyze our financial performance and operating results.
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The following table presents reconciliations of net income to adjusted EBITDA and to distributable cash flow, for the three and nine months ended September 30, 2022 and 2021 (unaudited, dollars in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Reconciliations to Non-GAAP Financial Measures: | |||||||||||||||||||||||
| Net income | $ | 10,166 | $ | 9,425 | $ | 31,035 | $ | 30,450 | |||||||||||||||
Interest expense | 1,516 | 2,781 | 4,139 | 6,120 | |||||||||||||||||||
| Income tax expense | 37 | 77 | 114 | 229 | |||||||||||||||||||
| Depreciation and amortization | 1,194 | 1,089 | 2,915 | 2,771 | |||||||||||||||||||
| Transaction costs | — | — | — | 5 | |||||||||||||||||||
| Unit-based compensation expense | 61 | 60 | 180 | 219 | |||||||||||||||||||
Proportional share of EBITDA adjustments of equity method investee (1) | 45 | 45 | 135 | 139 | |||||||||||||||||||
| Adjusted EBITDA | 13,019 | 13,477 | 38,518 | 39,933 | |||||||||||||||||||
| Interest paid or payable | (1,516) | (1,781) | (4,139) | (5,120) | |||||||||||||||||||
| Income taxes paid or payable | (37) | (77) | (114) | (229) | |||||||||||||||||||
| Maintenance capital expenditures | (124) | (137) | (382) | (139) | |||||||||||||||||||
Distributable cash flow (2) | $ | 11,342 | $ | 11,482 | $ | 33,883 | $ | 34,445 | |||||||||||||||
Distributions declared (3) | $ | 10,793 | $ | 10,310 | $ | 32,015 | $ | 15,996 | |||||||||||||||
| Coverage ratio | 1.05 | x | 1.11 | x | 1.06 | x | 2.15 | x | |||||||||||||||
(1) Represents our proportional share of depreciation and amortization of our equity method investee.
(2) Distributable cash flow does not include adjustments for the principal payment on the term loan of $1.0 million for the nine months ended September 30, 2022. Distributable cash flow does not include adjustments for the principal payments on the credit facility of $3.2 million and $50.0 million, during the three and nine months ended September 30, 2021.
(3) Represents distributions declared for the applicable period and paid in the subsequent quarter for the three months ended September 30, 2022 and 2021, and distributions declared for each quarter of the applicable period for the nine months ended September 30, 2022 and 2021.
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Selected Financial Information and Operating Data
The following discussion reflects the results of the partnership for the three and nine months ended September 30, 2022 and 2021.
Selected financial information for the three and nine months ended September 30, 2022 and 2021, is as follows (unaudited, in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Var. | 2022 | 2021 | % Var. | ||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Storage and throughput services | $ | 11,565 | $ | 11,564 | — | % | $ | 34,693 | $ | 35,389 | (2.0) | % | |||||||||||||||||||||||
| Railcar transportation services | 5,615 | 4,688 | 19.8 | 15,386 | 14,525 | 5.9 | |||||||||||||||||||||||||||||
| Terminal services | 1,864 | 1,998 | (6.7) | 5,984 | 6,258 | (4.4) | |||||||||||||||||||||||||||||
| Trucking and other | 1,022 | 1,001 | 2.1 | 2,757 | 3,186 | (13.5) | |||||||||||||||||||||||||||||
| Total revenues | 20,066 | 19,251 | 4.2 | 58,820 | 59,358 | (0.9) | |||||||||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| Operations and maintenance (excluding depreciation and amortization reflected below) | 6,287 | 5,161 | 21.8 | 18,012 | 17,153 | 5.0 | |||||||||||||||||||||||||||||
| General and administrative | 949 | 892 | 6.4 | 3,059 | 3,152 | (3.0) | |||||||||||||||||||||||||||||
| Depreciation and amortization | 1,194 | 1,089 | 9.6 | 2,915 | 2,771 | 5.2 | |||||||||||||||||||||||||||||
| Total operating expenses | 8,430 | 7,142 | 18.0 | 23,986 | 23,076 | 3.9 | |||||||||||||||||||||||||||||
| Operating income | $ | 11,636 | $ | 12,109 | (3.9) | % | $ | 34,834 | $ | 36,282 | (4.0) | % | |||||||||||||||||||||||
Selected operating data for the three and nine months ended September 30, 2022 and 2021, is as follows (unaudited):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Var. | 2022 | 2021 | % Var. | ||||||||||||||||||||||||||||||
| Product volumes (mmg) | |||||||||||||||||||||||||||||||||||
| Storage and throughput services | 219.7 | 182.2 | 20.6% | 649.4 | 553.1 | 17.4% | |||||||||||||||||||||||||||||
| Terminal services: | |||||||||||||||||||||||||||||||||||
| Affiliate | 24.2 | 22.1 | 9.5 | 79.2 | 62.1 | 27.5 | |||||||||||||||||||||||||||||
| Non-affiliate | 23.7 | 26.2 | (9.5) | 68.9 | 77.7 | (11.3) | |||||||||||||||||||||||||||||
| 47.9 | 48.3 | (0.8) | 148.1 | 139.8 | 5.9 | ||||||||||||||||||||||||||||||
| Railcar capacity billed (daily avg.) | 74.7 | 68.6 | 8.9 | 73.0 | 70.3 | 3.8 | |||||||||||||||||||||||||||||
Three Months Ended September 30, 2022, Compared with the Three Months Ended September 30, 2021
Consolidated revenues for the three months ended September 30, 2022 increased $0.8 million compared with the same period for 2021. Storage and throughput services revenue was consistent with the prior year. Railcar transportation services revenue increased $0.9 million primarily due to an increase in capacity provided. Terminal services revenue decreased $0.1 million due to slightly lower throughput volumes compared to the prior year. Trucking and other revenue was consistent with the prior year.
Operations and maintenance expenses increased $1.1 million for the three months ended September 30, 2022, compared with the same period for 2021 primarily due to higher railcar lease expense.
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General and administrative expenses increased $0.1 million for the three months ended September 30, 2022 compare with the same period for 2021 due to an increase in expenses allocated by our parent under the Operational Services and Secondment Agreement.
Distributable cash flow decreased $0.1 million for the three months ended September 30, 2022, compared with the same period for 2021, associated with the increase in net income offset by the changes in interest expense versus the prior period.
Nine Months Ended September 30, 2022, Compared with the Nine Months Ended September 30, 2021
Consolidated revenues decreased $0.5 million for the nine months ended September 30, 2022, compared with the same period for 2021. Storage and throughput services revenue decreased $0.7 million due to a reduction in contracted minimum volume commitments as a result of the sale of our parent’s Ord ethanol plant in the first quarter of 2021. Railcar transportation services revenue increased $0.9 million due to an increase in capacity provided and higher fees charged on the volumetric capacity. Terminal services revenue decreased $0.3 million due to lower minimum volume commitment fees earned. Trucking and other revenue decreased $0.4 million primarily as a result of lower non-affiliate freight volume.
Operations and maintenance expenses increased $0.9 million for the nine months ended September 30, 2022, compared with the same period for 2021 primarily due to an increase in railcar lease expense.
General and administrative expenses decreased $0.1 million for the nine months ended September 30, 2022 compared with the same period for 2021 primarily due to lower insurance expense.
Distributable cash flow decreased $0.6 million for the nine months ended September 30, 2022, compared with the same period for 2021, associated with an increase in net income offset by changes in interest expense versus the prior period.
Industry Factors Affecting our Results of Operations
U.S. Ethanol Supply and Demand
According to the EIA, domestic ethanol production averaged 979 thousand barrels per day during the third quarter of 2022, which was 0.5% higher than the 974 thousand barrels per day for the same quarter last year. Refiner and blender input volume was 902 thousand barrels per day for the third quarter of 2022, compared with 919 thousand barrels per day for the same quarter last year. Gasoline demand decreased 0.6 million barrels per day, or 6.6% during the third quarter of 2022 compared to the prior year. U.S. domestic ethanol ending stocks increased by approximately 1.5 million barrels compared to the prior year, or 7.2%, to 21.7 million barrels as of September 30, 2022. As of this filing, according to Prime the Pump, there were approximately 2,743 retail stations selling E15 in 31 states, up from 2,555 at the beginning of the year, and approximately 386 suppliers at 113 pipeline terminal locations now offering E15 to wholesale customers.
Global Ethanol Supply and Demand
According to the USDA Foreign Agriculture Service, domestic ethanol exports through August 31, 2022, were approximately 1,012 mmg, up from 796 mmg for the same period of 2021. Canada was the largest export destination for U.S. ethanol accounting for 32% of domestic ethanol export volume, driven in part by their national clean fuel standard. South Korea, India and the Netherlands accounted for 13%, 8%, and 7%, respectively, of U.S. ethanol exports. We currently estimate that net ethanol exports will range from 1.3 to 1.5 billion gallons in 2022, based on historical demand from a variety of countries and certain countries that seek to improve their air quality, reduce green house gas emissions through low carbon fuel programs and eliminate MTBE from their own fuel supplies. The recent strengthening of the U.S. Dollar relative to other currencies has the potential to adversely impact the U.S. ethanol competitiveness in the global market.
Legislation and Regulation
We are sensitive to government programs and policies that affect the supply and demand for ethanol and other fuels, which in turn may impact the volume of ethanol and other fuels we handle. Over the years, various bills and amendments have been proposed in the House and Senate, which would eliminate the RFS entirely, eliminate the corn based ethanol portion of the mandate, and make it more difficult to sell fuel blends with higher levels of ethanol. Bills have also been
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introduced to require higher levels of octane blending, and require car manufacturers to produce vehicles that can operate on higher ethanol blends. We believe it is unlikely that any of these bills will become law in the current Congress. In addition, the manner in which the EPA administers the RFS and related regulations can have a significant impact on the actual amount of ethanol and other biofuels blended into the domestic fuel supply.
Federal mandates and state-level clean fuel programs supporting the use of renewable fuels are a significant driver of ethanol demand in the U.S. Ethanol policies are influenced by concerns for the environment, diversifying the fuel supply, and reducing the country’s dependence on foreign oil. Consumer acceptance of flexible-fuel vehicles (FFVs) and higher ethanol blends in non-FFVs may be necessary before ethanol can achieve further growth in U.S. surface transportation fleet market share. In addition, expansion of clean fuel programs in other states and countries, or a national low carbon fuel standard, could increase the demand for ethanol, depending on how it is structured.
The Inflation Reduction Act of 2022, which was signed into law on August 16, 2022, is a sweeping policy that could have many potential impacts on both our and our parent's business which we are continuing to evaluate. The legislation (a) created a new Clean Fuel Production Credit, section 45Z of the Internal Revenue Code, which runs from 2025 to 2027 of up to $1.00 per gallon, which could impact our parent's fuel ethanol, depending on the level of green house gas reduction for each gallon; (b) created a new tax credit for sustainable aviation fuel of $1.25 to $1.75 per gallon, depending on the green house gas reduction for each gallon, that could possibly involve some of our parent's low carbon ethanol through an alcohol to jet pathway, depending on the life cycle analysis model being used (this credit expires after 2024 and shifts to the Clean Fuel Production Credit, where it qualifies for up to $1.75 per gallon); (c) expanded the carbon capture and sequestration credit, section 45Q, to $85 for each ton of carbon sequestered, which could impact our parent's carbon capture partnership and other potential carbon capture investments; (d) extended the biodiesel tax credit which could impact our parent's renewable corn oil values, as this co-product serves as a low-carbon feedstock for renewable diesel and biomass based diesel production; (e) funded biofuel refueling infrastructure, which could impact the availability of higher level ethanol blended fuel; (f) increased funding for working lands conservation programs for farmers by $20 billion; and (g) provided credits for the production and purchase of electric vehicles, which could impact the amount of internal combustion engines built and sold longer term, and by extension impact the demand for liquid fuels including ethanol.
The RFS sets a floor for biofuels use in the United States. When the RFS was established in 2010, the required volume of conventional, or corn-based, ethanol to be blended with gasoline was to increase each year until it reached 15 billion gallons in 2015, which left the EPA to address existing limitations in both supply and demand. As of this filing, the EPA has finalized RVOs, reducing the conventional ethanol levels for 2020 and 2021 to reflect lower fuel demand during the pandemic, and finalized an RVO at the statutory 15 billion gallons for 2022, with an additional 250 million gallons of supplemental volume to reflect a court-ordered remand of a previously-lowered RVO. The EPA has agreed to a consent decree from the U.S. District Court for D.C. to propose an RVO for 2023 (and possibly 2024 and 2025) by November 16, 2022, and finalize the rule by June 14, 2023. It is possible they expand the types of fuels that can qualify for credits under the RFS, including so-called e-RINS for electric vehicles.
According to the RFS, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022, the year through which the statutorily prescribed volumes run. While conventional ethanol maintained 15 billion gallons, 2019 was the second consecutive year that the total RVO was more than 20% below the statutory volume levels. Thus, the EPA was expected to initiate a reset rulemaking, and modify statutory volumes through 2022, and do so based on the same factors they are to use in setting the RVOs post 2022. These factors include environmental impact, domestic energy security, expected production, infrastructure impact, consumer costs, job creation, price of agricultural commodities, food prices, and rural economic development. However, in late 2019, the EPA announced it would not be moving forward with a reset rulemaking in 2020. The current EPA has indicated they will not propose a reset rulemaking, though they have stated an intention to propose a post 2022 set rulemaking by November 16, 2022, and finalize by June 14, 2023, in compliance with a consent decree from the U.S. District Court for D.C.
Under the RFS, RINs and SREs are important tools impacting supply and demand. The EPA assigns individual refiners, blenders, and importers the volume of renewable fuels they are obligated to use in each annual RVO based on their percentage of total production of domestic transportation fuel. Obligated parties use RINs to show compliance with the RFS mandated volumes. Ethanol producers assign a RIN to each gallon of renewable fuel they produce and the RINs are detached when the renewable fuel is blended with transportation fuel domestically. Market participants can trade the detached RINs in the open market. The market price of detached RINs affects the price of ethanol in certain markets and can influence purchasing decisions by obligated parties.
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As it relates to SREs, a small refinery is defined as one that processes fewer than 75,000 barrels of petroleum per day. Small refineries can petition the EPA for a SRE which, if approved, waives their portion of the annual RVO requirements. The EPA, through consultation with the DOE and the USDA can grant a full or partial waiver, or deny it outright within 90 days of submittal. The EPA granted significantly more of these waivers for the 2016, 2017 and 2018 reporting years than they had in prior years, totaling 790 mmg of waived requirements for the 2016 compliance year, 1.82 billion gallons for 2017 and 1.43 billion gallons for 2018. In doing so, the EPA effectively reduced the RFS mandated volumes for those compliance years by those amounts respectively, and as a result RIN values declined significantly. In the waning days of the previous administration, the EPA approved three additional SREs, reversing one denial from 2018 and granting two from 2019. A total of 88 SREs were granted under the Trump Administration, erasing a total of 4.3 billion gallons of potential blending demand. The EPA, under the current administration, reversed the three SREs issued in the final weeks of the previous administration, and in conjunction with the RVO rulemaking for 2020, 2021 and 2022, denied all pending SREs. There are multiple on-going legal challenges to how the EPA has handled SREs and RFS rulemakings.
The One-Pound Waiver, which was extended in May 2019 to allow E15 to be sold year-round to all vehicles model year 2001 and newer, was challenged in an action filed in Federal District Court for the D.C. Circuit. On July 2, 2021, the Circuit Court vacated the EPA’s rule so the future of summertime, defined as June 1 to September 15, sales of E15 is uncertain. The Supreme Court declined to hear a challenge to this ruling. On April 12, 2022, the President announced that he has directed the EPA to issue an emergency waiver to allow for the continued sale of E15 during the summer months, and that the temporary waiver should be extended as long as the gasoline supply emergency lasts. As of this filing, E15 is sold year-round at approximately 2,743 stations in 31 states.
In October 2019, the White House directed the USDA and EPA to move forward with rulemaking to expand access to higher blends of biofuels. This includes funding for infrastructure, labeling changes and allowing E15 to be sold through E10 infrastructure. The USDA rolled out the Higher Blend Infrastructure Incentive Program in the summer of 2020, providing competitive grants to fuel terminals and retailers for installing equipment for dispensing higher blends of ethanol and biodiesel. In December 2021, the USDA announced they would administer another infrastructure grant program. The recently enacted Inflation Reduction Act provided for an additional $500 million in USDA grants for biofuel infrastructure from 2022 to 2031.
Liquidity and Capital Resources
Our principal sources of liquidity include cash generated from operating activities. We expect operating cash flows will be sufficient to meet our liquidity needs. We consider opportunities to repay or refinance our debt, depending on market conditions, as part of our normal course of doing business. Our ability to meet our debt service obligations and other capital requirements depends on our future operating performance, which is subject to general economic, financial, business, competitive, legislative, regulatory and other conditions, many of which are beyond our control. We plan to utilize a combination of operating cash, refinancing and other strategic actions, to repay debt obligations as they come due.
As of September 30, 2022, we had $15.7 million of cash and cash equivalents.
Net cash provided by operating activities was $31.2 million for the nine months ended September 30, 2022, compared with $33.7 million for the nine months ended September 30, 2021. The decrease in cash flows from operating activities was primarily due to changes in net working capital. Net cash used by investing activities was $0.4 million for the nine months ended September 30, 2022, compared with net cash provided by investing activities of $27.0 million for the nine months ended September 30, 2021, with the change primarily associated with the Ord disposition in the first quarter of 2021. Net cash used in financing activities was $32.7 million for the nine months ended September 30, 2022, compared with $49.0 million for the nine months ended September 30, 2021. The decrease was due to a reduction of required principal payments on our previous credit facility, offset by an increase in our quarterly distribution payment.
We incurred capital expenditures of $0.4 million for the nine months ended September 30, 2022 for various maintenance and upgrades. We expect to incur approximately $0.3 million for the remainder of 2022 for additional capitalized costs.
We did not make any equity method investee contributions related to the NLR joint venture for the nine months ended September 30, 2022, and we do not anticipate making significant equity contributions to NLR for the remainder of 2022. We anticipate receiving future distributions from NLR as excess cash becomes available.
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Term Loan Facility
On July 20, 2021, we entered into the Amended Credit Facility to our existing credit facility with BlackRock and TMI Trust Company as administrative agent. The Amended Credit Facility reduced the total amount available to $60.0 million, extended the maturity from December 31, 2021 to July 20, 2026, and converted the balance to a term loan. On February 11, 2022, the Amended Credit Facility was modified to allow Green Plains Partners and its affiliates to repurchase outstanding notes. At that time, we purchased $1.0 million of the outstanding notes from BlackRock and subsequently retired the notes. The term loan does not require any principal payments; however, we have the option to prepay $1.5 million per quarter beginning July 2022. As of September 30, 2022, the term loan had a balance of $59.0 million and an interest rate of 11.19%.
Under the terms of the Amended Credit Facility, BlackRock purchased the outstanding balance of the existing notes from the previous lenders. Interest on the term loan is based on three-month LIBOR plus 8.00%, with a 0% LIBOR floor, and is payable on the 15th day of each March, June, September and December, during the term, and commenced September 15, 2021. Financial covenants of the Amended Credit Facility include a maximum consolidated leverage ratio of 2.5x and a minimum consolidated debt service coverage ratio of 1.10x. The Amended Credit Facility is secured by substantially all of the assets of the partnership.
The administrator of LIBOR ceased publication of the one-week and two-month LIBOR settings immediately following the LIBOR publication on December 31, 2021, and announced that the remaining USD LIBOR settings, including the three-month LIBOR, will cease immediately following the LIBOR publication on June 30, 2023. We use three-month LIBOR as a reference rate for our term loan. It is unclear if LIBOR will cease to exist or if new methods of calculating LIBOR will be established by the applicable phase out dates. We may need to amend our credit facility to determine the interest rate to replace LIBOR with the new standard that is established. The potential effect of any such event on interest expense cannot yet be determined.
For more information related to our debt, see Note 3 – Debt to the consolidated financial statements in this report.
Distributions to Unitholders
On February 11, 2022, the partnership distributed $10.4 million to unitholders of record as of February 4, 2022, related to the quarterly cash distribution of $0.44 per unit that was declared on January 20, 2022, for the quarter ended December 31, 2021.
On May 13, 2022, the partnership distributed $10.5 million to unitholders of record as of May 6, 2022, related to the quarterly cash distribution of $0.445 per unit that was declared on April 21, 2022, for the quarter ended March 31, 2022.
On August 12, 2022, the partnership distributed $10.7 million to unitholders of record as of August 5, 2022, related to the quarterly cash distribution of $0.45 per unit that was declared on July 21, 2022, for the quarter ended June 30, 2022.
On October 20, 2022, the board of directors of the general partner declared a quarterly cash distribution of $0.455 per unit, or approximately $10.8 million, for the quarter ended September 30, 2022. The distribution is payable on November 14, 2022, to unitholders of record at the close of business on November 4, 2022.
Effects of Inflation
While inflation has increased relative to recent years, we do not expect it to have a material impact on our future results of operations. However, inflation has and may continue to impact the interest rate environment in which we operate resulting in a higher cost of capital. See Item 3 below for additional information related to interest rate risk.
Contractual Obligations and Commitments
In addition to debt, our material future obligations include certain lease agreements associated with our railcar fleet. Aggregate minimum lease payments under these operating lease agreements for future fiscal years as September 30, 2022 totaled $41.1 million. Refer to Note 9 – Commitments and Contingencies included in the notes to consolidated financial statements for more information.
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Critical Accounting Policies and Estimates
Critical accounting policies relating to leases and impairment of goodwill are impacted significantly by judgments, assumptions and estimates used to prepare our consolidated financial statements. Information about our critical accounting policies and estimates is included in our 2021 annual report.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of loss arising from adverse changes in market rates and prices. At this time, we conduct all of our business in U.S. dollars and are not exposed to foreign currency risk.
Interest Rate Risk
We are exposed to interest rate risk through our credit facility, which bears interest at variable rates. At September 30, 2022, we had $59.0 million outstanding under our credit facility. A 10% change in interest rates would affect our interest expense by approximately $0.7 million per year, assuming no changes in the amount outstanding or other variables.
Other details about our outstanding debt are discussed in the notes to the consolidated financial statements included in this report and in our 2021 annual report.
Commodity Price Risk
We do not have any direct exposure to risks associated with fluctuating commodity prices because we do not own the ethanol and other fuels that are stored at our facilities or transported by our railcars and trucks.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure information that must be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision and participation of our chief executive officer and chief financial officer, management carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2022, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act and concluded that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
We may be involved in litigation that arises during the ordinary course of business. We are not, however, involved in any material litigation at this time.
Item 1A. Risk Factors.
Investors should carefully consider the discussion of risks and the other information in our annual report on Form 10-K for the year ended December 31, 2021, in Part I, Item 1A, “Risk Factors,” and the discussion of risks and other information in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under “Cautionary Information Regarding Forward-Looking Statements” of this report. Although we have attempted to discuss key factors, our investors need to be aware that other risks may prove to be important in the future. New risks may emerge at any time and we cannot predict such risks or estimate the extent to which they may affect our financial performance. The following risk factors supplement and/or update risk factors previously disclosed and should be considered in conjunction with the other information included in, or incorporated by reference in, this quarterly report on Form 10-Q.
Future demand for ethanol is uncertain and changes in federal mandates, public perception, global political or economic events, climate concerns related to fossil fuels, consumer acceptance and overall consumer demand for transportation fuel could affect demand.
There are limited markets for fuel ethanol beyond the federal mandates and further consumer acceptance of E15 and E85 fuels may be necessary before ethanol can achieve significant market share growth. Discretionary and E85 blending are important secondary markets. Discretionary blending is often determined by the price of ethanol relative to gasoline, and availability to consumers. When discretionary blending is financially unattractive, the demand for ethanol may be reduced. Demand for ethanol is also affected by overall demand for transportation fuel and with fossil fuels under pressure due to climate change concerns, which may adversely affect ethanol demand. Global events, such as COVID-19, which has disrupted supply chains and at times travel, and such as the war in Ukraine and sanctions associated therewith, which have disrupted customary product flows, exports and prices, all which impact the demand and supply of fossil fuels and in turn, for ethanol. Consumer demand for gasoline may be impacted by emerging transportation trends, such as electric vehicles or ride sharing. Additionally, factors such as over-supply of ethanol, which has been the case for some time, could continue to negatively impact our parent’s business. Reduced demand for ethanol may depress the value of our parent’s products, erode its margins, and reduce our parent’s, and consequently our, ability to generate revenue or operate profitably.
Government mandates affecting ethanol could change and impact the ethanol market.
Under the provisions of the Energy Independence and Security Act of 2007, as amended, Congress expanded the RFS. The RFS mandates the minimum volume of renewable fuels that must be blended into the transportation fuel supply each year which affects the domestic market for ethanol. Each year the EPA is supposed to undertake rulemaking to set the RVO for the following year, though at times months or years pass without a finalized RVO. Further, the EPA has the authority to waive the requirements, in whole or in part, if there is inadequate domestic renewable fuel supply or the requirement severely harms the economy or the environment. After 2022, volumes shall be determined by the EPA in coordination with the Secretaries of Energy and Agriculture, taking into account such factors as impact on environment, energy security, future rates of production, cost to consumers, infrastructure, and other factors such as impact on commodity prices, job creation, rural economic development, or impact on food prices.
According to the RFS, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022; the year through which the statutorily prescribed volumes run. While conventional ethanol maintained 15 billion gallons, 2019 was the second consecutive year that the total RVO was more than 20% below the statutory volumes levels. Thus, the EPA was expected to initiate a reset rulemaking, and modify statutory volumes through 2022, and do so based on the same factors they are to use in setting the RVOs post-2022. However, on December 19, 2019, the EPA announced it would not be moving forward with a reset rulemaking. It is unclear when or if they will propose a reset rulemaking. The EPA has stated an intention to propose a post-2022 set rulemaking by November 16, 2022, and finalize by June 14, 2023, in compliance with a consent decree from the U.S. District Court for D.C.
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Volumes can also be impacted as small refineries can petition the EPA for an SRE which, if approved, waives their portion of the annual RVO requirements. The EPA, through consultation with the DOE and the USDA, can grant them a full or partial waiver, or deny it outright within 90 days of submittal. A small refinery is defined as one that processes fewer than 75,000 barrels of petroleum per day.
Our parent’s operations, and consequently our operations, could be adversely impacted by legislation, administration actions, EPA actions, or lawsuits that may reduce the RFS mandated volumes of conventional ethanol and other biofuels through the annual RVO, the 2022 set rulemaking, the point of obligation for blending, or SREs. A recent Supreme Court ruling held that the small refineries can continue to apply for an extension of their waivers from the RFS, even if they have not been awarded a continuous string of exemptions, though the current EPA, in conjunction with the RVO rulemaking for 2020, 2021 and 2022, denied all pending SREs. There are multiple legal challenges to how the EPA has handled SREs and RFS rulemakings. A recent D.C. Circuit Court of Appeals ruling held that the EPA overstepped its authority in extending the one pound Reid Vapor Pressure waiver for 10% ethanol blends to 15% ethanol blends in the summer, effectively limiting summertime sales of ethanol blends above 10% to FFVs from June 1 to September 15 each year. Notwithstanding, on April 12, 2022, the President announced that he has directed the EPA to issue an emergency waiver to allow for the continued sale of E15 during the June 1 to September 15 period. As of this filing, E15 is sold year-round at approximately 2,743 stations in 31 states.
Similarly, should federal mandates regarding oxygenated gasoline be repealed, the market for domestic ethanol could be adversely impacted. Economic incentives to blend based on the relative value of gasoline versus ethanol, taking into consideration the octane value of ethanol, environmental requirements and the RFS mandate, may affect future demand. A significant increase in supply beyond the RFS mandate could have an adverse impact on ethanol prices. Moreover, changes to RFS could negatively impact the price of ethanol or cause imported sugarcane ethanol to become more economical than domestic ethanol. Likewise, national, state and regional LCFS like that of California, Oregon, Brazil or Canada could be favorable or harmful to conventional ethanol, depending on how the regulations are crafted, enforced and modified.
Future demand may be influenced by economic incentives to blend based on the relative value of gasoline versus ethanol, taking into consideration the octane value of ethanol, environmental requirements and the value of RFS credits or RINs. A significant increase in supply beyond the RFS mandate could have an adverse impact on ethanol prices. Moreover, any changes to RFS, whether by legislation, EPA action or lawsuit, originating from issues associated with the market price of RINs could negatively impact the demand for ethanol, discretionary blending of ethanol and/or the price of ethanol. Prior actions by the EPA to grant SREs without accounting for the lost gallons, for example, resulted in lower RIN prices. Similarly, proposals to reduce annual RVO levels could also lead to lower RIN prices.
To the extent federal or state laws or regulations are modified and/or enacted, it may result in the demand for ethanol being reduced, which could negatively and materially affect our parent’s, and consequently our, financial performance.
Regulatory and/or railroad tariff changes may result in additional costs, equipment issues, service delays and/or facility improvements to satisfy customers' requirements to mitigate increased rail rates.
The U.S. ethanol industry has long relied on railroads to deliver its product to market. In 2015, the DOT announced final rules which call for enhanced tank car standards known as the DOT specification 117, or DOT-117 tank car, and establishes a schedule for retrofitting or replacing older tank cars carrying crude oil and ethanol. The rule also establishes new braking standards that are intended to reduce the severity of accidents. These regulations will result in upgrades or replacements of our railcars, and may have an adverse effect on our operations as lease costs for railcars may increase over the long term. The deadline for compliance with DOT specification 117 is May 1, 2023. As of September 30, 2022, approximately 74% of our 2,500 railcars were DOT 117 compliant. Our railcars are also subject to federally-mandated tank car requalification, which requires inspection, repairs and upgrades to our current railcar fleet every ten years. Due to these regulatory standards, as well as any potential modifications that may be issued in the future, existing railcars could be out of service for a period of time while such upgrades are made, tightening supply in an industry that is highly dependent on such railcars to transport its product. Since we cannot charge our customers for railcars that are out of service, a significant increase in out of service railcars could have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions. Additionally, railroads may make tariff adjustments and specifically have modified their tariffs to incent larger unit trains that in some instances may require modifications to our terminals to accommodate these larger unit trains. Tariff changes of this nature may result in customers’ unwillingness to renew contracts with us if such improvements are not made. The foregoing could have an adverse impact on our financial condition, results of operations, cash flows and ability to make distributions.
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Rail logistical or labor problems may delay the delivery of our customers’ products.
Rail labor issues or weather related incidents, particularly snow and flooding, can cause increased transit times and result in rail congestion at destinations. In the past, rail delays have caused some ethanol plants to slow or suspend production. If railroad performance is inadequate, we may face delays in shipping railcars to and from our parent’s ethanol production plants, which may affect our ability to transport product. Rail logistical problems due to circumstances outside of the control or us or our customers could have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Directors may surrender units when restricted unit awards are vested to satisfy income tax withholding obligations.
The following table lists the units that were surrendered during the third quarter of 2022:
| Period | Total Number of Shares Withheld | Average Price per Share | ||||||||||||
| July 1 - July 31 | 538 | $ | 12.18 | |||||||||||
| August 1 - August 31 | — | — | ||||||||||||
| September 1 - September 30 | — | — | ||||||||||||
| Total | 538 | $ | 12.18 | |||||||||||
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
| Exhibit No. | Description of Exhibit | ||||
| 10.1 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101 | The following information from Green Plains Partners LP Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements | ||||
| 104 | The cover page from Green Plains Partners LP Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022, formatted in iXBRL. | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| GREEN PLAINS PARTNERS LP | ||||||||
| (Registrant) | ||||||||
| By: | Green Plains Holdings LLC, its general partner | |||||||
Date: November 3, 2022 | By: | /s/ Todd A. Becker | ||||||
| Todd A. Becker | ||||||||
| President and Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
Date: November 3, 2022 | By: | /s/ James E. Stark | ||||||
| James E. Stark | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
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ATTACHMENTS / EXHIBITS
XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
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