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BIOF > SEC Filings for BIOF > Form 10-K on 1-Apr-2013All Recent SEC Filings

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Form 10-K for BIOFUEL ENERGY CORP.


1-Apr-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with the audited consolidated financial statements and the accompanying notes included in this Form 10-K. 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-K, 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-K 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-K and those listed in other documents we have filed with the Securities and Exchange Commission.

Overview

BioFuel Energy Corp.("we" or "the Company") produces and sells ethanol and its related co-products, primarily distillers grain and corn oil. We have historically operated our two dry-mill 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"). Our operations are subject 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". Drought conditions in the American Midwest significantly impacted the 2012 corn crop and caused a significant reduction in the corn yield. This led to an increase in the price of corn and a corresponding narrowing in the crush spread as ethanol prices did not rise sufficiently with rising corn prices, due to an oversupply of ethanol. As a result, in September 2012 the Company decided to idle its Fairmont facility until the crush spread improved. Due to continued narrow crush spreads, in February 2013 we reduced staffing at the Fairmont facility and expect the Fairmont facility to remain idle until the 2013 harvest season. 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 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 (the "Operating Subsidiaries"). 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, and substantially all of the assets of the Operating Subsidiaries are pledged as collateral under the Senior Debt Facility. Neither the Company nor the LLC is a party, either as borrower or guarantor, under the Senior Debt Facility, and none of their respective assets, other than the LLC interests in the Operating Subsidiaries themselves, are pledged as collateral under the Senior Debt Facility.

We work closely with Cargill, one of the world's leading agribusiness companies, with whom we have an extensive commercial relationship. At each of our plant locations, Cargill has a local grain origination 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 have also from time to time relied upon extensions of payment terms by Cargill as a source of liquidity and working capital. See - "Liquidity and capital resources".

Liquidity and Going Concern Considerations

Our financial results and cash flows are subject to wide and unpredictable fluctuations in 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 $46.3 million during the year ended December 31, 2012, 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 $9.3 million of cash and cash equivalents as of December 31, 2012, of which $8.6 million was held at the LLC and $0.7 million was held at the Operating Subsidiaries, which is subject to the lenders' liens under the Senior Debt Facility.

Due to our limited and declining liquidity, our Board of Directors determined that, in order to preserve cash at the LLC, 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 from First National Bank of Omaha, as Administrative Agent for the lenders under the Senior Debt Facility. Since the initial default, the Operating Subsidiaries have not made any of the regularly-scheduled principal and interest payments, which through December 31, 2012 totaled $8.2 million. On November 5, 2012, the Operating Subsidiaries and the lenders under the Senior Debt Facility entered into a Forbearance Agreement whereby the lenders agreed to forbear from exercising their remedies until November 15, 2012. Although the Forbearance Agreement expired on November 15, 2012 and has not been extended, the Company continues to engage in active and continuing discussions with the lenders and their advisors.

In conjunction with our ongoing discussions with the lenders under the Senior Debt Facility, in March 2013 the Company engaged a financial adviser to assist it with an assessment of its strategic alternatives. These alternatives could include, but are not limited to, a sale of all or substantially all of the assets of the Operating Subsidiaries, which comprise substantially all of the assets of the Company other than cash on hand. The lenders under the Senior Debt Facility have indicated that they are willing to provide the Company with a grace period until July 30, 2013 to allow us to pursue one or more strategic alternatives. This grace period would be subject to the achievement of certain milestones, and could be extended at the sole discretion of the Administrative Agent under the Senior Debt Facility. The Company expects to enter into a formal agreement to reflect the foregoing as soon as reasonably practicable. In the event of a sale of one or both of our ethanol plants, the proceeds of such sale would first be applied to repay all or a portion of the outstanding indebtedness under the Senior Debt Facility. Residual proceeds after satisfying the senior indebtedness, if any, would accrue to the Company. Any such sale would also most likely require the consent of the lenders under the Senior Debt Facility.

The Company, on behalf of the Operating Subsidiaries, has also been engaged in separate discussions with the lenders under the Senior Debt Facility regarding a consensual resolution of the default. It is likely that any such agreement with the lenders will entail the transfer of all or substantially all of the assets of the Operating Subsidiaries in satisfaction of all of the outstanding indebtedness under the Senior Debt Facility. To that end, the Company's Board of Directors has approved in principle our proceeding with such a transaction in the event the Company is unable to achieve an alternative transaction. We cannot assure you, however, that we will be able to reach agreement with our lenders with respect to any such transaction, or achieve any other transaction, which could also include a capital contribution by the Company of its cash on hand to the Operating Subsidiaries, additional loans, a long-term forbearance or restructuring under the Senior Debt Facility, some combination of the foregoing, or another transaction in a form yet to be determined.

Although the Company intends to diligently explore and pursue any number of strategic alternatives, we cannot assure you that it will be able to do so on terms acceptable to the Company or to the lenders under the Senior Debt Facility, if at all. In addition, in either the case of a transfer of the assets of the Operating Subsidiaries to the lenders under the Senior Debt Facility or a sale of one or both of our plants, as discussed above, we cannot assure you as to what value, if any, may be derived for shareholders of the Company from such transfer or sale.

As of December 31, 2012, the Operating Subsidiaries had $170.5 million of principal 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 December 31, 2012 consolidated balance sheet. If the Company is unable to reach an agreement with the lenders under the Senior Debt Facility, and if the 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.

The consolidated financial statements that are included elsewhere in this Annual Report have been prepared assuming that the Company will continue as a going concern; however, the default of our Operating Subsidiaries under the Senior Debt Facility, the cessation of operations at the Fairmont ethanol facility, our limited liquidity and the continued narrow crush spread all raise substantial doubt about the Company's ability to do so. Our financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

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 Company has installed corn oil extraction systems at each of the plants which was completed in Wood River in December 2011 and in Fairmont in January 2012. Both Operating Subsidiaries began generating revenues from corn oil sales in the first quarter of 2012. The corn oil produced at our plants is non-food grade and 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 was 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 years ended December 31, 2012 and 2011. This discussion should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements contained in this Annual Report on Form 10-K.

At December 31, 2012, the Company owned 87.3% of the LLC membership units with the remaining 12.7% owned by an individual and by certain investment funds affiliated with one 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 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:

                                                        Years Ended December 31,
                                                  2012                           2011
                                                         (dollars in thousands)
Net sales                               $  463,280          100.0 %    $  653,073          100.0 %
Cost of goods sold                         493,901          106.6         642,504           98.4
Gross profit (loss)                        (30,621 )         (6.6 )        10,569            1.6
General and administrative expenses          9,868            2.1          10,804            1.6
Operating loss                             (40,489 )         (8.7 )          (235 )         (0.0 )
Other income                                 1,442            0.3               -           (0.0 )
Interest expense                            (7,275 )         (1.6 )       (10,126 )         (1.6 )
Net loss                                   (46,322 )        (10.0 )       (10,361 )         (1.6 )
Less: Net loss attributable to the
noncontrolling interest                      6,479            1.4           1,644            0.3
Net loss attributable to BioFuel
Energy Corp. common stockholders        $  (39,843 )         (8.6 )%   $   (8,717 )         (1.3 )%

The following table sets forth key operational data for the years ended December 31, 2012 and 2011 that we believe are important indicators of our results of operations:

                                                       Years Ended December 31,
                                                         2012              2011
   Ethanol sold (gallons, in thousands)                    161,728         216,694
   Dry distillers grains sold (tons, in thousands)           158.6           335.6
   Wet distillers grains sold (tons, in thousands)           807.8           715.6
   Corn oil sold (pounds, in thousands)                     37,770               -
   Corn Ground (bushels, in thousands)                      57,601          78,286

Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011

Net Sales: Net Sales were $463.3 million for the year ended December 31, 2012 compared to $653.1 million for the year ended December 31, 2011, a decrease of $189.8 million or 29.1%. This decrease was primarily attributable to a decrease in ethanol revenue of $196.7 million, which was partially offset by an increase in co-product revenue of $6.9 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, coupled with shutting down our Fairmont plant beginning in late September 2012 due to poor operating margins. 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 $14.5 million of corn oil revenue for 2012. Distillers grains revenue was $7.6 million lower as compared to the year ago period. Although distillers grains production was lower resulting from the production factors discussed above, the lower production and resulting sales were partially 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 years ended December 31, 2012 and December 31, 2011:

                                                 Years Ended December 31,
                                            2012                              2011
                                                   Per Gallon                     Per Gallon
                                 Amount            of Ethanol        Amount       of Ethanol
                                     (amounts in thousands, except per gallon amounts)
 Corn                         $    397,884       $         2.46     $ 526,307     $      2.43
 Natural gas                        12,957       $         0.08        26,843     $      0.12
 Denaturant                          6,607       $         0.04         6,833     $      0.03
 Electricity                        11,569       $         0.07        13,356     $      0.06
 Chemicals and enzymes              11,282       $         0.07        15,721     $      0.07
 General operating expenses         27,374       $         0.17        27,538     $      0.13
 Depreciation                       26,228       $         0.16        25,906     $      0.12
 Cost of goods sold           $    493,901                          $ 642,504

Cost of goods sold was $493.9 million for the year ended December 31, 2012, compared to $642.5 million for the year ended December 31, 2011, a decrease of $148.6 million or 23.1%. The decrease was primarily attributable to a $128.4 million decrease in the cost of corn and a $13.9 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 operating expenses and depreciation increased on a per gallon of ethanol basis from 2011 to 2012. These costs are mostly fixed costs and therefore as production volumes decreased from 2011 to 2012, the per gallon of ethanol cost increased.

General and administrative expenses: General and administrative expenses decreased $0.9 million or 8.3%, to $9.9 million for the year ended December 31, 2012, as compared to $10.8 million for the year ended December 31, 2011. The decrease was primarily attributable to a reduction in compensation expense.

Other income: Other income was $1.4 million for the year ended December 31, 2012. Other income relates to the subleasing of excess ethanol tanker cars that commenced in 2012.

Interest expense: Interest expense was $7.3 million for the year ended December 31, 2012, compared to $10.1 million for the year ended December 31, 2011, a decrease of $2.8 million or 27.7%. The decrease in interest expense was primarily attributable to the Company's average outstanding debt balance being lower during the year ended December 31, 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 years ended December 31, 2012 and 2011 are summarized below (in thousands):

                                                          Years Ended December 31,
                                                            2012              2011
 Cash provided by (used in):
 Operating activities                                   $      1,453       $   23,567
 Investing activities                                           (843 )         (2,843 )
 Financing activities                                         (6,426 )        (13,013 )
 Net increase (decrease) in cash and cash equivalents   $     (5,816 )     $    7,711

Cash provided by operating activities. Net cash provided by operating activities was $1.5 million for the year ended December 31, 2012, compared to $23.6 million for the year ended December 31, 2011. For the year ended December 31, 2012, the amount was primarily comprised of a net loss of $46.3 million which was offset by working capital sources of $18.0 million and non-cash charges of $29.8 million, which were primarily depreciation and amortization. Working capital sources primarily related to a decrease in accounts receivable of $4.3 million and a decrease in inventories of $12.8 million. The decrease in both accounts receivable and inventories was primarily a result of shutting down production at our Fairmont facility in late September 2012 which resulted in the collection of accounts receivable and the reduction of inventory balances at that plant. For the year ended December 31, 2011, the amount was primarily comprised of a net loss of $10.4 million which was offset by working capital sources of $2.8 million and non-cash charges of $31.25 million, which were primarily depreciation and amortization.

Cash used in investing activities. Net cash used in investing activities was $0.8 million for the year ended December 31, 2012, compared to $2.8 million for the year ended December 31, 2011. The net cash used in investing activities during both periods was for capital expenditures related to various plant improvement projects.

Cash used in financing activities. Net cash used in financing activities was $6.4 million for the year ended December 31, 2012, compared to $13.0 million for the year ended December 31, 2011. For the year ended December 31, 2012, the amount was comprised of $6.3 million in principal payments under our Senior Debt Facility and $0.1 million in payments of notes payable and capital leases. For the year ended December 31, 2011, the amount was comprised of $46.0 million of proceeds related to our Rights Offering and LLC concurrent private placement, offset by $12.6 million in principal payments under our Senior Debt Facility, a $21.5 million payment to pay off our subordinated debt, a $20.0 million payment to pay off our bridge loan, $3.2 million in payments of notes payable and capital leases, and $1.7 million in payments for debt and equity issuance costs.

The LLC's principal source of liquidity at December 31, 2012 consisted of cash generated from its management services agreements between the LLC and our Operating Subsidiaries, which totals $0.3 million per month, and its cash and cash equivalents of $8.6 million. The LLC has no obligation to fund any of the Operating Subsidiaries cash flow needs. The Operating Subsidiaries principal source of liquidity at December 31, 2012 consisted of cash generated from operations and cash and cash equivalents of $0.7 million. The Operating Subsidiaries have also relied upon extensions of payment terms by Cargill as an additional source of liquidity and working capital. As of December 31, 2012, the Operating Subsidiaries owed Cargill $9.0 million for accounts payable related to corn purchases. Pursuant to an arrangement with Cargill, the Operating Subsidiaries have been permitted to extend corn payment terms beyond the $10.0 million contractual limit so long as the amounts Cargill owes the Operating Subsidiaries for ethanol exceed their accounts payable balance by an amount that is satisfactory to Cargill. This arrangement may be terminated by Cargill at any time on little or no notice, in which case the Operating Subsidiaries would need to use cash on hand or other sources of liquidity, if available, to fund their operations.

Our principal liquidity needs are expected to be funding our plant operations, capital expenditures, debt service requirements and general corporate purposes. As noted elsewhere in this Annual Report, the Company incurred a net loss of $46.3 million during the year ended December 31, 2012 due to narrow commodity margins. We have had, and continue to have, limited liquidity. We cannot predict when or if crush spreads will fluctuate again or if the current commodity margins will improve or worsen. As described in "Overview" above, we idled our Fairmont facility in September 2012 until such time as the crush spread . . .

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