Granite Falls Energy, LLC - Quarter Report: 2022 January (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

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For the quarterly period ended January 31, 2022

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OR

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☐Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

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For the transition period from to .

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COMMISSION FILE NUMBER 000-51277

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GRANITE FALLS ENERGY, LLC

(Exact name of registrant as specified in its charter)

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Securities registered pursuant to Section 12(b) of the Act:

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

⌧Yes    ◻No

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Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

⌧Yes    ◻No

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

◻Yes    ⌧No

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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

As of March 17, 2022 there were 30,606 membership units outstanding.

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INDEX

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PART I FINANCIAL INFORMATION

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Item 1.  Financial Statements

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GRANITE FALLS ENERGY, LLC and Subsidiaries

Condensed Consolidated Balance Sheets

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Notes to Condensed Consolidated Unaudited Financial Statements are an integral part of this Statement.

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GRANITE FALLS ENERGY, LLC and Subsidiaries

Condensed Consolidated Statements of Operations

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Notes to Condensed Consolidated Unaudited Financial Statements are an integral part of this Statement.

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GRANITE FALLS ENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Unaudited Statements of Changes in Members' Equity

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Notes to Condensed Consolidated Unaudited Financial Statements are an integral part of this Statement.

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GRANITE FALLS ENERGY, LLC and Subsidiaries

Condensed Consolidated Statements of Cash Flows

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Notes to Condensed Consolidated Unaudited Financial Statements are an integral part of this Statement.

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Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2022

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1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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Nature of Business

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Granite Falls Energy, LLC (“GFE”) is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers’ grains, and crude corn oil near Granite Falls, Minnesota and sells these products, pursuant to marketing agreements, throughout the continental U.S. and on the international market. GFE’s plant has an approximate annual production capacity of 63 million gallons, but is currently permitted to produce up to 70 million gallons of undenatured ethanol on a twelve-month rolling sum basis.

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Additionally, as of October 31, 2021 and January 31, 2022, GFE has 100% ownership in Heron Lake BioEnergy, LLC (“HLBE”).  HLBE is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers’ grains, and crude corn oil near Heron Lake, Minnesota and sells these products, pursuant to marketing agreements, throughout the continental United States. HLBE’s plant has an approximate annual production capacity of 65 million gallons, but is currently permitted to produce up to 72.3 million gallons per year of undenatured ethanol on a twelve-month rolling sum basis.  Additionally, HLBE, through a wholly owned subsidiary, operates a natural gas pipeline that provides natural gas to the HLBE’s ethanol production facility and other customers.

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All references to “we”, “us”, “our”, and the “Company” collectively refer to GFE and its wholly-owned and majority-owned subsidiaries.

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Basis of Presentation and Principles of Consolidation

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The accompanying condensed consolidated financial statements consolidate the operating results and financial position of GFE, and its approximately 50.7% owned subsidiary, HLBE (through GFE’s 100% ownership of Project Viking, L.L.C.) through September 29, 2021, when the remaining non-controlling interest was acquired. Given GFE’s control over the operations of HLBE and its majority voting interest, GFE consolidates the financial statements of HLBE with its consolidated financial statements. The remaining approximately 49.3% ownership of HLBE is included in the consolidated financial statements as a non-controlling interest through September 2021. HLBE is also the sole owner Agrinatural Gas, LLC (“Agrinatural”), through its wholly owned subsidiary, HLBE Pipeline Company, LLC.  Given HLBE’s control over the operations of Agrinatural and its majority voting interest, HLBE consolidates the financial statements of Agrinatural with its consolidated financial statements. All significant intercompany balances and transactions are eliminated in consolidation.

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The accompanying condensed consolidated unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s audited consolidated financial statements for the year ended October 31, 2021, contained in the Company’s annual report on Form 10-K.

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In the opinion of management, the condensed consolidated unaudited financial statements reflect all adjustments consisting of normal recurring accruals that we consider necessary to present fairly the Company’s results of operations, financial position and cash flows. The results reported in these condensed consolidated unaudited financial statements should not be regarded as necessarily indicative of results that may be expected for any other fiscal period or for the fiscal year.

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Reportable Operating Segments

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Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” establishes the standards for reporting information about segments in financial statements. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Therefore, in applying the criteria set forth in ASC 280, the Company determined that based on the nature of the products and production process and the expected financial results,

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Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2022

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the Company’s operations at GFE’s ethanol plant and HLBE’s plant, including the production and sale of ethanol and its co-products, are aggregated into one reporting segment.

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Additionally, the Company also realizes relatively immaterial revenue from natural gas pipeline operations at Agrinatural, HLBE’s owned subsidiary. Before and after accounting for intercompany eliminations, these revenues from Agrinatural represent approximately 1-2% of our consolidated revenues and have little to no impact on the overall performance of the Company. Therefore, the Company does not separately review Agrinatural’s revenues, cost of sales or other operating performance information. Rather, the Company reviews Agrinatural’s natural gas pipeline financial data on a consolidated basis with the Company’s ethanol production operating segment. The Company believes that the presentation of separate operating performance information for Agrinatural’s natural gas pipeline operations would not provide meaningful information to a reader of the Company’s consolidated financial statements and would not achieve the basic principles and objectives of ASC 280.

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Accounting Estimates

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Management uses estimates and assumptions in preparing these condensed consolidated unaudited financial statements in accordance with generally accepted accounting principles in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for the following significant matters, among others: economic lives of property and equipment, valuation of commodity derivatives, inventory, and inventory purchase and sale commitments, evaluation of rail car rehabilitation costs, and the assumptions used in the impairment analysis of long-lived assets and evaluation of going concern. Actual results may differ from previously estimated amounts, and such differences may be material to our consolidated financial statements. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made.

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Revenue Recognition

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Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Our contracts primarily consist of agreements with marketing companies and other customers as described below. Our performance obligations consist of the delivery of ethanol, distillers' grains, corn oil, and natural gas to our customers. Our customers primarily consist of two distinct marketing companies as described below. The consideration we receive for these products reflects an amount that the Company expects to be entitled to in exchange for those products, based on current observable market prices at the Chicago Mercantile Exchange, generally, and adjusted for local market differentials. Our contracts have specific delivery modes, rail or truck, and dates. Revenue is recognized when the Company delivers the products to the mode of transportation specified in the contract, at the transaction price established in the contract, net of commissions, fees, and freight. We sell each of the products via different marketing channels as described below.

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Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2022

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Inventory

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Inventory is stated at the lower of cost or net realizable value. Cost for all inventories is determined using the first in first out method. Net realizable value is the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. Inventory consists of raw materials, work in process, finished goods, and supplies. Corn is the primary raw material along with other raw materials.  Finished goods consist of ethanol, distillers' grains, and corn oil.

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Derivative Instruments

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From time to time the Company enters into derivative transactions to hedge its exposures to commodity price fluctuations. The Company is required to record these derivatives on the balance sheets at fair value.

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In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings. If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Changes in the fair value of undesignated derivatives are recorded in earnings.

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Additionally, the Company is required to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as “normal purchases or normal sales”. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from accounting and reporting requirements, and therefore, are not marked to market in our condensed consolidated unaudited financial statements.

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In order to reduce the risks caused by market fluctuations, the Company occasionally hedges its anticipated corn, natural gas, and denaturant purchases and ethanol sales by entering into options and futures contracts. These contracts are used with the intention to fix the purchase price of anticipated requirements for corn in the Company's ethanol production activities and the related sales price of ethanol. The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter market conditions. Although the Company believes its commodity derivative positions are economic hedges, none have been formally designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings or losses. The Company does not enter into financial instruments for trading or speculative purposes.

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The Company has adopted authoritative guidance related to “Derivatives and Hedging,” and has included the required enhanced quantitative and qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses from derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. See further discussion in Note 5.

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Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2022

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Investments

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The Company has an investment interest in a company in a related industry. The investment is accounted for by the equity method, under which the Company’s share of the net income of the investee is recognized as income in the Company’s Condensed Consolidated unaudited Statements of Operations and added to the investment account, and distributions received from the affiliates are treated as a reduction of the investment.

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On June 29, 2018, we subscribed to purchase 20 preferred membership units of Harvestone Group, LLC (“Harvestone”) at a price of $100,000 per unit for a total of $2,000,000. We paid the $2,000,000 in connection with our subscription, which is reflected in our investing cash flows. Harvestone is a Delaware limited liability company that provides ethanol marketing, logistics, and trading services. Harvestone’s headquarters are located in Franklin, Tennessee. Harvestone is owned by several other ethanol producers and other private investors.

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On November 15, 2021,  Harvestone redeemed GFE’s 20 units for $3,000,000.  As a result of the Harvestone redemption, GFE no longer owns any Harvestone units and has ceased to be a member of Harvestone. The Company received and recorded the $3,000,000 redemption in November 2021. No gain or loss was recognized upon redemption during the three months ended January 31, 2022.

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In August 2004, GFE entered an electric service agreement with Minnesota Valley Cooperative Light and Power Association (“MVCLPA”) to supply electricity to the GFE plant. The MVCLPA electric service agreement entitles GFE to receive patronage dividends in the form of a special allocation of capital credits. The capital credits are recognized as a component of other income on the consolidated statement of operations. Through the fiscal year 2021, GFE has recognized approximately $3.2 million of investment income related to the MVCLPA capital credits. Approximately $273,000 of GFE’s capital credits were redeemed in March 2021, and as a result the investment balance was approximately $2.9 million as of October 31, 2021. MVCLPA generally redeems its capital credits on a first-in, first-out basis on a 13-year rotation, and therefore if MVCLPA continues to be successful, managements expects the MVCLPA capital credits will continue to be redeemed for cash payments to GFE.

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2.   RISKS AND UNCERTAINTIES

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The Company has certain risks and uncertainties that it experiences during volatile market conditions. These volatilities can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol, distillers' grains, corn oil, and natural gas to customers primarily located in the United States. Corn for the production process is supplied to our plant primarily from local agricultural producers and from purchases on the open market. Ethanol sales typically average 75% - 90% of total revenues and corn costs typically average 65% - 85% of cost of goods sold.

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The Company's operating and financial performance is largely driven by the prices at which they sell ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, and unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company’s largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and a risk management program used to protect against the price volatility of these commodities. Market fluctuations in the price of and demand for these products may have further significant adverse effects on the Company’s operations, profitability and the availability and adequacy of cash flow to meet the Company’s working capital requirements. The Company’s risk management program is used to protect against the price volatility of these commodities.

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Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2022

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3.   REVENUE

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Revenue by Source

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All revenues from contracts with customers under ASC Topic 606 are recognized at a point in time. The following table disaggregates revenue by major source for the three months ended January 31, 2022 and 2021:

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Payment Terms

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The Company has contractual payment terms with each respective marketer that sells ethanol, distillers’ grains and corn oil. These terms are 10 calendar days after the transfer of control date. The Company has contractual payment terms with natural gas customers of 20 days.

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Shipping and Handling Costs

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Shipping and handling costs related to contracts with customers for sale of goods are accounted for as a fulfillment activity and are included in cost of goods sold. Accordingly, amounts billed to customers for such costs are included as a component of revenue.

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4.   INVENTORY

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Inventories consist of the following:

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The Company performs a lower of cost or net realizable value analysis on inventory to determine if the net realizable values of certain inventories are less than their carrying value, which is attributable primarily to decreases in market prices of corn and ethanol. Based on the lower of cost or net realizable value analysis, as a component of cost of

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Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2022

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goods sold, the Company recorded a loss on ethanol inventories of approximately $37,000 and $325,000 for the three months ended January 31, 2022 and 2021, respectively.

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5.   DERIVATIVE INSTRUMENTS

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As of January 31, 2022, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 5,295,000 bushels, comprised of short corn futures positions that were entered into to hedge forecasted ethanol sales through March 2023. Additionally, there are corn options positions of 350,000 bushels through May 2022. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

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As of January 31, 2022, the Company had approximately $3,170,000 of cash collateral (restricted cash) related to derivatives held by a broker.

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The following tables provide details regarding the Company's derivative instruments at January 31, 2022, none of which were designated as hedging instruments:

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As of October 31, 2021, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 9,175,000 bushels, comprised of long corn futures positions on 3,180,000 bushels that were entered into to hedge forecasted ethanol sales through March 2022, and short corn futures positions on 5,995,000 bushels that were entered into to hedge its forward corn purchase contracts through December 2022. Additionally, there are corn options positions of 140,000 bushels through May 2022. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

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As of October 31, 2021, the Company had approximately $1,641,000 of cash collateral (restricted cash) related to derivatives held by a broker.

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The following tables provide details regarding the Company’s derivative instruments at October 31, 2021, none of which were designated as hedging instruments:

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The following tables provide details regarding the gains (losses) from Company's derivative instruments in the condensed consolidated statements of operations, none of which are designated as hedging instruments:

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Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2022

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6.   FAIR VALUE

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The following table sets forth, by level, the Company assets that were accounted for at fair value on a recurring basis at January 31, 2022:

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The following table provides information on those derivative assets and liabilities measured at fair value on a recurring basis at October 31, 2021:

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The Company determines the fair value of commodity derivative instruments by obtaining fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade market and New York Mercantile Exchange. We determine the fair value Level 2 accounts payable based on nearby futures values, plus or minus nearby basis.

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Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2022

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7.  DEBT FACILITIES

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Long-term debt consists of the following:

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Based on the most recent debt agreements, estimated maturities of long-term debt at January 31, 2022 are as follows:

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On September 27, 2021, GFE finalized loan documents for an amended credit facility (the “2021 Credit Facility”) with AgCountry Farm Credit Services, PCA, AgCountry Farm Credit Services, FLCA (“AgCountry”). CoBank FCB (“CoBank”) serves as AgCountry’s administrative agent for the 2021 Credit Facility. The 2021 Credit Facility is intended to finance GFE’s acquisition of HLBE and consolidate certain existing debts of GFE and HLBE.  The loan documents include an Amended and Restated Credit Agreement (the “Credit Agreement”), which amends and replaces the Company’s credit agreement with AgCountry dated September 27, 2018.

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The 2021 Credit Facility contains customary financial and affirmative covenants and negative covenants for loans of this type and size to ethanol companies. Each loan from AgCountry to GFE is subject to the terms of the Credit Agreement.  Pursuant to the Credit Agreement, all agreements between GFE and AgCountry and/or CoBank are secured by a first lien on all equity or personal property owned or acquired by GFE. Financial covenants under the Amended Credit Facility include (i) maintenance of working capital of at least $20.0 million, and (ii) maintenance of a debt service coverage ratio of not less than 1.75 to 1.00 at the end of each fiscal year, beginning October 31, 2022.  

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The 2021 Credit Facility provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among others, the following: nonpayment of principal or interest; breach of covenants or other agreements in the Amended Credit Facility; defaults in failure to pay certain other indebtedness; and certain events of bankruptcy or insolvency.  If any event of default occurs, the remaining principal balance and accrued interest on all loans subject to the Amended Credit Facility will become immediately due and payable.

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The 2021 Credit Facility includes the following agreements:

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$20 million Revolving Credit Promissory Note:

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Under the terms of the Revolving Credit Promissory Note, GFE may borrow, repay, and reborrow up to the aggregate principal commitment amount of $20.0 million. Final payment of amounts borrowed under revolving credit promissory note is due October 1, 2022. Interest on the amended revolving term promissory note accrues at a variable weekly rate equal to the One-Month London Interbank Offered Rate (“LIBOR”) Index rate plus 3.25% and is payable monthly in arrears, which equated to 3.36% at January 31, 2022. The revolving credit promissory note is also subject to a 0.30% fee on the unused commitment. The purpose of the revolving credit promissory note is to provide for the operating needs of

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Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2022

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GFE and consolidate a $5 million revolving credit promissory note dated February 4, 2021, between AgCountry and HLBE.  

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$20 million Amended and Restated Revolving Term Promissory Note:

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Under the terms of the Amended and Restated Revolving Term Promissory Note, GFE may borrow, repay, and reborrow up to the aggregate principal commitment amount of $20.0 million. Final payment of amounts borrowed under the note is due October 1, 2026. Subject to GFE’s selection, interest on the note accrues at either a variable weekly rate of the LIBOR Index rate plus 3.50%, which equated to 3.61% at January 31, 2022, or an annual fixed rate determined by CoBank.  The note is subject to an overadvance fee, an amendment fee, and a 0.50% unused commitment fee. The purposes of the note are to providing working capital to GFE, to finance GFE’s acquisition of the non-controlling interest of HLBE, and to terminate and transfer to GFE the existing indebtedness on a $13 million amended and restated revolving term promissory note dated June 11, 2020, between HLBE and AgCountry.

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$25 million Single Advance Term Promissory Note:

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Under the terms of the $25.0 million Single Advance Term Promissory Note, AgCountry agrees to make a single advance loan to GFE in the amount of $25.0 million for the purpose of financing GFE’s acquisition of the non-controlling interest of HLBE and refinancing existing indebtedness.  GFE agrees to repay the note in eighteen quarterly installments of $1.125 million, beginning March 2022, plus a final installment of any unpaid balance. Subject to GFE’s selection, the amounts borrowed bear interest at either a variable weekly rate equal to the LIBOR Index Rate plus 3.50%, which equated to 3.61% at January 31, 2022, or an annual fixed rate set by CoBank, with a minimum period of one year and minimum amount of $100,000.  

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$2.4 million Single Advance Term Promissory Note:

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Under the terms of the $2.4 million Single Advance Term Promissory Note, AgCountry made a single advance loan to GFE in the amount of $2.4 million loan for the purpose of financing GFE’s acquisition of the non-controlling interest of HLBE and to terminate and transfer GFE’s existing indebtedness pursuant to a HLBE’s single advance term promissory note dated June 19, 2020. Amounts borrowed under the note bear interest at a fixed rate of 3.80%.  The note is to be repaid in seven semi-annual installments of $300,000, beginning December 2021 and the final installment of the unpaid balance in June 2025.  HLBE’s single advance term promissory note dated June 19, 2020 provided a commitment of $3.0 million to HLBE for the purpose of constructing a new grain bin and reducing a revolving term promissory note.  

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Project Hawkeye Loan

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On August 2, 2017, GFE entered into a replacement credit facility with Project Hawkeye. The terms of the replacement credit facility allow GFE to borrow up to $7.5 million of variable-rate, amortizing non-recourse debt from Project Hawkeye using the GFE’s $7.5 million investment in Ringneck Energy & Feed, LLC (“Ringneck”), as collateral.  The Project Hawkeye loan bears interest from date funds are first advanced on the loan through maturity, at a rate per annum equal to the sum of the One Month LIBOR Index Rate plus 3.05% per annum, with an interest rate floor of 3.55%, which equated to 3.55% at January 31, 2022.

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The Project Hawkeye loan requires annual interest payments only for the first two years of the loan and monthly principal and interest payments for years three through nine based on a seven-year amortization period.  The monthly amortized payments will be re-amortized following any change in interest rate. The entire outstanding principal balance of the loan, plus any accrued and unpaid interest thereon, is due and payable in full on August 2, 2026. GFE is permitted to voluntarily prepay all or any portion of the outstanding balance of this loan at any time without premium or penalty.

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Pursuant to a pledge agreement entered into in connection with the Project Hawkeye loan, GFE’s obligations are secured by all of its right, title, and interest in its investment in Ringneck, including the 1,500 units subscribed for by GFE. The loan is non-recourse to all of GFE’s other assets, meaning that in the event of default, the only remedy available to Project Hawkeye will be to foreclose and seize all of GFE’s right, title and interest in its investment in Ringneck.

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Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2022

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8. LEASES

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The Company leases rail cars for its facility to transport ethanol and dried distillers’ grains to its end customers. Operating lease right of use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate, unless an implicit rate is readily determinable, as the discount rate for each lease in determining the present value of lease payments. For the twelve months ended January 31, 2022, the Company’s weighted average discount rate was 4.87%.  Operating lease expense is recognized on a straight-line basis over the lease term.

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The Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining terms of approximately two to six years. For the twelve months ended January 31, 2022, the weighted average remaining lease term was three years.

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The Company elected to use a portfolio approach for lease classification, which allows for an entity to group together leases with similar characteristics provided that its application does not create a material difference when compared to accounting for the leases at a contract level. For railcar leases, the Company elected to combine the railcars within each rider and account for each rider as an individual lease.

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The following table summarizes the remaining annual maturities of the Company’s operating lease liabilities as of January 31, 2022:

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For the three months ended January 31, 2022 and 2021, the Company recorded operating lease costs of approximately $1,611,000 and $1,444,000 respectively, in cost of goods sold in the condensed consolidated unaudited statement of operations, which approximates cash paid for the period.

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9.   MEMBERS' EQUITY

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The Company has one class of membership units. The units have no par value and have identical rights, obligations and privileges.  Income and losses are allocated to all members based upon their respective percentage of units held. As of January 31, 2022 and October 31, 2021, the Company had 30,606 membership units authorized, issued, and outstanding.

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On December 22, 2021, the Board of Governors of the Company declared a cash distribution of $330.00 per membership unit to the holders of record of the Company’s units at the close of business on December 22, 2021, for a total distribution of $10,099,980. The Company paid the distribution in January 2022.

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10.  RELATED PARTY TRANSACTIONS

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Corn Purchases - Members

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The Company purchased corn from board members of approximately $2,998,000 and $4,719,000 for the three months ended January 31, 2022 and 2021, respectively.

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Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2022

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11.  COMMITMENTS AND CONTINGENCIES

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Corn Forward Contracts

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At January 31, 2022, the Company had cash and basis contracts for forward corn purchase commitments for approximately 9,012,000 bushels for deliveries through October 2023.

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Given the uncertainty of future ethanol and corn prices, the Company could incur a loss on the outstanding corn purchase contracts in future periods. Management has evaluated these forward contracts and its inventories using the lower of cost or net realizable value evaluation, similar to the method used on its inventory, and has determined that no impairment existed for the forward corn purchase commitments at January 31, 2022 and October 31, 2021.  

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Ethanol Forward Contracts

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At January 31, 2022, the Company had fixed and basis contracts to sell approximately $40,094,000 of ethanol for various delivery periods through March 2022, which approximates 95% of its anticipated ethanol sales for this that period.

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Distillers' Grain Forward Contracts

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At January 31, 2022, the Company had forward contracts to sell approximately $4,708,000 of distillers’ grain for deliveries through March 2022, which approximates 60% of its anticipated distillers’ grain sales during that period.

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Corn Oil Forward Contracts

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At January 31, 2022, the Company had forward contracts to sell approximately $2,439,000 of corn oil for delivery through February 2022, which approximates 70% of its anticipated corn oil sales for that period.

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Rail Car Rehabilitation Costs

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GFE leases 75 hopper rail cars under a multi-year agreement, which ends November 2025. HLBE leases 50 hopper rail cars under a multi-year agreement which ends in May 2027. Under the agreements, the Company is required to pay to rehabilitate each car for "damage" that is considered to be other than normal wear and tear upon turn in of the car(s) at the termination of the lease. During the three months ended January 31, 2022 and 2021, GFE has recorded a corresponding estimated long-term liability totaling $825,000. During the three months ended January 31, 2022 and 2021, HLBE has recorded a corresponding estimated long-term liability totaling approximately $654,000. The Company accrues the estimated cost of rail car damages over the term of the leases as the damages are incurred as a component of cost of goods sold. During the three months ended January 31, 2022 and 2021, the Company recorded an expense in cost of goods of approximately $11,000 and $12,000, respectively.

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Letter of Credit Promissory Note

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The 2021 Credit Facility includes an amended and restated letter of credit promissory note. Under the terms of the note, the Company may borrow, repay, and reborrow up to the aggregate principal commitment of $500,000 until its maturity on December 1, 2023. Amounts borrowed under the note bear interest at a variable weekly rate equal to 3.25% above the rate quoted by LIBOR Index rate, which was 3.36% at January 31, 2022 The aggregate principal amount available under the letter of credit promissory note was $500,000 at January 31, 2022 and October 31, 2021.

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

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We prepared the following discussion and analysis to help readers better understand our financial condition, changes in our financial condition, and results of operations for the three months ended January 31, 2022 and 2021.  This section should be read in conjunction with the condensed consolidated unaudited financial statements and related notes in PART I - Item 1 of this report and the information contained in the Company’s annual report on Form 10-K for the fiscal year ended October 31, 2021.

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When we use the terms “Granite Falls Energy” or “GFE” or similar words in this Quarterly Report on Form 10-Q, unless the context otherwise requires, we are referring to Granite Falls Energy, LLC and our operations at our ethanol production facility located in Granite Falls, Minnesota.  When we use the terms “Heron Lake BioEnergy”, “Heron Lake”, or “HLBE” or similar words, unless the context otherwise requires, we are referring to Heron Lake BioEnergy, LLC and its wholly owned subsidiary, HLBE Pipeline Company, LLC, through which, HLBE holds a 100% interest in Agrinatural Gas, LLC. When we use the terms the “Company,” “we,” “us,” “our” or similar words in this quarterly report on Form 10-Q, unless the context otherwise requires, we are referring to Granite Falls Energy, LLC and our consolidated wholly- and majority-owned subsidiaries.  

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Disclosure Regarding Forward-Looking Statements

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The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so investors can better understand future prospects and make informed investment decisions. As such, we have historical information, as well as forward-looking statements regarding our business, financial condition, results of operations, performance and prospects in this report.  All statements that are not historical or current facts are forward-looking statements. In some cases,  you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions.  

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Forward-looking statements are subject to a number of known and unknown risks, uncertainties and other factors, many of which may be beyond our control, and may cause actual results, performance or achievements to differ materially from those projected in, expressed or implied by forward-looking statements. These risks and uncertainties include, but are not limited to, the following:

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We believe our expectations regarding future events are based on reasonable assumptions; however, these assumptions may not be accurate or account for all risks and uncertainties. Consequently, forward-looking statements are not guaranteed. Actual results may vary materially from those expressed or implied in our forward-looking statements. In addition, we are not obligated and do not intend to update our forward-looking statements as a result of new information unless it is required by applicable securities laws. We caution investors not to place undue reliance on forward-looking statements, which represent management’s views as of the date of this report. We qualify all of our forward-looking statements by these cautionary statements.

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Available Information

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Our website address is www.granitefallsenergy.com.  Our annual report on Form 10-K, periodic reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available, free of charge, on our website under the link “SEC Compliance,” as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this report on Form 10-Q.

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Industry and Market Data

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Much of the information in this report regarding the ethanol industry, including government regulation relevant to the industry is from information published by the Renewable Fuels Association (“RFA”), a national trade association for the United States (“U.S.”) ethanol industry, and information about the market for our products and competition is derived from publicly available information from governmental agencies or publications and other published independent sources.  Although we believe our third-party sources are reliable, we have not independently verified the information.

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Overview

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Granite Falls Energy, LLC is a Minnesota limited liability company formed on December 29, 2000 for the purpose of constructing, owning and operating a fuel-grade ethanol plant located in Granite Falls, Minnesota.  Our business consists primarily of the production and sale of ethanol and its co-products (wet, modified wet and dried distillers’ grains, corn oil and corn syrup) locally, and throughout the continental U.S. However, as markets allow, our products can be, and have been, sold in the export markets.  Our revenues from operations come from three primary sources: sales of fuel ethanol, sales of distillers’ grains and sales of corn oil at GFE’s ethanol plant and HLBE’s ethanol plant.  

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Heron Lake BioEnergy, LLC (“Heron Lake BioEnergy” or “HLBE”), which owns an ethanol plant located near Heron Lake, Minnesota, is a wholly owned subsidiary of GFE. In July 2013, we acquired controlling interest in HLBE through our wholly owned subsidiary Project Viking, L.L.C (“Project Viking”). Prior to September 29, 2021, GFE held a 50.7% ownership interest in HLBE. On September 29, 2021, we completed a merger in which we acquired the remaining non-controlling interest of HLBE for $14,000,000. As a result of the merger, GFE and Project Viking own 100% of HLBE’s issued and outstanding membership units.

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The Company experienced a significant increase in its revenue and net income during the three month period ended January 31, 2022, as compared to the same three month period a year earlier, due primarily to a substantial increase in the price received per gallon of ethanol, as well as increases in the price received for our other principal products, distillers grain and corn oil. The increase in the price of ethanol is attributable, in part, to the economic rebound from the effects of the COVID-19 pandemic, which has led to increased demand for transportation fuel, including the ethanol we produce. Management expects demand for ethanol to remain strong in the near term; however, it is possible that additional

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factors including the conflict in Ukraine, inflation, and the possibility of additional COVID-19 outbreaks could lead to volatility in the economy generally and in the ethanol industry specifically.  

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Ethanol Production

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Our business consists primarily of the production and sale of ethanol and its co-products (wet, modified wet and dried distillers’ grains, corn oil and corn syrup) locally, and throughout the continental U.S.  Our production operations are carried out at GFE’s ethanol plant located in Granite Falls, Minnesota and at HLBE’s ethanol plant near Heron Lake, Minnesota.    

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The GFE plant has an annual nameplate production capacity of approximately 63 million gallons of denatured ethanol, but is currently permitted to produce up to 70 million gallons of undenatured ethanol on a twelve-month rolling sum basis. The HLBE plant has an approximate annual nameplate production capacity of approximately 65 million gallons of denatured ethanol, but is currently permitted to produce up to approximately 72.3 million gallons of undenatured fuel-grade ethanol on a twelve-month rolling sum basis.  We intend to continue working toward increasing production at both the GFE and HLBE plants to take advantage of the additional production allowed pursuant to our permits as long as we believe it is profitable to do so.

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We market and sell the products produced at our plants primarily using third party marketers. The markets in which our products are sold may be local, regional, national, and international and depend primarily upon the efforts of third party marketers. We have contracted with Eco-Energy, Inc. to market all of the ethanol produced at our ethanol plants.  GFE also independently markets a small portion of the ethanol production at its plant as E-85 to local retailers.  

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We do not have any long-term, fixed price exclusive supply contracts for the purchase of corn for either the GFE or HLBE plants. Both GFE and HLBE purchase the corn necessary for operating directly from grain elevators, farmers, and local dealers within approximately 80 miles of their respective plants. GFE’s members are not obligated to deliver corn to our plants.

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Plan of Operations for the Next Twelve Months

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Over the next twelve months, we will continue our focus on operational improvements at our plants. These operational improvements include exploring methods to improve ethanol yield per bushel and increasing production output at our plants to take full advantage of our permitted production capacities, reducing our operating costs, and optimizing our margin opportunities through prudent risk-management policies. Additionally, we expect to continue to conduct routine maintenance and repair activities at our ethanol plants to maintain current plant infrastructure, as well as small capital projects to improve operating efficiency. We anticipate using cash from our revolving term loans to finance these plant upgrade projects.

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Trends and Uncertainties Impacting Our Operations

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The principal factors affecting our results of operations and financial conditions are the market prices for corn, ethanol, distillers’ grains and natural gas, as well as governmental programs designed to create incentives for the use of corn-based ethanol.  Other factors that may affect our future results of operation include those risks discussed below and our annual report on Form 10-K for the fiscal year ended October 31, 2021, which are incorporated herein by reference.

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Our operations are highly dependent on commodity prices, especially prices for corn, ethanol, distillers’ grains and natural gas. As a result, our operating results can fluctuate substantially due to volatility in these commodity markets. The price and availability of corn is subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, yields, domestic and global stocks, weather, federal policy and foreign trade. Natural gas prices are influenced by severe weather in the summer and winter and hurricanes in the spring, summer and fall. Other factors include North American exploration and production, and the amount of natural gas in underground storage during injection and withdrawal seasons. Ethanol prices are sensitive to world crude oil supply and demand, domestic gasoline supply and demand, the price of crude oil, gasoline and corn, the price of substitute fuels and octane enhancers, refining capacity and utilization, government regulation and incentives and consumer demand for alternative fuels. Distillers’ grains prices are impacted by livestock numbers on feed, prices for feed alternatives and supply, which is associated with ethanol plant production.

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Given the inherent volatility in ethanol, distillers’ grains, non-food grade corn oil, grain and natural gas prices, we cannot predict the likelihood that the spread between ethanol, distillers’ grains, non-food grade corn oil, and grain prices in future periods will be consistent compared to historical periods.

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Corn Prices

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Corn prices increased significantly in fiscal year 2021, due in part to the improved domestic economy as well as increased demand from China and drought in South America’s corn-growing regions. Average corn prices remained above $5.00 per bushel for the three months ended January 31, 2022.

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Because the market price of ethanol is not always directly related to corn, at times ethanol prices may lag price movements in corn prices and corn-ethanol price spread may be tightly compressed or negative. If the corn-ethanol spread is compressed or negative for sustained period, it is possible that our operating margins will decline or become negative and our plants may not generate adequate cash flow for operations. In such cases, we may reduce or cease production at our plants to minimize our variable costs and optimize cash flow.

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U.S. Ethanol Supply and Demand

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During the three months ended January 31, 2022, domestic ethanol production increased approximately 10% compared to the same three month period a year earlier, with U.S. ethanol plants producing more than 1 million barrels of fuel ethanol per day on average, according to the U.S. Energy Information Administration (“EIA”).

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Ethanol production is projected to increase slightly in 2022. The EIA projects fuel ethanol production will average 1.03 million barrels per day in 2022, up from approximately 980,000 barrels per day produced in 2021. Further, EIA projects fuel ethanol production will average 1.02 million barrels per day in 2023. Continued ethanol production capacity increases could also have a negative impact on the market price of ethanol, which could negatively affect our profitability.

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Exports of ethanol decreased slightly in our fiscal year 2021, after increasing slightly each of the previous two fiscal years. Export demand for ethanol is less consistent compared to domestic demand which can lead to ethanol price volatility. The decrease in ethanol exports is due to various factors, including a decrease in trading with Brazil, which had been one of the two largest importers of U.S. ethanol, due to the expiration of a Brazilian import quota. The USDA projects that U.S. ethanol exports will increase slightly in 2022 due to both volume and price gains due, in part, to increased renewable fuel blending requirements in the United Kingdom, India, and other nations. Any decrease in U.S. ethanol exports could adversely impact the market price of ethanol unless domestic demand increases or additional foreign markets are developed.

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U.S. ethanol exports to China increased during the 2021 fiscal year, following the execution of a “phase one” trade agreement with China. The agreement, signed by former President Donald Trump on January 15, 2020, includes a commitment by China to purchase agricultural products, including ethanol, over the course of two years.  There is, however, no guarantee that exports of ethanol to China will continue or increase.  Additionally, the imposition of tariffs and duties on ethanol imported from the U.S., as well as increased production of ethanol and similar fuels in other countries, can also negatively impact domestic export demand.

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Further,  reductions renewable fuel blending requirements or waivers of small refiner renewable volume obligations by the U.S. Environmental Protection Agency (“EPA”) may also reduce demand for ethanol and thereby adversely affect our profitability.

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Changes in the price for crude oil and unleaded gasoline affect the demand for gasoline and may impact the market price of ethanol. According to the EIA projections published in January 2021, U.S. gasoline consumption is forecast to average 9.1 million barrels per day in 2022, up from 8.8 million barrels per day in 2021. Further, according to EIA’s January projections, regular gasoline retail prices in the U.S. were expected to average $3.06 in 2022, up from $3.00 in 2021. However, more recent events, including the conflict in Ukraine, have contributed to increased volatility in global fuel markets.

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Management believes that the ethanol outlook in the fiscal year 2022 will remain relatively consistent with the three months ended January 31, 2022. However, it is possible that increased volatility will occur due to the conflict in Ukraine, the COVID-19 pandemic, inflation, or other unforeseen factors.

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Conflict in Ukraine

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Russia’s invasion of Ukraine in February 2022 has contributed to significant economic volatility, which could have adverse effects on our business. Since the beginning of the conflict in Ukraine, fuel prices, including retail gasoline, have increased significantly due, in part, to the United States and other nations imposing economic sanctions on Russia, a major producer and exporter of oil and other fuels. It is possible that increased gasoline prices will result in increased demand for alternative fuels, including the ethanol we produce. It is, however, also possible that the Ukrainian conflict will cause increased economic volatility or other unforeseen conditions that adversely affect the domestic economy generally and our business specifically.

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Further, it is possible that the conflict in Ukraine could result in increased grain prices, including the price of corn we use to produce ethanol. If the Ukrainian conflict causes an increase in corn prices, or other volatility in agriculture markets, it could adversely affect the profitability of our business.

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Additionally, while neither Russia nor Ukraine have historically imported U.S. ethanol, it is possible that economic turmoil caused by the Ukrainian conflict could affect the U.S. exports of ethanol, which could affect our business.  

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COVID-19 Pandemic

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After experiencing volatile and adverse conditions for much of the fiscal year 2020 due to the COVID-19 pandemic and its ramifications, the Company and the ethanol industry as a whole benefited from more favorable market conditions during our 2021 fiscal year, as vehicle travel and demand for transportation fuel, including the ethanol we produce, rebounded. The prices we received for a gallon of ethanol increased significantly during the three months ended January 31, 2022, as compared to the same period the prior year.  As a result, we experienced positive operating margins, increased cash flow from operations, and increased net income during the three months ended January 31, 2022, compared to the three months ended January 31, 2021.  

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During the three months ended January 31, 2022, the outbreak of the COVID-19 Omicron variant led to increased COVID-19 infections and hospitalizations and renewed government restrictions in some regions. However, demand for transportation fuel, including the ethanol we produce, remained strong during the recent three-month period. Further, the Omicron variant began to subside in early 2022, and many local governments have eased COVID-19 related restrictions. As restrictions related to the pandemic subside, management expects favorable market conditions for the ethanol industry to continue.

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However, the pandemic is ongoing and various dynamic factors, including the possible outbreak of new coronavirus variants, make it difficult to forecast the long-term effects of the pandemic on our industry as a whole and our Company specifically. Further, tangential effects of the COVID-19 pandemic, including inflation, supply chain bottlenecks, labor market volatility, and raw material shortages may continue affect our operations and profitability.

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It is possible that even after the pandemic subsides, there will be permanent changes to business and transportation norms that will reduce demand for ethanol. For example, increased adoption of “work from home” policies or tele-commuting, and the use virtual meetings, may permanently reduce business travel and thereby reduce the demand for transportation fuel, including the ethanol we produce.

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The Renewable Fuels Standard

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The ethanol industry is dependent on several economic incentives to produce ethanol, the most significant of which is the federal Renewable Fuels Standard (the “RFS”). The RFS is a national program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective. The RFS has been, and we expect will continue to be, a significant factor impacting ethanol usage.

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Under the RFS, the EPA is required to pass an annual rule that establishes the number of gallons of different types of renewable fuels that must be used in the U.S. by refineries, blenders, distributors and importers which is called the renewable volume obligations (“RVOs”). The EPA has the authority to waive the mandates in whole or in part if one of

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two conditions is met: 1) there is inadequate domestic renewable fuel supply, or 2) implementation of the mandate requirement severely harms the economy or environment of a state, region or the United States.

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The RFS sets the statutory RVO for corn-based ethanol at 15 billion gallons beginning in 2016 and each year thereafter through 2022. Under RFS statute, the EPA is required to finalize RVOs for a particular compliance year by November 30 of the preceding year.

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On December 7, 2021, the EPA announced long-delayed blending requirement under the RFS. The EPA proposed RVOs of 17.13 billion gallons for 2020, 18.52 billion gallons for 2021, and 20.77 billion gallons for 2022. Ethanol industry advocates have denounced the proposal for significantly cutting the 2020 RVO, which was set in a 2019 final rule. The proposal reduces the 2020 blending requirement from 20.09 billion gallons to 17.13 billion gallons, an approximately 15 percent decrease. For 2021, the EPA proposed to set the RVO for total renewable fuel at 18.52 billion gallons. For 2022, the proposed RVO is 20.77 billion gallons, which the EPA said is the highest level in the history of the RFS program.

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In a separate action also on December 7, 2021, the EPA proposed an action to deny 65 pending applications for small refinery exemptions. Concurrently, the USDA announced $800 million to support biofuel producers and infrastructure.  This includes up to $700 million to provide economic relief to biofuel producers and restore renewable fuel markets affected by the pandemic.

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Beyond the federal mandates, there are limited domestic markets for ethanol.  Further, opponents of ethanol such as large oil companies will likely continue their efforts to repeal or reduce the RFS through lawsuits or lobbying of Congress.  If such efforts are successful in further reducing or repealing the blending requirements of the RFS, a significant decrease in ethanol demand may result and could have a material adverse effect on our results of operations, cash flows and financial condition, unless additional demand from exports or discretionary E85 blending develops.

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Results of Operations for the Three Months Ended January 31, 2022 and 2021

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The following table shows summary information from the results of our operations and the approximate percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our unaudited condensed consolidated statements of operations for the three months ended January 31, 2022 and 2021 (amounts in thousands).

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