Ethanol and By-Products
At July 31, 2020, investments in our ethanol business include equity investments
in three ethanol limited liability companies, in two of which we have a majority
ownership interest. The following table is a summary of ethanol gallons shipped
at our plants:
Trailing 12 REX's Current Effective
Months Current Ownership of
Ethanol Effective Trailing 12
Gallons Ownership Months Ethanol
Entity Shipped Interest Gallons Shipped
One Earth Energy, LLC 115.7 M 75.3% 87.1 M
NuGen Energy, LLC 72.6 M 99.5% 72.2 M
Big River Resources, LLC:
Big River Resources W Burlington, LLC 103.8 M 10.3% 10.7 M
Big River Resources Galva, LLC 112.0 M 10.3% 11.5 M
Big River United Energy, LLC 117.9 M 5.7% 6.7 M
Big River Resources Boyceville, LLC 54.3 M 10.3% 5.6 M
Total 576.3 M 193.8 M
Our ethanol operations and the results thereof are highly dependent on commodity
prices, especially prices for corn, ethanol, distillers grains, non-food grade
corn oil and natural gas, and availability of corn. As a result of price
volatility for these commodities, our operating results can fluctuate
substantially. The price and availability of corn is subject to significant
fluctuations due to several factors that affect commodity prices in general,
including crop conditions, global health pandemics, the amount of corn stored on
farms, weather, federal policy and foreign trade. Because the market prices of
ethanol and distillers grains are not always directly related to corn prices
(for example, demand for crude and other
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energy and related prices, the export market demand for ethanol and distillers
grains and the results of federal policy decisions and trade negotiations, can
impact ethanol and distillers grains prices), at times ethanol and distillers
grains prices may not follow movements in corn prices and, in an environment of
higher corn prices or lower ethanol or distillers grains prices, reduce the
overall margin structure at the plants. As a result, at times, we may operate
our plants at negative or minimally positive operating margins.
We expect our ethanol plants to produce approximately 2.8 gallons of denatured
ethanol for each bushel of grain processed in the production cycle. We refer to
the actual gallons of denatured ethanol produced per bushel of grain processed
as the realized yield. We refer to the difference between the price per gallon
of ethanol and the price per bushel of grain (divided by the realized yield) as
the "crush spread". Should the crush spread decline, it is possible that our
ethanol plants will generate operating results that do not provide adequate cash
flows for sustained periods of time. In such cases, production at the ethanol
plants may be reduced or stopped altogether in order to minimize variable costs
at individual plants.
We attempt to manage the risk related to the volatility of commodity prices by
utilizing forward grain purchase, forward ethanol, distillers grains and corn
oil sale contracts and commodity futures agreements, as management deems
appropriate. We attempt to match quantities of these sale contracts with an
appropriate quantity of grain purchase contracts over a given period of time
when we can obtain an adequate gross margin resulting from the crush spread
inherent in the contracts we have executed. However, the market for future
ethanol sales contracts generally lags the spot market with respect to ethanol
price. Consequently, we generally execute fixed price contracts for no more than
four months into the future at any given time and we may lock in our corn or
ethanol price without having a corresponding locked in ethanol or corn price for
short durations of time. As a result of the relatively short period of time our
fixed price contracts cover, we generally cannot predict the future movements in
our realized crush spread for more than four months; thus, we are unable to
predict the likelihood or amounts of future income or loss from the operations
of our ethanol facilities. We utilize derivative financial instruments,
primarily exchange traded commodity future contracts, in conjunction with
certain of our grain procurement activities.
Refined Coal
On August 10, 2017, we purchased the entire ownership interest of an entity that
owns a refined coal facility, through a 95.35% owned subsidiary, for
approximately $12.0 million. We began operating the refined coal facility
immediately after the acquisition. We expect that the revenues from the sale of
refined coal produced in the facility will be subsidized by federal production
tax credits through November 2021, subject to meeting qualified emissions
reductions as governed by Section 45 of the Internal Revenue Code. In order to
maintain compliance with Section 45 of the Internal Revenue Code, we are
required to test the effectiveness of our process with respect to emissions
reductions every six months through an independent laboratory. Annually, the IRS
publishes the amount of federal income tax credit earned per ton of refined coal
produced and sold. We expect to earn credits at the rate of approximately $7.30
per ton of refined coal produced and sold during calendar year 2020. The tax
credits can be earned for refined coal produced and sold by our facility through
November 2021.
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The refined coal facility is located at the site of a utility-owned electrical
generating power station, which is our refined coal operation's sole customer.
Refined coal production and sales vary depending on fluctuations in demand from
the site host utility, which generally changes based upon weather conditions in
the geographic markets the utility serves and competing energy prices and
supplies and the state of the economy. We have contracted with an experienced
third party to operate and maintain the refined coal facility and to provide us
with management reporting and operating data as required. We do not have any
employees on site at the refined coal facility.
Future Energy
During fiscal year 2013, we entered into a joint venture with Hytken HPGP, LLC
("Hytken") to file and defend patents for eSteam technology relating to heavy
oil and oil sands production methods, and to commercially exploit the technology
to generate license fees, royalty income and development opportunities. The
patented technology is an enhanced method of heavy oil recovery involving zero
emissions downhole steam generation. We own 60% and Hytken owns 40% of the
entity named Future Energy, LLC ("Future Energy").
We have agreed to fund direct patent expenses relating to patent applications
and defense, annual annuity fees and maintenance on a country by country basis,
with the right to terminate funding and transfer related patent rights to
Hytken. We have funded all costs relating to new intellectual property,
consultants, research and development, pilot field tests and equipment purchases
with respect to the proposed commercialization stage of the technology. To date,
we have paid and expensed approximately $2.5 million cumulatively primarily for
patents, purchases of certain equipment and other expenses. We have not yet
tested or proven the commercial feasibility of the technology.
Critical Accounting Policies and Estimates
During the three months ended July 31, 2020, we did not change any of our
critical accounting policies as disclosed in our 2019 Annual Report on Form 10-K
as filed with the Securities and Exchange Commission on April 1, 2020.
Fiscal Year
All references in this report to a particular fiscal year are to REX's fiscal
year ended January 31. For example, "fiscal year 2020" means the period February
1, 2020 to January 31, 2021.
Results of Operations
Trends and Uncertainties
During fiscal years 2020 and 2019, operating results in our ethanol and
by-products segment have been adversely affected by a weak margin environment
highlighted by higher costs for corn, lower availability of local corn, lower
oil prices resulting from an oversupply of oil, the EPA granting small refiner
waivers, and in the first quarter of fiscal year 2020, the outbreak of a new
strain of the coronavirus "COVID-19".
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Weather conditions delayed, and in some cases prevented the planting of corn in
much of the United States during 2019. Weather also contributed to intermittent
logistical delays during fiscal year 2019. Throughout the first six months of
fiscal year 2020 and most of fiscal year 2019, we struggled to obtain adequate
supplies of corn at our NuGen facility, on a consistent basis, at acceptable
price levels. Consequently, we were not able to operate our NuGen ethanol plant
at production levels near our historical averages. We cannot reasonably predict
the likelihood of future period production levels compared to historical
averages.
During the early months of 2020, COVID-19 spread into the United States and
other countries. In an effort to contain the spread of this virus, there have
been various government mandated restrictions, in addition to voluntary
privately implemented restrictions, including limiting public gatherings, retail
store closures, restrictions on employees working and the quarantining of people
who may have been exposed to the virus. This has led to reduced demand for
gasoline and ethanol. The duration of the resulting downturn in economic
activity is unknown and has led to historically low ethanol pricing.
Consequently, we idled our NuGen and One Earth ethanol plants in late March of
2020. In May of 2020, businesses and other activities slowly began to reopen,
which led to an increase in demand for gasoline and ethanol, and in related
prices. As a result, we resumed production operations at the One Earth ethanol
plant in late May of 2020 and at NuGen in late June of 2020. In addition, recent
actions by the Federal Reserve, related to the COVID-19 outbreak, have reduced
interest rates. Given the amount of cash and short-term investments we have,
this will significantly reduce our interest income in future periods, depending
on the length of time interest rates remain at these levels. The impacts of the
COVID-19 outbreak on our business operations, including the duration and impact
on ethanol demand, cannot be reasonably estimated at this time, although a
future prolonged production stoppage at our plants would have a further material
adverse impact on our results of operations, financial condition and cash flows
in fiscal year 2020.
Under the Renewable Fuel Standard "RFS", the EPA assigns individual refiners,
blenders and importers the volume of renewable fuels they are obligated to use
based on their percentage of total domestic transportation fuel sales. The EPA
can waive the obligation for individual small refineries that are experiencing
"disproportionate economic hardship" due to compliance with the RFS. Until
recent years, the EPA approved relatively few such waivers. The EPA approved 31
small refiner waivers related to their 2018 Renewable Fuel Standard compliance
obligations, which is estimated to effectively reduce the obligation for ethanol
in 2018 by 1.4 billion gallons. The EPA previously granted waivers for 2016 and
2017 totaling approximately 2.6 billion gallons. These actions affect current
year demand as obligated parties such as refiners can use the waivers granted by
the EPA to help them meet their obligations in different years. There continues
to be uncertainty regarding how the EPA will administer the small refiner
waivers. We believe the waivers have resulted in reduced domestic ethanol
demand. There are three small refiner waiver requests filed for the 2020
compliance year, 28 small refiner waiver requests filed for the 2019 compliance
year and 67 prior year waiver requests for compliance years 2011 through 2018.
The prior year waiver requests are widely viewed as an attempt by oil refiners
to work around a January 2020 ruling by the 10thU.S. Circuit Court of Appeals
that vacated the EPA's approval of three small refiner waivers, saying that the
agency exceeded its authority in approving the waivers because the Clean Air Act
prevents the EPA from extending waivers to any refiner whose previous waivers
had lapsed.
During the first six months of fiscal year 2020 and throughout fiscal year 2019,
operating results in our refined coal segment have been adversely affected by
lower utility plant demand from our only customer. Projections, provided by the
utility plant, for the next twelve months indicate this trend may continue and
may be further impacted by the COVID-19 pandemic. While this leads to lower
pre-tax losses from this segment, it also leads to lower tax benefits from
Section 45 credits being recognized. Ultimately, this results in lower amounts
of segment profit.
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Should these trends and uncertainties continue, our future operating results are
likely to be negatively impacted.
For a detailed analysis of period to period changes, see the segment discussion
that follows this section as that discussion reflects how management views and
monitors our business.
Comparison of Three and Six Months Ended July 31, 2020 and 2019
Net sales and revenue in the quarter ended July 31, 2020 were approximately
$39.3 million compared to approximately $105.9 million in the prior year's
second quarter, representing a decrease of approximately $66.5 million, which
was primarily caused by lower sales in our ethanol and by-products segment. Net
sales and revenue in the first six months of fiscal year 2020 were approximately
$122.6 million compared to approximately $210.4 million in the first six months
of fiscal year 2019, representing a decrease of approximately $87.9 million,
which was primarily caused by lower sales in our ethanol and by-products segment
of approximately $87.7 million. The decline in ethanol and by-products segment
net sales and revenue reflects significantly lower production volumes during
fiscal year 2020. This relates primarily to diminished local availability of
corn, the effects of the COVID-19 outbreak on ethanol demand and lower ethanol
pricing which resulted in the idling of the NuGen and One Earth ethanol plants
in March of 2020. We resumed production operations at One Earth in late May of
2020 and at NuGen in late June of 2020.
Gross loss for the second quarter of fiscal year 2020 was approximately $1.3
million, compared to gross profit of approximately $4.0 million for the second
quarter of fiscal year 2019. Gross profit for the second quarter of fiscal year
2020 decreased by approximately $5.6 million compared to the prior year second
quarter as a result of operations in the ethanol and by-products segment. Gross
loss in the refined coal segment was $1.9 million in the second quarter of
fiscal year 2020 compared to $2.2 million in the second quarter of fiscal year
2019. Gross loss for the first six months of fiscal year 2020 was approximately
$10.7 million compared to gross profit of approximately $7.7 million for the
first six months of fiscal year 2019. Gross profit for the first six months of
fiscal year 2020 decreased by approximately $20.0 million compared to the first
six months of fiscal year 2019 as a result of operations in the ethanol and
by-products segment and increased by approximately $1.6 million as a result of
operations in the refined coal segment.
SG&A expenses were approximately $4.4 million for the second quarter of fiscal
year 2020, compared to approximately $4.8 million of expenses for the second
quarter of fiscal year 2019. The decrease is primarily related to lower ethanol
freight charges consistent with lower production and sales. SG&A expenses were
approximately $9.0 million for the first six months of fiscal year 2020,
compared to approximately $9.5 million of expenses for the first six months of
fiscal year 2019. The decrease is primarily related to a decrease in incentive
compensation expense associated with lower profitability in fiscal year 2020.
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During the second quarter of fiscal year 2020, we recognized a loss of
approximately $0.5 million compared to income of approximately $0.2 million for
the second quarter of fiscal year 2019, from our equity investment in Big River,
which is included in our ethanol and by-products segment results. We recognized
a loss of approximately $1.0 million for the first six months of fiscal year
2020 compared to income of approximately $0.4 million for the first six months
of fiscal year 2019. Big River has interests in four ethanol production plants
that shipped approximately 388 million gallons in the trailing twelve months
ended July 31, 2020 and has an effective ownership of ethanol gallons shipped
for the same period of approximately 335 million gallons. Big River's operations
also include agricultural elevators. Due to the inherent volatility of commodity
prices within the ethanol industry, we cannot predict the likelihood of future
operating results from Big River being similar to historical results.
Interest and other income was approximately $0.2 million for the second quarter
of fiscal year 2020 compared to approximately $1.3 million for the second
quarter of fiscal year 2019. Interest and other income was approximately $0.9
million for the first six months of fiscal year 2020 compared to approximately
$2.4 million for the first six months of fiscal year 2019. Interest income has
decreased as yields on our excess cash decreased compared to fiscal year 2019
and our excess cash investment balances decreased compared to fiscal year 2019.
As a result of the foregoing, loss before income taxes was approximately $6.1
million for the second quarter of fiscal year 2020 versus income of
approximately $0.7 million for the second quarter of fiscal year 2019. Loss
before income taxes was approximately $19.8 million for the first six months of
fiscal year 2020 versus income of approximately $0.9 million for the first six
months of fiscal year 2019.
We determined that small changes in estimated "ordinary" income would result in
significant changes in the estimated annual effective tax rate. Thus, the
Company used a discrete effective tax rate method to calculate the provision or
benefit for income taxes for the three and six months ended July 31, 2020 and
2019. Our tax benefit was approximately 66.6% and approximately 358.7% for the
three months ended July 31, 2020 and 2019, respectively, and was approximately
47.2% and was approximately 687.1% for the first six months of fiscal years 2020
and 2019, respectively. The fluctuation in the rate results primarily from the
production tax credits we expect to receive associated with our refined coal
segment relative to pre-tax income or loss. Our income tax benefit for the first
six months of fiscal year 2020 includes approximately $1.8 million related to
the lengthening of a net operating loss carryback allowed by the recently passed
CARES Act.
As a result of the foregoing, net loss was approximately $2.0 million for the
second quarter of fiscal year 2020 compared to net income of approximately $3.4
million for the second quarter of fiscal year 2019. Net loss was approximately
$10.5 million for the first six months of fiscal year 2020 compared to net
income of approximately $7.1 million for the first six months of fiscal year
2019.
Loss (income) related to noncontrolling interests was approximately $0.3 million
and approximately $(1.1) million during the second quarters of fiscal years 2020
and 2019, respectively, and was approximately $1.1 million and approximately
$(2.0) million during the first six months of fiscal years 2020 and 2019,
respectively. These amounts represent the other owners' share of the income or
loss of NuGen, One Earth and the refined coal entity.
As a result of the foregoing, net loss attributable to REX common shareholders
for the second quarter of fiscal year 2020 was approximately $1.7 million, a
decrease of approximately $4.0 million from net income attributable to REX
common shareholders of approximately$2.3 million for the second quarter
28
of fiscal year 2019. Net loss attributable to REX common shareholders for the
first six months of fiscal year 2020 was approximately $9.4 million, a decrease
of approximately $14.5 million from net income attributable to REX common
shareholders of approximately $5.1 million for the first six months of fiscal
year 2019.
Business Segment Results
We have two reportable segments: i) ethanol and by-products; and ii) refined
coal. We evaluate the performance of each reportable segment based on segment
profit. Segment profit excludes indirect interest income and certain other items
that are included in net income determined in accordance with accounting
principles generally accepted in the United States of America. Segment profit
includes realized and unrealized gains and losses on derivative financial
instruments and the provision/benefit for income taxes.
The following sections discuss the results of operations for each of our
business segments and corporate and other. Amounts in the corporate and other
category include activities that are not separately reportable or related to a
segment. The following tables summarizes segment and other results (amounts in
thousands):
Three Months Ended Six Months Ended
July 31, July 31,
2020 2019 2020 2019
Net sales and revenue:
Ethanol and by-products $ 39,242 $ 105,770 $ 122,477 $ 210,223
Refined coal 1 85 98 100 220
Total net sales and revenue $ 39,327 $ 105,868 $ 122,577 $ 210,443 1 We record sales in the refined coal segment net of the cost of coal as we
purchase the coal feedstock from the customer to which refined coal is sold.
Segment gross (loss) profit:
Ethanol and by-products $ 553 $ 6,169 $ (7,670 ) $ 12,284
Refined coal (1,884) (2,165) (2,991) (4,634)
Total gross (loss) profit $ (1,331) $ 4,004 $ (10,661) $ 7,650
(Loss) income before income taxes:
Ethanol and by-products $ (3,259) $ 3,111 $ (15,610) $ 6,313
Refined coal (2,118) (2,028) (2,965) (4,703)
Corporate and other (702) (352) (1,247) (712)
Total (loss) income before income taxes $ (6,079) $ 731 $ (19,822) $ 898
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Three Months Ended Six Months Ended
July 31, July 31,
2020 2019 2020 2019
Benefit (provision) for income taxes:
Ethanol and by-products $ 893 $ (619) $ 5,054 $ (1,105)
Refined coal 2,919 3,155 3,878 7,101
Corporate and other 234 86 427 174
Total benefit for income taxes $ 4,046 $ 2,622 $ 9,359 $ 6,170
Segment (loss) profit (net of
noncontrolling interests):
Ethanol and by-products $ (2,178) $ 1,305 $ (9,611) $ 3,014
Refined coal 898 1,216 1,048 2,602
Corporate and other (468) (265) (820) (539)
Net (loss) income attributable to REX
common shareholders $ (1,748) $ 2,256 $ (9,383) $ 5,077
Ethanol and by-Products
The ethanol and by-products segment includes the consolidated financial results
of One Earth and NuGen, our equity investment in Big River and certain
administrative expenses. The following table summarizes net sales and revenue
from One Earth and NuGen by product group (amounts in thousands):
Three Months Ended Six Months Ended
July 31, July 31,
2020 2019 2020 2019
Sales of products, ethanol and
by-products segment:
Ethanol $ 32,524 $ 83,219 $ 93,121 $ 160,837
Dried distillers grains 5,480 15,887 24,398 34,561
Non-food grade corn oil 1,313 4,599 4,501 9,582
Modified distillers grains 209 2,004 666 5,144
Derivative financial instruments
losses (298) - (298) -
Other 14 61 89 99
Total $ 39,242 $ 105,770 $ 122,477 $ 210,223
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The following table summarizes selected operating data from One Earth and NuGen:
Three Months Ended Six Months Ended
July 31, July 31,
2020 2019 2020 2019
Average selling price per gallon of
ethanol $ 1.23 $ 1.38 $ 1.25 $ 1.32
Gallons of ethanol sold (in millions) 26.5 60.4 74.8 121.7
Average selling price per ton of dried
distillers grains $ 135.54 $ 135.46 $ 143.24 $ 138.92Tons of dried distillers grains sold 40,429 117,280 170,324 248,770
Average selling price per pound of
non-food grade corn oil
$ 0.24 $ 0.25 $ 0.25 $ 0.25
Pounds of non-food grade corn oil sold
(in millions) 5.4 18.1 18.1 37.9
Average selling price per ton of
modified distillers grains $ 31.87 $ 53.01 $ 49.32 $ 60.12
Tons of modified distillers grains
sold 6,566 37,795 13,507 85,555
Average cost per bushel of grain $ 3.63 $ 3.80 $ 3.86 $ 3.65
Average cost of natural gas (per
MmBtu)
$ 2.92 $ 2.63 $ 3.60 $ 3.16
Ethanol sales decreased from approximately $83.2 million in the second quarter
of fiscal year 2019 to approximately $32.5 million in the second quarter of
fiscal year 2020, primarily as a result of a 56% decrease in gallons sold
compared to the second quarter of fiscal year 2019 as both of our consolidated
ethanol plants were in production for approximately only one month during the
second quarter of fiscal year 2020. Dried distillers grains sales decreased from
approximately $15.9 million in the second quarter of fiscal year 2019 to
approximately $5.5 million in the second quarter of fiscal year 2020, primarily
as a result of a 66% decrease in tons sold compared to the second quarter of
fiscal year 2019. Non-food grade corn oil sales were approximately $1.3 million
in the second quarter of fiscal year 2020 compared to approximately $4.6 million
in the second quarter of fiscal year 2019. The decrease was primarily a result
of a 70% decrease in pounds sold compared to the second quarter of fiscal year
2019. Modified distillers grains sales were approximately $0.2 million in the
second quarter of fiscal year 2020 compared to approximately $2.0 million in the
second quarter of fiscal year 2019. The decrease was primarily a result of an
83% decrease in tons sold compared to the second quarter of fiscal year 2019.
Ethanol sales decreased from approximately $160.8 million in the first six
months of fiscal year 2019 to approximately $93.1 million in the first six
months of fiscal year 2020, primarily a result of a decrease of 46.9 million
gallons sold. Dried distillers grains sales decreased from approximately $34.6
million in the first six months of fiscal year 2019 to approximately $24.4
million in the first six months of fiscal year 2020, primarily a result of a 32%
decrease in tons sold compared to the first six months of fiscal year 2019.
Non-food grade corn oil sales decreased from approximately $9.6 million in the
first six months of fiscal year 2019 to approximately $4.5 million in the first
six months of fiscal year 2020, primarily a result of a 52% decrease in pounds
sold. Modified distillers grains sales decreased from approximately $5.1 million
in the first six months of fiscal year 2019 to approximately $0.7 million in the
first six months of fiscal year 2020, primarily a result of an 84% decrease in
tons sold compared to the first six months of fiscal year 2019. The volume
decreases for the quarter and six months ended July 31, 2020
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were primarily a result of the impact of the COVID-19 outbreak on ethanol
demand, lower ethanol pricing, an oversupply of oil and corn availability at the
NuGen ethanol plant. These factors resulted in idling both of our consolidated
ethanol plants in March of 2020. In May of 2020, businesses and other activities
slowly began to reopen, which led to an increase in demand for gasoline and
ethanol, and in related prices. As a result, we resumed production operations at
the One Earth ethanol plant in May of 2020 and at the NuGen ethanol plant in
June of 2020.
Gross profit for the second quarter of fiscal year 2020 was approximately $0.6
million compared to approximately $6.2 million of gross profit for the second
quarter of fiscal year 2019. The crush spread for the second quarter of fiscal
year 2020 was approximately $(0.04) per gallon of ethanol sold compared to $0.07
per gallon of ethanol sold during the second quarter of fiscal year 2019. During
the second quarter of fiscal year 2020, both of our consolidated ethanol plants
were idled for most of the quarter. Consequently, lower production and resulting
sales volumes significantly reduced gross profit for the second quarter of
fiscal year 2020.
Corn accounted for approximately 68% ($26.1 million) of our cost of sales during
the second quarter of fiscal year 2020 compared to approximately 78% ($77.5
million) during the second quarter of fiscal year 2019. Natural gas accounted
for approximately 5% ($1.9 million) of our cost of sales during the second
quarter of fiscal year 2020 compared to approximately 4% ($4.2 million) during
the second quarter of fiscal year 2019. Both the corn and natural gas dollar
decreases were primarily attributable to the lower production levels incurred in
the second quarter of fiscal year 2020 compared to the second quarter of fiscal
year 2019 levels.
Gross (loss) profit for the first six months of fiscal year 2020 was
approximately $(7.7) million, which was approximately $20.0 million lower
compared to approximately $12.3 million of gross profit for the first six months
of fiscal year 2019. The crush spread for the first six months of fiscal year
2020 was approximately $(0.08) per gallon of ethanol sold compared to the first
six months of fiscal year 2019 which was approximately $0.06 per gallon of
ethanol sold Both of our consolidated ethanol plants were idled for portions of
the first six months of fiscal year 2020. Consequently, lower production and
resulting sales volumes significantly reduced gross profit for the first six
months of fiscal year 2020.
Grain accounted for approximately 73% ($94.8 million) of our cost of sales
during the first six months of fiscal year 2020 compared to approximately 77%
($152.7 million) during the first six months of fiscal year 2019. Natural gas
accounted for approximately 6% ($7.3 million) of our cost of sales during the
first six months of fiscal year 2020 compared to approximately 5% ($10.4
million) during the first six months of fiscal year 2019. Both the grain and
natural gas dollar decreases were primarily attributable to the lower production
levels incurred in the first six months of fiscal year 2020 compared to the
first six months of fiscal year 2019 levels.
We attempt to match quantities of ethanol, distillers grains and non-food grade
corn oil sales contracts with an appropriate quantity of grain purchase
contracts over a given time period when we can obtain a satisfactory margin
resulting from the crush spread inherent in the contracts we have executed.
However, the market for future ethanol sales contracts generally lags the spot
market with respect to ethanol price. Consequently, we generally execute fixed
price sales contracts for no more than four months into the future at any given
time and we may lock in our corn or ethanol price without having a corresponding
locked in ethanol or corn price for short durations of time. As a result of the
relatively
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short period of time our contracts cover, we generally cannot predict the future
movements in our realized crush spread for more than four months.
SG&A expenses for the second quarter of fiscal year 2020 were approximately $3.4
million, compared to the second quarter of fiscal year 2019 amount of
approximately $4.2 million. The decrease is primarily related to lower ethanol
freight charges, consistent with lower production and sales. SG&A expenses were
approximately $7.6 million for the first six months of fiscal year 2020,
compared to the first six months of fiscal year 2019 amount of $8.1 million. The
decrease is primarily related to a decrease in incentive compensation expense
associated with lower profitability in fiscal year 2020.
During the second quarter of fiscal year 2020 we recognized a loss of
approximately $0.5 million compared to income of approximately $0.2 million for
the second quarter of fiscal year 2019, from our equity investment in Big River.
We recognized a loss of approximately $1.0 million during the first six months
of fiscal year 2020 compared to income of approximately $0.4 million during the
first six months of fiscal year 2019. Big River's results for the quarter and
six months ended July 31, 2020 were negatively impacted by the COVID-19
outbreak. Big River has interests in four ethanol production plants that shipped
approximately 388 million gallons in the trailing twelve months ended July 31,
2020 and has an effective ownership of ethanol gallons shipped for the same
period of approximately 335 million gallons. Big River's operations also include
agricultural elevators. Due to the inherent volatility of commodity prices
within the ethanol industry, we cannot predict the likelihood of future
operating results from Big River being similar to historical results.
Interest and other income was approximately $0.1 million for the second quarter
of fiscal year 2020 compared to approximately $0.9 million for the second
quarter of fiscal year 2019. Interest and other income was approximately $0.6
million for the first six months of fiscal year 2020 compared to approximately
$1.7 million for the first six months of fiscal year 2019. Interest income has
decreased as yields on our excess cash decreased compared to fiscal year 2019
and our excess cash investment balances decreased compared to fiscal year 2019.
The benefit for income taxes was approximately $0.9 million in the second
quarter of fiscal year 2020 compared to a provision of approximately $0.6
million in the second quarter of fiscal year 2019. The benefit for income taxes
was approximately $5.1 million in the first six months of fiscal year 2020
compared to a provision of approximately $1.1 million in the first six months of
fiscal year 2019. The fluctuation in segment income tax benefit or provision is
primarily related to the pre-tax loss incurred in fiscal year 2020 compared to
pre-tax income incurred in fiscal year 2019.
Loss (income) related to noncontrolling interests was approximately $0.2 million
and approximately $(1.2) million during the second quarters of fiscal years 2020
and 2019, respectively. Loss (income) related to noncontrolling interests was
approximately $0.9 million and approximately $(2.2) million during the first six
months of fiscal years 2020 and 2019, respectively. These amounts represent the
other owners' share of the income of NuGen and One Earth.
Segment loss for the second quarter of fiscal year 2020 was approximately $2.2
million, which was a decrease of approximately $3.5 million compared to the
prior year second quarter segment profit of approximately $1.3 million. Segment
loss for the first six months of fiscal year 2020 was approximately $9.6
million, which was approximately $12.6 million lower compared to the first six
months of fiscal year 2019 segment profit of approximately $3.0 million.
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Refined Coal
The refined coal segment includes the consolidated financial results of our
refined coal entity and certain administrative expenses. We acquired the refined
coal entity during the third quarter of fiscal year 2017. The following table
summarizes sales from refined coal operations by product group (amounts in
thousands):
Three Months Ended Six Months Ended
July 31, July 31,
Sales of products, refined coal segment: 2020 2019 2020 2019
Refined coal 1 $ 85 $ 98 $ 100 $ 220
1 We record sales in the refined coal segment net of the cost of coal as we
purchase the coal feedstock from the customer to which refined coal is sold.
Refined coal sales were approximately $85,000 and approximately $98,000 in the
second quarters of fiscal years 2020 and 2019, respectively. Refined coal sales
were approximately $100,000 and approximately $220,000 in the first six months
of fiscal years 2020 and 2019, respectively. During fiscal year 2020, operating
results have been adversely affected by lower utility plant demand (our only
customer). Refined coal sales vary depending on fluctuations in demand from the
site host utility, which generally changes based upon weather conditions in the
geographic markets the utility serves and competing energy prices and supplies
and the state of the economy. Based upon current year operations and projections
from the site host utility, we expect varying and intermittent demand for
refined coal in future periods compared to historical results.
Gross loss was approximately $1.9 million and approximately $2.2 million in the
second quarters of fiscal years 2020 and 2019, respectively. Gross loss was
approximately $3.0 million and approximately $4.6 million in the first six
months of fiscal years 2020 and 2019, respectively. We expect future period
gross losses to vary like the sales fluctuations described above. Based upon the
agreements in place that govern the operation, sales and purchasing activities
of the refined coal plant, we expect the refined coal operation to continue
operating at a gross loss. We expect that the ongoing losses will be subsidized
by federal production income tax credits.
SG&A expenses were insignificant during the second quarters and first six months
of fiscal years 2020 and 2019. We expect future period expenses to also be
insignificant.
Loss related to noncontrolling interests was approximately $0.1 million for each
of the second quarters of fiscal years 2020 and 2019. Loss related to
noncontrolling interests was approximately $0.1 million and approximately $0.2
million in the first six months of fiscal years 2020 and 2019, respectively.
This amount represents the other owner's share of the pre-tax loss of refined
coal operations.
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The benefit for income taxes was approximately $2.9 million and approximately
$3.2 million in the second quarters of fiscal years 2020 and 2019, respectively.
The benefit for income taxes was approximately $3.9 million and approximately
$7.1 million in the first six months of fiscal years 2020 and 2019,
respectively. The refined coal segment tax benefit is comprised of an estimated
statutory benefit of its pre-tax losses and an estimated benefit from the
federal production tax credits we expect to earn from producing and selling
refined coal. The amount of benefit we recognize during interim periods will
fluctuate based on actual production and profitability levels.
As a result of the foregoing, including the benefit of federal production tax
credits attributable to refined coal production and sales, segment profit was
approximately $0.9 million and approximately $1.2 million for the second
quarters of fiscal years 2020 and 2019, respectively. Segment profit was
approximately $1.0 million and approximately $2.6 million for the first six
months of fiscal years 2020 and 2019, respectively.
Corporate and Other
SG&A expenses were approximately $0.8 million for the second quarter of fiscal
year 2020, consistent with the approximately $0.7 million of expenses for the
second quarter of fiscal year 2019. These expenses were approximately $1.5
million and approximately $1.3 million for the first six months of fiscal years
2020 and 2019, respectively.
Interest and other income was approximately $0.1 million and approximately $0.3
million for the second quarters of fiscal years 2020 and 2019, respectively.
Interest and other income was approximately $0.2 million and approximately $0.6
million for the first six months of fiscal years 2020 and 2019, respectively.
Interest income has decreased as yields on our excess cash decreased compared to
fiscal year 2019 and our excess cash investment balances decreased compared to
fiscal year 2019.
Liquidity and Capital Resources
Net cash used in operating activities was approximately $9.0 million for the
first six months of fiscal year 2020, compared to cash provided of approximately
$12.5 million for the first six months of fiscal year 2019. For the first six
months of fiscal year 2020, cash was used by a net loss of approximately $10.5
million, adjusted for non-cash items of approximately $9.3 million, which
consisted of depreciation, amortization of operating lease right-of-use assets,
loss from equity method investments, interest income from short-term
investments, the deferred income tax provision and stock based compensation
expense. We received dividends from Big River of approximately $2.0 million
during the first six months of fiscal year 2020. A decrease in the balance of
accounts receivable provided cash of approximately $3.2 million, which was
primarily a result of the timing of customer shipments and payments as well as
lower commodity prices. Inventories decreased by approximately $5.3 million,
which was primarily a result of the timing of receipt of raw materials,
shipments of finished goods and lower commodity prices. An increase in the
balance of refundable income taxes of approximately $4.6 million primarily
relates to a net operating loss we intend to carry back for federal income tax
purposes. A decrease in the balance of accounts payable used cash of
approximately $10.3 million, which was primarily a result of the timing of
inventory receipts and vendor payments. A decrease in the balance of other
liabilities used cash of approximately $2.9 million, which was primarily a
result of payments of operating leases and incentive compensation.
35
Net cash provided by operating activities was approximately $12.5 million for
the first six months of fiscal year 2019. For the first six months of fiscal
year 2019, cash was provided by net income of approximately $7.1 million,
adjusted for non-cash items of approximately $9.0 million, which consisted of
depreciation, amortization of operating lease right-of-use assets, income from
equity method investments, interest income from short-term investments, the
deferred income tax provision and stock based compensation expense. A decrease
in the balance of accounts receivable provided cash of approximately $3.7
million, which was primarily a result of the timing of customer payments and
shipments. An increase in the balance of inventories used cash of approximately
$3.6 million, which was primarily a result of the timing of receipt of raw
materials and the shipment of finished goods. An increase in the balance of
accounts payable provided cash of approximately $1.4 million, which was
primarily a result of the timing of inventory receipts and vendor payments. A
decrease in the balance of other liabilities used cash of approximately $4.9
million, which was primarily a result of payments of operating leases and
incentive compensation as well as lower accruals for utilities.
At July 31, 2020, working capital was approximately $225.8 million, compared to
approximately $239.5 million at January 31, 2020. The ratio of current assets to
current liabilities was 8.6 to 1 at July 31, 2020 and 11.7 to 1 at January 31,
2020.
Cash of approximately $12.4 million was used in investing activities for the
first six months of fiscal year 2020, compared to cash provided of approximately
$13.6 million during the first six months of fiscal year 2019. During the first
six months of fiscal year 2020, we had capital expenditures of approximately
$5.7 million, primarily for the purchase of land at One Earth Energy. We expect
our capital expenditures to be in the range of $3 million to $5 million for the
remainder of fiscal year 2020. During the first six months of fiscal year 2020,
we purchased certificates of deposit (classified as short-term investments) of
approximately $45.5 million. During the first six months of fiscal year 2020, we
sold certificates of deposit (classified as short-term investments) of
approximately $39.0 million. The certificates of deposit, both purchased and
sold, had maturities of less than one year. Depending on investment options
available, we may elect to retain the funds, or a portion thereof, in cash
investments, short-term investments or long-term investments.
Cash of approximately $13.6 million was provided by investing activities for the
first six months of fiscal year 2019. During the first six months of fiscal year
2019, we had capital expenditures of approximately $1.4 million. During the
first six months of fiscal year 2019, we sold United States treasury bills
(classified as short-term investments) of approximately $15.0 million. Depending
on investment options available, we may elect to retain the funds, or a portion
thereof, in cash investments, short-term investments or long-term investments.
Cash of approximately $5.7 million was used in financing activities for the
first six months of fiscal year 2020, compared to approximately $2.4 million
during the first six months of fiscal year 2019. During the first six months of
fiscal year 2020, we used cash of approximately $5.6 million to purchase
approximately 109,000 shares of our common stock in open market transactions.
Cash of approximately $2.4 million was used in financing activities for the
first six months of fiscal year 2019 as we used cash of approximately $2.6
million to pay dividends to and to purchase shares from noncontrolling members.
During the first six months of fiscal year 2019, we received approximately $0.2
million in capital contributions from the minority investor in the refined coal
entity.
36
We are investigating various uses for our excess cash and short-term
investments. We have a stock buyback program, and given our current
authorization level, can repurchase a total of approximately 241,000 shares at
July 31, 2020. We also plan to seek and evaluate investment opportunities
including carbon sequestration, energy related, agricultural or other ventures
we believe fit our investment criteria in addition to investing in highly liquid
short-term securities.
We are working with the University of Illinois to explore the development of a
carbon sequestration project to be located near the One Earth ethanol plant. The
University of Illinois has received a United States Department of Energy award
through the CarbonSAFE program and will evaluate the greenhouse gas storage
potential beneath the site by drilling a test well and performing seismic
surveys. Further work and research are needed to determine if this will be a
feasible project.
Forward-Looking Statements
This Form 10-Q contains or may contain forward-looking statements as defined in
the Private Securities Litigation Reform Act of 1995. Such statements can be
identified by use of forward-looking terminology such as "may," "expect,"
"believe," "estimate," "anticipate" or "continue" or the negative thereof or
other variations thereon or comparable terminology. Readers are cautioned that
there are risks and uncertainties that could cause actual events or results to
differ materially from those referred to in such forward-looking statements.
These risks and uncertainties include the risk factors set forth from time to
time in the Company's filings with the Securities and Exchange Commission and
include among other things: the effect of pandemics such as COVID-19 on the
Company's business operations, including impacts on supplies, demand, personnel
and other factors, the impact of legislative and regulatory changes, the price
volatility and availability of corn, distillers grains, ethanol, non-food grade
corn oil, gasoline, natural gas, logistical delays, our ethanol and refined coal
plants operating efficiently and according to forecasts and projections, changes
in the international, national or regional economies, weather, results of income
tax audits, changes in income tax laws or regulations and the effects of
terrorism or acts of war. The Company does not intend to update publicly any
forward-looking statements except as required by law. Other factors that could
cause actual results to differ materially from those in the forward-looking
statements are set forth in Item 1A of the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 2020 (File No. 001-09097).
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