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BIOF > SEC Filings for BIOF > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for BIOFUEL ENERGY CORP.

Form 10-Q for BIOFUEL ENERGY CORP.


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with the unaudited consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Specifically, forward-looking statements may be preceded by, followed by or may include such words as "estimate", "plan", "project", "forecast", "intend", "expect", "is to be", "anticipate", "goal", "believe", "seek", "target" or other similar expressions. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Form 10-Q, or in the case of a document incorporated by reference, as of the date of that document. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. Our actual results may differ materially from those discussed in or implied by any of the forward-looking statements as a result of various factors, including but not limited to those listed elsewhere in this Form 10-Q and those listed in our Annual Report on Form 10-K for the year ended December 31, 2011 or in any other documents we have filed with the Securities and Exchange Commission.

Overview

BioFuel Energy Corp. produces and sells ethanol, distillers grain and corn oil through its two ethanol production facilities located in Wood River, Nebraska and Fairmont, Minnesota. Each of these plants has an undenatured nameplate production capacity of approximately 110 million gallons per year ("Mmgy"). We work closely with Cargill, one of the world's leading agribusiness companies, with whom we have an extensive commercial relationship. The two plant locations were selected primarily based on access to corn supplies, the availability of rail transportation and natural gas and Cargill's competitive position in the area. At each location, Cargill has a strong local presence and owns adjacent grain storage and handling facilities, which we lease from them. Cargill provides corn procurement services, markets the ethanol we produce and provides transportation logistics for our two plants under long-term contracts.

We are a holding company with no operations of our own, and are the sole managing member of BioFuel Energy, LLC (the "LLC"), which is itself a holding company and indirectly owns all of our operating assets. As the sole managing member of the LLC, BioFuel Energy Corp. operates and controls all of the business and affairs of the LLC and its subsidiaries. The Company's ethanol plants are owned and operated by the Operating Subsidiaries of the LLC. Those Operating Subsidiaries are party to a Credit Agreement (the "Senior Debt Facility") with a group of lenders, for which First National Bank of Omaha acts as Administrative Agent.

On June 15, 2012, the Company effected a reverse stock split with respect to all outstanding shares of common stock and Class B common stock at a ratio of one-for-twenty. The Company also split the number of authorized shares of common stock at a ratio of one-for-fourteen, thereby reducing the aggregate number of authorized common stock shares to 10,000,000, and also split the number of authorized shares of Class B common stock at a ratio of one-for-twenty, thereby reducing the aggregate number of authorized Class B common stock shares to 3,750,000. All share and per share information and all necessary par value adjustments have been retroactively restated in this report to reflect the effect of this reverse stock split.

During 2011, the Company began installing corn oil extraction systems at each of its ethanol plants so that it could begin producing non-food grade corn oil as an additional co-product. These systems were installed using certain patented technology we have licensed from Greenshift Corporation for which we pay a royalty. The Operating Subsidiaries of the LLC have entered into operating leases with Farnam Street Financial, Inc., which leases provided the funding to pay for most of the costs of installing the corn oil extraction systems at each plant. The installation in Wood River was completed in December 2011 and the installation in Fairmont was completed in January 2012. Both Operating Subsidiaries began generating revenues from corn oil sales early in the first quarter of 2012.

Liquidity and Going Concern Considerations

Our operations and cash flows are subject to wide and unpredictable fluctuations primarily due to changes in commodity prices, specifically, the price of our main commodity input, corn, relative to the price of our main commodity product, ethanol, which is known in the industry as the "crush spread". The price of our main co-product, distillers grain, is likewise subject to wide, unpredictable fluctuations, typically in conjunction with changes in the price of corn. The prices of these commodities are volatile and beyond our control. As a result of the volatility of the prices for these and other items, our results fluctuate substantially and in ways that are largely beyond our control. As shown in the accompanying consolidated financial statements, the Company incurred a net loss of $11.3 million and $34.8 million during the three and nine months ended September 30, 2012, respectively, due to narrow commodity margins. Narrow commodity margins present a significant risk to our cash flows and liquidity. We have had, and continue to have, limited liquidity, with $10.8 million of cash and cash equivalents as of September 30, 2012. We have relied upon extensions of payment terms by Cargill as an additional source of liquidity and working capital. See "- Liquidity and capital resources".

Drought conditions in the American Midwest have significantly impacted this year's corn crop and caused a significant reduction in the corn yield. Since the end of the second quarter, this has led to a significant increase in the price of corn and a corresponding narrowing in the crush spread. The crush spread has narrowed as ethanol prices have not risen correspondingly with rising corn prices, due to an oversupply of ethanol. As a result, the Company announced on September 24, 2012 that it had decided to idle its Fairmont facility until the crush spread improves. In the event crush spreads narrow further, we may choose to curtail operations at our Wood River facility or idle the facility and cease operations altogether until such time as crush spreads improve. We expect fluctuations in the crush spread to continue.

Due to our limited and declining liquidity, during the third quarter the Company determined that the Operating Subsidiaries would not make the regularly-scheduled payments of principal and interest that were due under the outstanding Senior Debt Facility on September 28, 2012, in an aggregate amount of $3.6 million. As a result, the Operating Subsidiaries received a Notice of Default on September 28, 2012 from First National Bank of Omaha, as Administrative Agent for the Senior Debt Facility, concerning the failure to make the regularly-scheduled payments of principal and interest. On November 5, 2012, the Operating Subsidiaries and the its lenders entered into a Forbearance Agreement whereby its lenders agreed to forbear from exercising their remedies under the Senior Debt Facility until November 15, 2012. The Company is engaged in active and continuing discussions with its lenders and their advisors regarding the terms of a potential capital infusion into the Operating Subsidiaries. This capital may take the form of a capital contribution from the Company, additional loans, a long-term forbearance or restructuring under the Senior Debt Facility, some combination of the foregoing, or another form yet to be determined. While the Company intends to reach resolution with its lenders with respect to this matter, there can be no assurance it will do so on terms that are favorable or acceptable to the Company, or at all.

As of September 30, 2012, the Operating Subsidiaries had $170.5 million of indebtedness outstanding under the Senior Debt Facility. The entire amount outstanding under the Senior Debt Facility has been classified as a current liability in the September 30, 2012 consolidated balance sheet. If the Company is unable to reach an agreement with its lenders under the Senior Debt Facility, and if its lenders successfully exercise their remedies under the Senior Debt Facility, the Company may be unable to continue as a going concern, and could be forced to seek relief from creditors through a filing under the U.S. Bankruptcy Code.

Since we commenced operations, we have from time to time entered into derivative financial instruments such as futures contracts, swaps and options contracts with the objective of limiting our exposure to changes in commodities prices. We have only been able to conduct such hedging activities on a limited basis due to our lack of financial resources and we may not have the financial resources to increase or conduct any material hedging activities in the future.

Basis for Consolidation

At September 30, 2012, the Company owned 87.3% of the LLC membership units with the remaining 12.7% owned by certain individuals and by certain investment funds affiliated with some of the original equity investors of the LLC. As a result, the Company consolidates the results of the LLC. The amount of income or loss allocable to the 12.7% holders is reported as noncontrolling interest in our consolidated statements of operations. The Class B common shares of the Company are held by the same individuals and investment funds who held 795,479 membership units in the LLC as of September 30, 2012 that, together with the corresponding Class B shares, can be exchanged for newly issued shares of common stock of the Company on a one-for-one basis. The proportionate value of the LLC membership units held by individuals or entities other than the Company are recorded as noncontrolling interest on the consolidated balance sheets.

Revenues

Our primary source of revenue is the sale of ethanol. The selling prices we realize for our ethanol are largely determined by the market supply and demand for ethanol, which, in turn, is influenced by industry and other factors, including government policy and regulations, over which we have little control. Ethanol prices are extremely volatile. Ethanol revenues are recorded net of transportation and storage charges, and net of marketing commissions we pay to Cargill.

We also receive revenue from the sale of distillers grain, which is a residual co-product of the processed corn used in the production of ethanol and is sold as animal feed. The selling prices we realize for our distillers grain are largely determined by the market supply and demand, primarily from livestock operators and marketing companies in the U.S. and internationally. Distillers grain is sold by the ton and, based upon the amount of moisture retained in the product, can either be sold "wet" or "dry".

The corn oil produced at our plants is used primarily as a feedstock for the production of biodiesel and as an animal feed ingredient. We market the corn oil produced in Wood River ourselves, although a portion is often sold to the same third party marketer that purchases our dried distillers grain from that facility. Most of the corn oil produced in Fairmont is being sold to a biodiesel producer under an off-take agreement.

Cost of goods sold and gross profit (loss)

Our gross profit (loss) is derived from our revenues less our cost of goods sold. Our cost of goods sold is affected primarily by the cost of corn and natural gas. The prices of both corn and natural gas are volatile and can vary as a result of a wide variety of factors, including weather, market demand, regulation and general economic conditions, all of which are outside of our control.

Corn is our most significant raw material cost. Rising corn prices may result in lower profit margins because changes in ethanol prices are not necessarily correlated with changes in corn prices and therefore producers are not always able to pass along increased corn costs to customers. The price and availability of corn is influenced by weather conditions and other factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors. These factors include government policies and subsidies with respect to agriculture and international trade, and global and local demand and supply for corn and for other agricultural commodities for which it may be substituted, such as soybeans. Historically, the cash price we pay for corn, relative to the spot price of corn, tends to rise during the spring planting season in April and May as the local basis (i.e., discount) contracts, and tends to decrease relative to the spot price during the fall harvest in October and November as the local basis expands.

We also purchase natural gas to power steam generation in our ethanol production process and as fuel for our dryers to dry our distillers grain. Natural gas represents our second largest operating cost after corn, and natural gas prices are extremely volatile. Historically, the spot price of natural gas tends to be highest during the heating and cooling seasons and tends to decrease during the spring and fall.

Corn procurement fees paid to Cargill are included in our cost of goods sold. Other cost of goods sold primarily consists of our cost of chemicals and enzymes, electricity, depreciation, manufacturing overhead and rail car lease expense.

General and administrative expenses

General and administrative expenses consist of salaries and benefits paid to our management and administrative employees, expenses relating to third party services, travel, office rent, marketing and other expenses, including expenses associated with being a public company, such as fees paid to our independent auditors associated with our annual audit and quarterly reviews, directors' fees, and listing and transfer agent fees.

Results of operations

The following discussion summarizes the significant factors affecting the consolidated operating results of the Company for the three and nine months ended September 30, 2012 and September 30, 2011. This discussion should be read in conjunction with the unaudited consolidated financial statements and notes to the unaudited consolidated financial statements contained in this Form 10-Q.

The following table sets forth net sales, expenses and net loss, as well as the percentage relationship to net sales of certain items in our consolidated statements of operations:

                             Three Months Ended September 30,                       Nine Months Ended September 30,
                             2012                        2011                       2012                        2011
                                       (unaudited)                                            (unaudited)
                                  (dollars in thousands)                                 (dollars in thousands)
Net sales           $ 116,149        100.0 %    $ 162,547        100.0 %   $ 378,382        100.0 %    $ 489,083        100.0 %
Cost of goods
sold                  124,192        106.9        155,498         95.7       401,204        106.0        487,950         99.8
Gross profit
(loss)                 (8,043 )       (6.9 )        7,049          4.3       (22,822 )       (6.0 )        1,133          0.2
General and
administrative
expenses                2,064          1.8          2,522          1.5         7,232          1.9          7,755          1.6
Operating income
(loss)                (10,107 )       (8.7 )        4,527          2.8       (30,054 )       (7.9 )       (6,622 )       (1.4 )
Other income              680          0.6              -          0.0           680          0.2              -          0.0
Interest expense       (1,901 )       (1.7 )       (1,978 )       (1.2 )      (5,461 )       (1.5 )       (8,195 )       (1.7 )
Net income (loss)     (11,328 )       (9.7 )        2,549          1.6       (34,835 )       (9.2 )      (14,817 )       (3.1 )
Less: Net
(income) loss
attributable to
the
noncontrolling
interest                1,498          1.3           (355 )       (0.2 )       5,015          1.3          2,307          0.5
Net income (loss)
attributable to
BioFuel Energy
Corp. common
stockholders        $  (9,830 )       (8.4 )%   $   2,194          1.4 %   $ (29,820 )       (7.9 )%   $ (12,510 )       (2.6 )%

The following table sets forth key operational data for the three and nine months ended September 30, 2012 and September 30, 2011 that we believe are important indicators of our results of operations:

                                            Three Months Ended             Nine Months Ended
                                              September 30,                  September 30,
                                           2012            2011           2012           2011
Ethanol sold (gallons, in thousands)         36,271         50,716        134,786        162,381
Dry distillers grains sold (tons, in
thousands)                                     32.6           80.1          131.9          260.2
Wet distillers grains sold (tons, in
thousands)                                    170.8          165.2          654.0          499.1
Corn oil sold (pounds, in thousands)         11,466              -         28,626              -
Corn ground (bushels, in thousands)          12,632         18,010         48,120         58,558

Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

Net Sales: Net Sales were $116.1 million for the three months ended September 30, 2012, compared to $162.5 million for the three months ended September 30, 2011, a decrease of $46.4 million or 28.6%. This decrease was primarily attributable to a decrease in ethanol revenue of $51.4 million which was offset by an increase in co-product revenue of $5.0 million. The decrease in ethanol revenue was attributable to both a decrease in the per unit price we received for ethanol, reflecting decreases in market prices compared to the year ago period, and a decrease in the quantity of ethanol produced and sold. Lower ethanol production as compared to the prior year resulted primarily from reduced grind rates due to a continuing tight corn supply in the third quarter of 2012. The increase in co-product revenue was primarily attributable to the inclusion of corn oil revenue in the three months ended September 30, 2012. The Company commenced corn oil extraction at both plants in the first quarter of 2012, which resulted in $4.4 million of corn oil revenue in the third quarter of 2012. Distillers grains revenue was unchanged as compared to the year ago period. Although distillers grains production was lower resulting from the reduced corn grind, the lower production and resulting sales was offset by higher per unit prices received for our distillers grains.

Cost of goods sold: The following table sets forth the components of cost of goods sold for the three months ended September 30, 2012 and September 30, 2011:

                                             Three Months Ended September 30,
                                            2012                              2011
                                                   Per Gallon                     Per Gallon
                                 Amount            of Ethanol        Amount       of Ethanol
                                     (amounts in thousands, except per gallon amounts)
 Corn                         $    100,204       $         2.76     $ 126,968     $      2.50
 Natural gas                         2,835       $         0.08         5,815     $      0.11
 Denaturant                          1,665       $         0.05         1,816     $      0.04
 Electricity                         3,299       $         0.09         3,616     $      0.07
 Chemicals and enzymes               2,565       $         0.07         3,844     $      0.08
 General operating expenses          7,083       $         0.19         6,972     $      0.14
 Depreciation                        6,541       $         0.18         6,467     $      0.13
 Cost of goods sold           $    124,192                          $ 155,498

Cost of goods sold was $124.2 million for the three months ended September 30, 2012 compared to $155.5 million for the three months ended September 30, 2011, a decrease of $31.3 million or 20.1%. The decrease was primarily attributable to a $26.8 million decrease in the cost of corn and a $3.0 million decrease in natural gas expense. The decrease in corn cost was primarily attributable to a decrease in the amount of corn ground as compared to the year ago period offset in part by a higher per-bushel price. The decrease in natural gas expense resulted from both a decrease in the amount of production of dry distillers grain as compared to the year ago period, as we produced more wet distillers grain, in addition to a decrease in the unit price paid for natural gas as compared to the year ago period.

General and administrative expenses: General and administrative expenses decreased $0.5 million or 20.0%, to $2.0 million for the three months ended September 30, 2012, as compared to $2.5 million for the three months ended September 30, 2011. The decrease was primarily attributable to a reduction in compensation expense.

Interest expense: Interest expense was $1.9 million for the three months ended September 30, 2012, compared to $2.0 million for the three months ended September 30, 2011, a decrease of $0.1 million or 5.0%. The decrease in interest expense was primarily attributable to the Company's average outstanding debt balance being lower during the three months ended September 30, 2012 as compared to the year ago period.

Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

Net Sales: Net Sales were $378.4 million for the nine months ended September 30, 2012, compared to $489.1 million for the nine months ended September 30, 2011, a decrease of $110.7 million or 22.6%. This decrease was primarily attributable to a decrease in ethanol revenue of $122.4 million which was offset by an increase in co-product revenue of $11.7 million. The decrease in ethanol revenue was attributable to both a decrease in the per unit price we received for ethanol, reflecting decreases in market prices compared to the year ago period, and a decrease in the quantity of ethanol produced and sold. Lower ethanol production as compared to the prior year resulted primarily from reduced grind rates due to a tightened corn supply in the first nine months of 2012. The increase in co-product revenue was primarily attributable to the commencement of corn oil extraction at both of our plants in the first quarter of 2012, which resulted in $11.1 million of corn oil revenue for the first nine months of 2012. Distillers grains revenue was relatively unchanged as compared to the year ago period. Although distillers grains production was lower resulting from the reduced corn grind, the lower production and resulting sales was offset by higher per unit prices received for our distillers grains.

Cost of goods sold: The following table sets forth the components of cost of goods sold for the nine months ended September 30, 2012 and September 30, 2011:

                                              Nine Months Ended September 30,
                                            2012                              2011
                                                   Per Gallon                     Per Gallon
                                 Amount            of Ethanol        Amount       of Ethanol
                                     (amounts in thousands, except per gallon amounts)
 Corn                         $    324,824       $         2.41     $ 398,779     $      2.46
 Natural gas                        10,396       $         0.08        20,683     $      0.13
 Denaturant                          5,562       $         0.04         5,701     $      0.04
 Electricity                         9,895       $         0.07        10,136     $      0.06
 Chemicals and enzymes               9,414       $         0.07        12,037     $      0.07
 General operating expenses         21,503       $         0.16        21,204     $      0.13
 Depreciation                       19,610       $         0.15        19,410     $      0.12
 Cost of goods sold           $    401,204                          $ 487,950

Cost of goods sold was $401.2 million for the nine months ended September 30, 2012, compared to $488.0 million for the nine months ended September 30, 2011, a decrease of $86.8 million or 17.8%. The decrease was primarily attributable to a $74.0 million decrease in the cost of corn and a $10.3 million decrease in natural gas expense. The decrease in corn cost was primarily attributable to a decrease in the amount of corn ground as compared to the year ago period. The decrease in natural gas expense resulted from both a decrease in the amount of production of dry distillers grain as compared to the year ago period, as we produced more wet distillers grain, in addition to a decrease in the unit price paid for natural gas as compared to the year ago period.

General and administrative expenses: General and administrative expenses decreased $0.6 million or 7.7%, to $7.2 million for the nine months ended September 30, 2012, as compared to $7.8 million for the nine months ended September 30, 2011. The decrease was primarily attributable to a reduction in compensation expense.

Interest expense: Interest expense was $5.5 million for the nine months ended September 30, 2012, compared to $8.2 million for the nine months ended September 30, 2011, a decrease of $2.7 million or 32.9%. The decrease in interest expense was primarily attributable to the Company's average outstanding debt balance being lower during the nine months ended September 30, 2012, as compared to the year ago period, resulting primarily from the Company paying off its subordinated debt and bridge loan in the first quarter of 2011, in addition to the Company having expensed $1.5 million of remaining unamortized debt issuance costs related to the subordinated debt and bridge loan when those debt facilities were paid off in the year ago period. See "- Liquidity and capital resources - Rights Offering and LLC Concurrent Private Placement".

Liquidity and capital resources

Our cash flows from operating, investing and financing activities during the nine months ended September 30, 2012 and September 30, 2011 are summarized below (in thousands):

                                                                Nine Months Ended September 30,
                                                                  2012                  2011
Cash provided by (used in):
Operating activities                                         $         2,717       $        14,113
Investing activities                                                    (606 )              (2,067 )
Financing activities                                                  (6,408 )              (9,810 )
Net increase (decrease) in cash and cash equivalents         $        (4,297 )     $         2,236

Cash provided by operating activities. Net cash provided by operating activities was $2.7 million for the nine months ended September 30, 2012, compared to $14.1 million for the nine months ended September 30, 2011. For the nine months ended September 30, 2012, the amount was primarily comprised of a net loss of $34.8 million which was offset by working capital sources of $12.5 million and non-cash charges of $22.3 million, which were primarily depreciation and amortization. Working capital sources primarily related to a decrease in inventories of $13.3 million. The decrease in inventories was primarily a result of carrying lower corn, work-in-process, and ethanol inventory balances at September 30, 2012 versus December 31, 2011. For the nine months ended September 30, 2011, the amount was primarily comprised of a net loss of $14.8 million . . .

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