Green Plains Partners LP - Quarter Report: 2017 June (Form 10-Q)







UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________



FORM 10-Q



Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934



For the Quarterly Period Ended June 30, 2017



Commission File Number 001-37469



Green Plains PARTNERS LP

(Exact name of registrant as specified in its charter)







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





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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





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.





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



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



☐ Yes   ☒ No



The registrant had 15,923,492 common units and 15,889,642 subordinated units outstanding as of August 1, 2017.



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TABLE OF CONTENTS









 

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Commonly Used Defined Terms



The abbreviations, acronyms and industry terminology used in this quarterly report are defined as follows:



Green Plains Partners LP and Subsidiaries:





Green Plains Inc. and Subsidiaries:





Other Defined Terms:













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PART I – FINANCIAL INFORMATION



Item 1.  Financial Statements.



GREEN PLAINS PARTNERS LP

CONSOLIDATED BALANCE SHEETS

(in thousands, except unit amounts)









See accompanying notes to the consolidated financial statements.

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GREEN PLAINS PARTNERS LP

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands, except per unit amounts)









See accompanying notes to the consolidated financial statements.



 

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GREEN PLAINS PARTNERS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)





See accompanying notes to the consolidated financial statements.

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GREEN PLAINS PARTNERS LP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(unaudited)

 

1.  BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Organization



References to “the partnership” in the consolidated financial statements and notes to the consolidated financial statements refer to Green Plains Partners LP and its subsidiaries.

 

Green Plains Holdings LLC, a wholly owned subsidiary of Green Plains Inc., serves as the general partner of the partnership. References to (i) “the general partner” and “Green Plains Holdings” refer to Green Plains Holdings LLC; (ii) “the parent,” “the sponsor” and “Green Plains” refer to Green Plains Inc.; and (iii) “Green Plains Trade” refers to Green Plains Trade Group LLC, a wholly owned subsidiary of Green Plains.



Consolidated Financial Statements



The consolidated financial statements include the accounts of the partnership and its controlled subsidiaries. All significant intercompany balances and transactions are eliminated on a consolidated basis for reporting purposes. Results for the interim periods presented are not necessarily indicative of the expected results for the entire year.



The accompanying unaudited consolidated financial statements are prepared in accordance with GAAP for interim financial information and instructions to Form 10-Q and Article 10 of Regulation S-X. Because they do not include all of the information and footnotes required by GAAP, the consolidated financial statements should be read in conjunction with the partnership’s 2016 annual report on Form 10-K for the year ended December 31, 2016.



In accordance with GAAP, when transferring assets between entities under common control, the entity receiving the net assets initially recognizes the carrying amounts of the assets and liabilities at the date of transfer and the prior period financial statements of the transferee are recast for all periods the transferred operations were part of the parent’s consolidated financial statements. On July 1, 2015, in addition to the interests of BlendStar, the partnership received the ethanol storage and railcar assets in a transfer between entities under common control. The transferred assets and liabilities are recognized at our parent’s historical cost and reflected retroactively in the consolidated financial statements presented in this report.



Effective January 1, 2016, the partnership acquired the ethanol storage and leased railcar assets of the Hereford, Texas and Hopewell, Virginia production facilities for $62.3 million from its sponsor in a transfer between entities under common control. The assets were recognized at historical cost and reflected retroactively along with related expenses for periods prior to the effective date of the acquisition, subsequent to the initial dates the assets were acquired by the sponsor, or October 23, 2015, and November 12, 2015, for Hopewell and Hereford, respectively. There were no revenues related to these assets for periods before January 1, 2016, when amendments to the commercial agreements related to the dropdown became effective.



On September 23, 2016, the partnership acquired the ethanol storage assets located in Madison, Illinois; Mount Vernon, Indiana and York, Nebraska for $90 million related to three ethanol plants, which occurred concurrently with the acquisition of these facilities by Green Plains from subsidiaries of Abengoa S.A. The transaction was accounted for as a transfer between entities under common control and the assets were recognized at the preliminary value recorded in Green Plains’ purchase accounting. No retroactive adjustments were required. 



Use of Estimates in the Preparation of Consolidated Financial Statements



Preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period. The partnership bases its estimates on historical experience and assumptions it believes are proper and reasonable under the circumstances. The partnership regularly evaluates the appropriateness of these estimates and assumptions. Actual results could differ from those estimates. Key accounting policies, including, but not limited to, those related to depreciation of property and equipment, asset retirement obligations, and impairment of long-lived assets and goodwill are impacted significantly by judgments, assumptions and estimates used to prepare the consolidated financial statements.

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Description of Business



The partnership provides fuel storage and transportation services by owning, operating, developing and acquiring ethanol and fuel storage tanks, terminals, transportation assets and other related assets and businesses. The partnership is its parent’s primary downstream logistics provider to support the parent’s approximately 1.5 bgy ethanol marketing and distribution business. The partnership’s assets are the principal method of storing and delivering the ethanol the parent produces. The ethanol produced by the parent is fuel grade, made principally from starch extracted from corn, and is primarily used for blending with gasoline. Ethanol currently comprises approximately 10% of the U.S. gasoline market and is an economical source of octane and oxygenates for blending into the fuel supply. The partnership does not take ownership of, or receive any payments based on the value of the ethanol or other fuels it handles; as a result, the partnership does not have any direct exposure to fluctuations in commodity prices.



Revenue Recognition



The partnership recognizes revenues when all of the following criteria are satisfied: persuasive evidence an arrangement exists; services have been provided; the price is fixed and determinable; and collectability is reasonably assured.



The partnership derives revenues when product is delivered to the customer from its ethanol storage tanks and fuel terminals, when railcar volumetric capacity is provided, and truck transportation services are performed. The partnership generates a substantial portion of its revenues under fee-based commercial agreements with Green Plains Trade.



The partnership’s storage and throughput agreement and certain terminal services agreements with Green Plains Trade are supported by minimum volume commitments. The partnership’s rail transportation services agreement is supported by minimum take-or-pay capacity commitments. Green Plains Trade is required to pay the partnership fees for these minimum commitments regardless of the actual volume throughput or volumetric capacity used for storage or transport. Under the storage and throughput agreement, if Green Plains Trade fails to meet its minimum volume commitment during any quarter, Green Plains Trade will pay the partnership a deficiency payment equal to the deficient volume multiplied by the applicable fee. The deficiency payment may be applied as a credit toward volumes throughput by Green Plains Trade in excess of the minimum volume commitment during the next four quarters, after which time any unused credits will expire. In the event a deficiency payment is charged, the partnership records a liability for unearned revenue in the amount of the credit that may be used in future periods. The partnership recognizes revenue and relieves the liability when credits are utilized or expire during the subsequent four quarters.



Under certain terminal services agreements with Green Plains Trade and other customers, minimum volume commitments are applicable to volumes throughput at the partnership’s terminals. If Green Plains Trade or other customers fail to meet their minimum volume commitments during the applicable term, a deficiency payment equal to the deficient volume multiplied by the applicable fee will be charged. Deficiency payments related to the partnership’s terminal services revenue may not be utilized as credits toward future volumes. The partnership recognizes revenue under these agreements when risk of loss is transferred with product delivery to the customer, and when a deficiency payment is charged.



Under the partnership’s rail transportation services agreement, Green Plains Trade is required to pay the partnership fees for the minimum railcar volumetric capacity provided, regardless of utilization of that capacity. However, Green Plains Trade is not charged for railcar volumetric capacity that is not available for use due to inspections, upgrades or routine repairs and maintenance. Revenue is recognized based on the fee associated with the average daily railcar volumetric capacity provided in the applicable period.



As a result of these take-or-pay minimum volume and capacity commitments, a portion of the partnership’s revenues may be associated with cash collected during an earlier period that did not generate cash during the current period.



Operations and Maintenance Expenses



The partnership’s operations and maintenance expenses consist primarily of lease expenses related to the transportation assets, labor expenses, outside contractor expenses, insurance premiums, repairs and maintenance expenses and utility costs. These expenses also include fees for certain management, maintenance and operational services to support the facilities, trucks and leased railcar fleet allocated by Green Plains under the operational services and secondment agreement.



Concentrations of Credit Risk



In the normal course of business, the partnership is exposed to credit risk resulting from the possibility a loss may occur due to failure of another party to perform according to the terms of their contract. The partnership provides fuel storage and

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transportation services for various parties with a significant portion of its revenues earned from Green Plains Trade. The partnership continually monitors its credit risk exposure and concentrations. Please refer to Note 9 – Major Customers Transactions and Note 10 – Related Party Transactions to the consolidated financial statements for additional information.



Segment Reporting



The partnership accounts for segment reporting in accordance with ASC 280, Segment Reporting, which establishes standards for entities reporting information about the operating segments and geographic areas in which they operate. Management evaluated how its chief operating decision maker has organized the partnership for purposes of making operating decisions and assessing performance, and concluded it has one reportable segment.



Asset Retirement Obligations



The partnership records an ARO for the fair value of the estimated costs to retire a tangible long-lived asset in the period in which it is incurred if it can be reasonably estimated, which is subsequently adjusted for accretion expense. The corresponding asset retirement costs are capitalized as a long-lived asset and depreciated on a straight-line basis over the asset’s remaining useful life. The expected present value technique used to calculate the fair value of the AROs includes assumptions about costs, settlement dates, interest accretion and inflation. Changes in assumptions, including the amount or timing of estimated cash flows, could result in increases or decreases to the AROs. The partnership’s AROs are based on legal obligations to perform remedial activity related to land, machinery and equipment upon the expiration of certain operating leases.



Recent Accounting Pronouncements 



Effective January 1, 2017, the partnership adopted the amended guidance in ASC Topic 718, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which requires all income tax effects of awards to be recognized in the income statement when the awards vest or settle. The amended guidance also allows an employer to repurchase more of an employee’s shares than it can currently for tax withholding purposes without triggering liability accounting, and make a policy election to account for forfeitures as they occur. The amended guidance requiring recognition of excess tax benefits and tax deficiencies in the income statement was applied prospectively. The partnership also made the policy election to account for forfeitures as they occur.  Implementation of the amended guidance did not have an impact on the consolidated financial statements.



Effective January 1, 2018, the partnership will adopt the amended guidance in ASC Topic 606, Revenue from Contracts with Customers.  ASC Topic 606 is designed to create improved revenue recognition and disclosure comparability in financial statements. The provisions of ASC Topic 606 include a five-step process by which an entity will determine revenue recognition, depicting the transfer of goods or services to customers in amounts reflecting the payment to which an entity expects to be entitled in exchange for those goods or services. The new guidance requires the company to apply the following steps: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the company satisfies the performance obligation. ASC Topic 606 requires certain disclosures about contracts with customers and provides more comprehensive guidance for transactions such as service revenue, contract modifications, and multiple-element arrangements.  The new standard is effective for fiscal years and interim periods within those years, beginning after December 15, 2017 and allows for early adoption.   



The partnership is in the process of completing a comparison of the partnership’s current revenue recognition policies to the requirements of ASC Topic 606 for each of the partnership’s major revenue categories. The partnership has established a cross-functional implementation team, consisting of representatives from various business groups. The results of the partnership’s preliminary assessment indicates that the majority of the partnership's contracts are outside the scope of ASC Topic 606 and will continue to be accounted for under ASC Topic 840 Leases.  In addition, contracts within the scope of ASC Topic 606 will continue to be recognized at a point in time, and the number of performance obligations and the accounting for variable consideration, is not expected to be significantly different from current practice. While the partnership has not identified any material differences in the amount and timing of revenue recognition for the revenue categories the partnership has reviewed to date, the partnership’s evaluation is not complete, and the partnership has not formally concluded on the overall impact of adopting ASC Topic 606.  ASC Topic 606 will require that the partnership’s revenue recognition policy disclosure include further detail regarding the partnership’s performance obligations as to the nature, amount, timing, and estimates of revenue and cash flows generated from the partnership’s contracts with customers. ASC Topic 606 will also require disclosure of significant changes in contract asset and contract liability balances period to period and the amount of the transaction price allocated to performance obligations that are unsatisfied (or partially

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unsatisfied) as of the end of the reporting period, as applicable. ASC Topic 606 provides for adoption either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The partnership anticipates adopting the amended guidance using the modified retrospective transition method.



Effective January 1, 2019, the partnership will adopt the amended guidance in ASC Topic 842, Leases, which aims to make leasing activities more transparent and comparable and requires substantially all leases to be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. Early application is permitted. The partnership is currently evaluating the impact the adoption of the amended guidance will have on the consolidated financial statements and related disclosures.



Effective January 1, 2020, the partnership will adopt the amended guidance in ASC Topic 350, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The annual goodwill impairment test will be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The amended guidance will be applied prospectively.



2.  ACQUISITIONS



Abengoa Acquisition



Effective September 23, 2016, the partnership acquired the ethanol storage assets located in Madison, Illinois; Mount Vernon, Indiana; and York, Nebraska for $90.0 million, which occurred concurrently with the acquisition of three ethanol plants by Green Plains from subsidiaries of Abengoa S.A. The partnership used its amended revolving credit facility to fund the purchase.



This transaction was accounted for as a transfer between entities under common control and approved by the conflicts committee. Therefore, the net assets were transferred at the preliminary value recorded in Green Plains’ purchase accounting of $12.5 million. 



The following is a summary of assets acquired and liabilities assumed (in thousands):







In conjunction with the acquisition, the partnership and Green Plains amended the 1) omnibus agreement, 2) operational services agreement, and 3) ethanol storage and throughput agreement. Please refer to Note 10 – Related Party Transactions to the consolidated financial statements for additional information.



Hereford and Hopewell Acquisition



Effective January 1, 2016, the partnership acquired the ethanol storage and certain leased railcar assets located in Hereford, Texas and Hopewell, Virginia from Green Plains for $62.3 million. The transaction was financed through the use of the revolving credit facility and cash on hand.



This transaction was considered a transfer between entities under common control and approved by the conflicts committee. Therefore, the net assets were transferred at their historical cost of $6.3 million as of the original date of acquisition by the sponsor in the fourth quarter of 2015.



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The following is a summary of assets acquired and liabilities assumed (in thousands):









At the time of acquisition, the Hopewell facility was not operational. However, upon completion of certain maintenance and enhancement projects, operations began at the plant in early February 2016.



In conjunction with the transfer of assets under common control, the partnership amended the 1) omnibus agreement, 2) operational services agreement, and 3) ethanol storage and throughput agreement. The minimum volumetric capacity under the rail transportation services agreement was also increased. Please refer to Note 10 – Related Party Transactions to the consolidated financial statements for additional information. 



3.  DEBT



Revolving Credit Facility



Green Plains Operating Company has a $155.0 million revolving credit facility, which matures on July 1, 2020, to fund working capital, acquisitions, distributions, capital expenditures and other general partnership purposes. Advances under the credit facility, as amended, are subject to a floating interest rate based on the preceding fiscal quarter’s consolidated leverage ratio at a base rate plus 1.25% to 2.00% per year or LIBOR plus 2.25% to 3.00%. The credit facility may be increased by up to $100.0 million without the consent of the lenders. The unused portion of the credit facility is also subject to a commitment fee of 0.35% to 0.50%, depending on the preceding fiscal quarter’s consolidated net leverage ratio.



The revolving credit facility is available for revolving loans, including sublimits of $30.0 million for swing line loans and $30.0 million for letters of credit. The partnership, each of its existing subsidiaries and future domestic subsidiaries guarantee the revolving credit facility. As of June 30, 2017, the revolving credit facility had an average interest rate of 3.78%.



The partnership’s obligations under the credit facility are secured by a first priority lien on (i) the capital stock of the partnership’s present and future subsidiaries, (ii) all of the partnership’s present and future personal property, such as investment property, general intangibles and contract rights, including rights under any agreements with Green Plains Trade, and (iii) all proceeds and products of the equity interests of the partnership’s present and future subsidiaries and its personal property. The terms impose affirmative and negative covenants, including restrictions on the partnership’s ability to incur additional debt, acquire and sell assets, create liens, invest capital, pay distributions and materially amend the partnership’s commercial agreements with Green Plains Trade. The credit facility also requires the partnership to maintain a maximum consolidated net leverage ratio of no more than 3.50x and a minimum consolidated interest coverage ratio of no less than 2.75x, each of which is calculated on a pro forma basis with respect to acquisitions and divestitures occurring during the applicable period. The consolidated leverage ratio is calculated by dividing total funded indebtedness minus the lesser of cash in excess of $5.0 million or $30.0 million by the sum of the four preceding fiscal quarters’ consolidated EBITDA. The consolidated interest coverage ratio is calculated by dividing the sum of the four preceding fiscal quarters’ consolidated EBITDA by the sum of the four preceding fiscal quarters’ interest charges.



The partnership had $127.9 million and $129.0 million of borrowings outstanding under the revolving credit facility as of June 30, 2017, and December 31, 2016, respectively.



Effective January 1, 2016, the partnership adopted ASC 835-30, Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. As of June 30, 2017 and December 31, 2016,  there were $149 thousand and $173 thousand, respectively, of debt issuance costs recorded as a direct reduction of the carrying value of the partnership’s long-term debt.    



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Scheduled long‑term debt repayments as of June 30, 2017, are as follows (in thousands):







Covenant Compliance

 

The partnership, including all of its subsidiaries, was in compliance with its debt covenants as of June 30, 2017.



Capitalized Interest



The partnership’s policy is to capitalize interest costs incurred on debt during the construction of major projects. The partnership had no capitalized interest for the three and six months ended June 30, 2017 and 2016.



4.  UNIT-BASED COMPENSATION



The board of directors of the general partner adopted the LTIP upon completion of the IPO. The LTIP is intended to promote the interests of the partnership, its general partner and affiliates by providing unit-based incentive compensation awards to employees, consultants and directors to encourage superior performance. The LTIP reserves 2,500,000 common units for issuance in the form of options, restricted units, phantom units, distribution equivalent rights, substitute awards, unit appreciation rights, unit awards, profits interest units or other unit-based awards. The partnership measures unit-based compensation grants at fair value on the grant date and records noncash compensation expense related to the awards over the requisite service period.



The non-vested unit-based award activity for the six months ended June 30, 2017, is as follows:



Compensation costs related to the unit-based awards of $60 thousand and $119 thousand were recognized during the three and six months ended June 30, 2017, respectively. Compensation costs related to the unit-based awards of $37 thousand and $22 thousand were recognized during the three and six months ended June 30, 2016, respectively. A net benefit of $15 thousand was recognized during the three months ended March 31, 2016, as a reduction to compensation expense due to a forfeiture during the period. As of June 30, 2017, there were no unrecognized compensation costs from unit-based compensation awards.



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5.  PARTNERS’ CAPITAL





Components of partners’ capital are as follows (in thousands):





There was no change in the number of common and subordinated limited partner units outstanding during the six months ended June 30, 2017.







The partnership’s subordinated units are not entitled to distributions until the common units have received the minimum quarterly distribution for that quarter plus any arrearages of the minimum quarterly distribution from prior quarters. Subordinated units do not accrue arrearages.



The partnership agreement authorizes the partnership to issue unlimited additional partnership interests on the terms and conditions determined by the general partner without unitholder approval.



Quarterly distributions are made within 45 days after the end of each calendar quarter, assuming the partnership has sufficient available cash. Available cash generally means, all cash and cash equivalents on hand at the end of that quarter less cash reserves established by the general partner plus all or any portion of the cash on hand resulting from working capital borrowings made subsequent to the end of that quarter.



On February 14, 2017, the partnership distributed $14.0 million to unitholders of record as of February 3, 2017, related to the quarterly cash distribution of $0.43 per unit that was declared on January 23, 2017, for the quarter ended December 31, 2016.



On May 15, 2017, the partnership distributed $14.3 million to unitholders of record as of May 5, 2017, related to the quarterly cash distribution of $0.44 per unit that was declared on April 20, 2017, for the quarter ended March 31, 2017.



On July 20, 2017, the board of directors of the general partner declared a quarterly cash distribution of $0.45 per unit, or approximately $14.6 million, for the quarter ended June 30, 2017. The distribution will be paid on August 11, 2017, to unitholders of record as of August 4, 2017.



The allocation of total cash distributions to the general and limited partners applicable to the period the distributions were earned for the three and six months ended June 30, 2017, are as follows (in thousands):















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6.  EARNINGS PER UNIT



The partnership computes earnings per unit using the two-class method. Earnings per unit applicable to common and subordinated units is calculated by dividing the respective limited partners’ interest in net income by the weighted average number of common and subordinated units outstanding during the period, adjusted for the dilutive effect of any outstanding dilutive securities. Diluted earnings per limited partner unit was the same as basic earnings per limited partner unit as there were no potentially dilutive common or subordinated units outstanding as of June 30, 2017.  The following tables show the calculation of earnings per limited partner unit – basic and diluted (in thousands, except for per unit data): 

























7.  INCOME TAXES



The partnership is a limited partnership, which is not subject to federal income taxes. The partnership owns a subsidiary, however, that is taxed as a corporation for federal and state income tax purposes. In addition, the partnership is subject to state income taxes in certain states. As a result, the financial statements reflect a provision or benefit for such income taxes. The general partner and the unitholders are responsible for paying federal and state income taxes on their share of the partnership’s taxable income.



The partnership recognizes uncertainties in income taxes based upon the technical merits of the position, and measures the maximum benefit and degree of likelihood to determine the tax liability in the financial statements.

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8.  COMMITMENTS AND CONTINGENCIES



Operating Leases



The partnership leases certain facilities, parcels of land and railcars under agreements that expire on various dates. For accounting purposes, lease expense is based on a straight-line amortization of the total payments required over the term of the lease, which resulted in a deferred lease liability of $769 thousand and $739 thousand as of June 30, 2017 and December 31, 2016, respectively. The partnership incurred lease expenses of $5.9 million and $11.7 million during the three and six months ended June 30, 2017 respectively, and $6.1 million and $12.6 million during the three and six months ended June 30, 2016 Aggregate minimum lease payments under these agreements for the remainder of 2017 and in future years are as follows (in thousands):







In accordance with the amended storage and throughput agreement with Green Plains Trade, Green Plains Trade is obligated to throughput a minimum of 296.6 mmg per calendar quarter at the partnership’s storage facilities and pay $.05 per gallon on all volume it throughputs. The partnership charged Green Plains Trade a deficiency payment in the amount of $1.0 million related to the minimum volume commitment for the three months ended June 30, 2017, which was recorded as unearned revenue as of June 30, 2017. The payment may be applied as a credit towards future volume throughput in excess of the minimum volume commitment during the next four quarters. Minimum operating lease revenues under this agreement for the remainder of 2017 and in future years are as follows (in thousands):





In accordance with the amended rail transportation services agreement with Green Plains Trade, Green Plains Trade is required to pay the rail transportation services fee for the railcar volumetric capacity provided by the partnership. Under the terms of the agreement, Green Plains Trade is not required to pay for volumetric capacity that is not available due to inspections, upgrades, or routine repairs and maintenance. As a result, the actual volumetric capacity billed may fluctuate based on the amount of volumetric capacity available for use in any applicable period. Anticipated minimum operating lease revenues under this agreement for the remainder of 2017 and in future years are as follows (in thousands):



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Service Agreements



The partnership entered into agreements for contracted services with certain vendors that require the partnership to pay minimum monthly amounts, which expire on various dates. The partnership exceeded all minimum commitments under these agreements during the three and six months ended June 30, 2017 and 2016. Aggregate minimum payments under these agreements for the remainder of 2017 and in future years are as follows (in thousands):







Legal



The partnership may be involved in litigation that arises during the ordinary course of business. The partnership is not currently party to any material litigation.

 

9.  MAJOR CUSTOMERS

 

Revenue from Green Plains Trade Group was $23.5 million and $49.3 million for the three and six months ended June 30, 2017, respectively, and $23.5 million and $45.3 million for the three and six months ended June 30, 2016, respectively, and exceeded 10% of the partnership's total revenue.



  

10.  RELATED PARTY TRANSACTIONS



In addition to related party purchases disclosed in Note 2 – Acquisitions to the consolidated financial statements, the partnership engages in various related party transactions with Green Plains and subsidiaries of Green Plains.



Green Plains provides a variety of shared services to the partnership, including general management, accounting and finance, payroll and human resources, information technology, legal, communications and treasury activities. These costs are proportionally allocated by Green Plains to its subsidiaries based on common financial metrics management believes are reasonable. The partnership recorded expenses related to these shared services of $1.0 million and $2.1 million for the three and six months ended June 30, 2017, respectively, and $0.9 million and $1.8 million for the three and six months ended June 30, 2016. In addition, the partnership reimburses Green Plains for wages and benefits of employees directly performing services on its behalf. Green Plains may also pay certain direct costs on behalf of the partnership, which are reimbursed by the partnership. The partnership believes the consolidated financial statements reflect all material costs of doing business related to these operations, including expenses incurred by other entities on its behalf.



Omnibus Agreement



The partnership has entered into an omnibus agreement, as amended, with Green Plains and its affiliates which, among other terms and conditions, addresses the partnership’s obligation to reimburse Green Plains for direct or allocated costs and expenses incurred by Green Plains for general and administrative services; the prohibition of Green Plains and its subsidiaries from owning, operating or investing in any business that owns or operates fuel terminals or fuel transportation assets; the partnership’s right of first offer to acquire assets if Green Plains decides to sell them; a nontransferable, nonexclusive, royalty-free license to use the Green Plains trademark and name; the allocation of taxes among the parent, partnership and its affiliates and the parent’s preparation and filing of tax returns; and an indemnity by Green Plains for environmental and other liabilities.



If Green Plains or its affiliates cease to control the general partner, then either Green Plains or the partnership may terminate the omnibus agreement, provided that (i) the indemnification obligations of the parties survive according to their respective terms; and (ii) Green Plains’ obligation to reimburse the partnership for operational failures survives according to its terms.



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Operating Services and Secondment Agreement



The general partner has entered into an operational services and secondment agreement, as amended, with Green Plains. Under the terms of the agreement, Green Plains seconds employees to the general partner to provide management, maintenance and operational functions for the partnership, including regulatory matters, health, environment, safety and security programs, operational services, emergency response, employees training, finance and administration, human resources, business operations and planning. The seconded personnel are under the direct management and supervision of the general partner who reimburses the parent for the cost of the seconded employees, including wages and benefits. If a seconded employee does not devote 100% of his or her time providing services to the general partner, the general partner reimburses the parent for a prorated portion of the employee’s overall wages and benefits based on the percentage of time the employee spent working for the general partner.



Under the operational services and secondment agreement, Green Plains will indemnify the partnership from any claims, losses or liabilities incurred by the partnership, including third-party claims, arising from their performance of the operational services secondment agreement; provided, however, Green Plains will not be obligated to indemnify the partnership for any claims, losses or liabilities arising out of the partnership’s gross negligence, willful misconduct or bad faith with respect to any services provided under the operational services and secondment agreement.



Commercial Agreements



The partnership has various fee-based commercial agreements with Green Plains Trade, including:



The storage and throughput agreement and terminal services agreements are supported by minimum volume commitments. The rail transportation services agreement is supported by minimum take-or-pay volumetric capacity commitments.



Under the storage and throughput agreement, as amended, Green Plains Trade is obligated to throughput a minimum of 296.6 mmg of product per calendar quarter at the partnership’s storage facilities and pay $0.05 per gallon on all volume it throughputs. If Green Plains Trade fails to meet its minimum volume commitment during any quarter, Green Plains Trade will pay the partnership a deficiency payment equal to the deficient volume multiplied by the applicable fee. The deficiency payment may be applied as a credit toward volumes throughput by Green Plains Trade in excess of the minimum volume commitment during the next four quarters, after which time any unused credits will expire. The partnership charged Green Plains Trade a deficiency payment in the amount of $1.0 million related to the minimum volume commitment for the three months ended June 30, 2017, which is recorded as unearned revenue as of June 30, 2017.



Under the rail transportation services agreement, Green Plains Trade is obligated to use the partnership to transport ethanol and other fuels from receipt points identified by Green Plains Trade to nominated delivery points. The partnership’s leased railcar fleet consisted of approximately 3,350 railcars as of June 30, 2017. During the three and six months ended June 30, 2017, the average monthly fee was approximately $0.0265 and $0.0273 per gallon, respectively, for the railcar volumetric capacity provided by the partnership, which was 91.4 mmg and 90.3 mmg, respectively. During the three and six months ended June 30, 2016 the average monthly fee was approximately $0.0343 and $0.0351 per gallon, respectively for the railcar volumetric capacity provided by the partnership, which was 77.2 mmg and 75.0 mmg, respectively.



Green Plains Trade is also obligated to use the partnership for logistical operations management and other services related to railcar volumetric capacity provided by Green Plains Trade, which was 6.5 mmg for the three and six months ended June 30, 2017. Green Plains Trade is obligated to pay a monthly fee of approximately $0.0013 per gallon for these services. In addition, Green Plains Trade reimburses the partnership for costs related to: (1) railcar switching and unloading fees; (2) increased costs related to changes in law or governmental regulation related to the specification, operation or maintenance of railcars; (3) demurrage charges, except when the charges are due to the partnership’s gross negligence or willful misconduct; and (4) fees related to rail transportation services under transportation contracts with third-party common carriers. Green Plains Trade frequently contracts for additional railcar volumetric capacity to be provided by the partnership in the normal course of business at comparable margins.

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Effective November 30, 2016, the rail transportation services agreement was amended to extend the initial term of the agreement, effective July 1, 2015, from a six-year term to a ten-year term. All other terms and conditions remain the same as the initial agreement, as previously amended.



Under the trucking transportation agreement, Green Plains Trade pays the partnership for use of the partnership’s truck transportation services to transport ethanol and other fuels from receipt points identified by Green Plains Trade to nominated delivery points. Green Plains Trade is obligated to pay a monthly trucking transportation services fee equal to the aggregate volume transported in a calendar month by the partnership’s trucks, multiplied by the applicable rate for each trucking lane. Green Plains Trade reimburses the partnership for costs related to: (1) truck switching and unloading fees; (2) increased costs related to changes in law or governmental regulation related to the specification, operation and maintenance of trucks; and (3) fees related to trucking transportation services under transportation contracts with third-party common carriers.



Under the Birmingham terminal services agreement, effective January 1, 2017, through December 31, 2019, Green Plains Trade is obligated to pay $0.0360 per gallon on volume throughput at the terminal, subject to a minimum volume commitment of approximately 2.8 mmg per month as well as fees for ancillary services. Green Plains Trade met the minimum volume commitments related to this agreement during the three and six months ended June 30, 2017 and 2016.



The partnership recorded revenues from Green Plains Trade under the storage and throughput agreement and rail transportation agreement of $21.5 million and $45.1 million for the three and six months ended June 30, 2017, respectively, and $21.8 million and $42.0 million for the three and six months ended June 30, 2016. The partnership recorded revenues from Green Plains Trade related to trucking and terminal services of $2.0 million and $4.2 million for the three and six months ended June 30, 2017, respectively,  and $1.7 million and $3.3 million for the three and six months ended June 30, 2016, respectively.



The partnership incurs expenses charged by a subsidiary of the parent for cleaning of its storage tanks.  During the three and six months ended June 30, 2017 and 2016, the partnership incurred tank cleaning expense of $17 thousand and $21 thousand, respectively, for these services.



The partnership distributed $9.2 million and $18.2 million to Green Plains related to the quarterly cash distribution paid for the three and six months ended June 30, 2017, respectively, and $8.4 million and $16.9 million for the three and six months ended June 30, 2016, respectively.

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



The following discussion and analysis provides information we believe is relevant to understand our consolidated financial condition and results of operations. This discussion should be read in conjunction with our unaudited consolidated financial statements and accompanying notes contained in this report together with our 2016 annual report. The results of operations for the three and six months ended June 30, 2017, are not necessarily indicative of the results we expect for the full year.



Cautionary Information Regarding Forward-Looking Statements



Forward-looking statements are made in accordance with safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations that involve a number of risks and uncertainties and do not relate strictly to historical or current facts, but rather to plans and objectives for future operations. These statements may be identified by words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “outlook,” “plan,” “predict,” “may,” “could,” “should,” “will” and similar expressions, as well as statements regarding future operating or financial performance or guidance, business strategy, environment, key trends and benefits of actual or planned acquisitions.



Factors that could cause actual results to differ from those expressed or implied in the forward-looking statements include those discussed in Part I, Item 1A – Risk Factors of our 2016 annual report or incorporated by reference. Specifically, we may experience fluctuations in future operating results due to changes in general economic, market or business conditions; foreign imports of ethanol; fluctuations in demand for ethanol and other fuels; risks of accidents or other unscheduled shutdowns affecting our assets, including mechanical breakdown of equipment or infrastructure; risks associated with changes to federal policy or regulation; ability to comply with changing government usage mandates and regulations affecting the ethanol industry; price, availability and acceptance of alternative fuels and alternative fuel vehicles, and laws mandating such fuels or vehicles; changes in operational costs at our facilities and for our railcars; failure to realize the benefits projected for capital projects; competition; inability to successfully implement growth strategies; the supply of corn and other feedstocks; unusual or severe weather conditions and natural disasters; ability and willingness of parties with whom we have material relationships, including Green Plains Trade, to fulfill their obligations; labor and material shortages; changes in the availability of unsecured credit and changes affecting the credit markets in general; and other risk factors detailed in our reports filed with the SEC.



We believe our expectations regarding future events are based on reasonable assumptions. However, these assumptions may not be accurate or account for all risks and uncertainties. Consequently, forward-looking statements are not guaranteed. Actual results may vary materially from those expressed or implied in our forward-looking statements. In addition, we are not obligated 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 or documents incorporated by reference.



Overview



Green Plains Partners provides fee-based fuel storage and transportation services by owning, operating, developing and acquiring ethanol and fuel storage tanks, terminals, transportation assets and other related assets and businesses. We are Green Plains’ primary downstream logistics provider and generate a substantial portion of our revenues under fee-based commercial agreements with Green Plains Trade for receiving, storing, transferring and transporting ethanol and other fuels, which are supported by minimum volume or take-or-pay capacity commitments.



Results of Operations



Our parent operated its ethanol production facilities at approximately 74.7% of capacity for the second quarter of 2017, compared to 89.8% of capacity for the same quarter last year, resulting in ethanol storage and throughput of 284.5 mmg for the second quarter of 2017, compared with 278.9 mmg for the same quarter last year. Ethanol production capacity was increased with our parent’s acquisition of the Madison, Illinois; Mount Vernon, Indiana; and York, Nebraska plants, acquired on September 23, 2016. During the three months ended June 30, 2017, our parent reduced its production capacity utilization in response to a weak ethanol margin environment, which resulted in a reduction in throughput at our storage facilities, to a level below minimum volume commitment, and a related deficiency charge of approximately $1.0 million to Green Plains Trade for the quarter.







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Industry Trends and Factors Affecting our Results of Operations



According to the EIA, average daily domestic ethanol production slowed to 1.00 million barrels per day during the second quarter of 2017, down slightly from 1.04 million barrels per day during the first quarter of 2017, due in part to plant shutdowns for routine maintenance. Average daily production, however, increased 4% during the second quarter of 2017 compared with the same quarter last year and 5% for the first half of 2017 compared with the first half of 2016 due to modest domestic production capacity growth. Weekly refiner and blender input volume increased by nearly 2% during the first half of the year compared with the first half of 2016, helped by the growing number of retail gasoline stations offering higher ethanol blends to consumers. According to Growth Energy, nearly 920 retail stations were selling E15 at July 11, 2017, up from 431 stations at December 31, 2016.



Year-to-date domestic ethanol exports through May 31, 2017, were 594.0 mmg, up 48%, from 400.7 mmg for the comparable period in 2016. Brazil accounted for 43% of the domestic ethanol export volumes, while Canada, India, the Philippines and United Arab Emirates accounted for 21%, 12%, 7% and 4%, respectively. China, the number three importer of U.S. ethanol last year, has imported negligible volumes year-to-date due to a 30% tariff imposed on U.S. and Brazil fuel ethanol, which took effect on January 1, 2017. On July 26, 2017, Brazil’s Chamber of Foreign Trade, or CAMEX, announced it would delay its decision on a pending proposal to impose a 20% tariff on U.S. ethanol imports until next month. We currently estimate that net ethanol exports will reach between 1.1 billion gallons and 1.3 billion gallons in 2017.



Average weekly gasoline demand slowed 1.3% during the second quarter of 2017 and 2.1% for the first half of the year compared with the same periods in 2016. Gasoline futures traded at a discount to ethanol futures in May and June of 2017.



On June 27, 2017, the Energy Regulatory Commission of Mexico approved the use of 10% ethanol blends, effective immediately, up from 5.8%, in all but three of its largest cities: Mexico City, Guadalajara and Monterrey. U.S. ethanol exports to Mexico totaled 29 mmg in 2016.



At June 30, 2017, domestic ethanol inventory of 21.6 million barrels was 0.4 million barrels higher than the ending stocks at the same time last year, implying that increased export volumes have offset the difference between increased production and blending volumes year over year.



On June 14, 2017, the Senate Environment and Public Works Committee held a hearing about the Consumer and Fuel Retailer Choice Act (S. 517). The bill was introduced to the Senate and House of Representatives (H.R. 1311) on March 2, 2017, proposing to lift restrictions on the sale of gasoline blended with 15% ethanol between June 1 and September 15 by extending the RVP waiver to E15. The RVP waiver would allow the sale of E15 in a manner consistent with E10 year-round, potentially reducing consumer confusion.

 

On July 5, 2017, the EPA proposed maintaining the RVOs for conventional ethanol at 15.0 billion gallons, in line with our expectations, while lowering the volume obligations for advanced alternatives, reducing the overall biofuel target to 19.24 billion gallons in 2018. According to RFS II, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022.  With the 2018 being the first year the total proposed RVOs are more than 20% below statutory levels, the Administrator has directed the EPA staff to initiate the required technical analysis to inform a reset rule. If 2019 RVOs are also more than 20% below statutory levels, an RVO reset will be triggered under RFS II.  This will require the EPA to modify statutory volumes through 2022 within one year of the trigger event, with the standard for review based on the same factors to be utilized when the EPA sets RVOs post-2022.



The U.S. Federal District Court for the D.C. Circuit ruled on July 28, 2107 in favor of the Americans for Clean Energy and its aligned petitioners against the EPA.  The decision concluded the EPA erred in how it interpreted the “inadequate domestic supply” waiver provision of RFS II which authorizes the EPA to consider supply-side factors affecting the volume of renewable fuel that is available to refiners, blenders, and importers to meet the statutory volume requirements, but as the Court concluded it does not allow the EPA to consider the volume of renewable fuel that is available to ultimate consumers or the demand-side constraints that affect the consumption of renewable fuel by consumers.  As a result, the Court vacated the EPA’s decision to reduce the total renewable fuel volume requirements for 2016 through use of its “inadequate domestic supply” waiver authority, and remanded to the EPA to address the 2016 total renewable fuels volume requirements. While we anticipate no direct impact from the decision, we expect the primary impact will be on the RINs market. However, we believe it should benefit our industry overall with the EPA's waiver analysis now limited to the supply-side of the equation only.

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Adjusted EBITDA and Distributable Cash Flow



Adjusted EBITDA is defined as earnings before interest expense, income tax expense, depreciation and amortization, plus adjustments for transaction costs related to acquisitions or financings, adjustments for minimum volume commitment deficiency payments, unit-based compensation expense and net gains or losses on asset sales.



Distributable cash flow is defined as adjusted EBITDA less interest paid or payable, income taxes paid or payable and maintenance capital expenditures, which are defined under our partnership agreement as cash expenditures (including expenditures for the construction or development of new capital assets or the replacement, improvement or expansion of existing capital assets) made to maintain our operating capacity or operating income.



We believe the presentation of adjusted EBITDA and distributable cash flow provides useful information to investors in assessing our financial condition and results of operations. Adjusted EBITDA and distributable cash flow are supplemental financial measures that we use to assess our financial performance. However, these presentations are not made in accordance with GAAP. The GAAP measure most directly comparable to adjusted EBITDA and distributable cash flow is net income. Since adjusted EBITDA and distributable cash flow may be defined differently by other companies in our industry, our definitions of adjusted EBITDA and distributable cash flow may not be comparable to similarly titled measures of other companies, diminishing its utility. Adjusted EBITDA and distributable cash flow should not be considered in isolation or as alternatives to net income or any other measure of financial performance presented in accordance with GAAP to analyze our results.



The following table presents a reconciliation of net income to adjusted EBITDA for each of the periods presented and a  reconciliation of net income to distributable cash flow for the three and six months ended June 30, 2017 and 2016 (unaudited, dollars in thousands): 







(1) Adjustment related to minimum volume commitment billing.

(2) Includes distributions declared for the periods indicated; the distributions declared for each quarter are paid during the following quarter.



Recent Developments



On February 13, 2017, we entered into an agreement with Delek Renewables, LLC to form NLR Energy Logistics LLC, a 50/50 joint venture, to build an ethanol unit train terminal in the Little Rock, Arkansas area capable of unloading 110-car unit trains in less than 24 hours.  On May 1, 2017 the joint venture signed a long-term lease with the Little Rock Port Authority, with an effective date of June 1, 2017, to construct and operate the terminal within their 2,600 acre industrial park which is served by two Class I railroads and has convenient access to major highways. The initial term of the lease is five years, with four renewal options of five years each. The joint venture plans to build approximately 100,000 barrels of storage, along with other infrastructure assets at the site.  The joint venture has also executed five year terminal throughput 

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agreements with affiliates of its partners which will provide minimum volume commitments to the terminal upon completion. The project is expected to be completed in the first quarter of 2018 at a total cost of approximately $7.0 million, subject to issuance of various permits and execution of other necessary agreements.



On June 13, 2016, our parent formed a 50/50 joint venture to construct and operate an intermodal export and import fuels terminal at Jefferson Gulf Coast Energy Partners’ existing Beaumont, Texas terminal. Phase I development of the joint venture is expected to be completed in October of 2017.  Green Plains will offer its interest in the joint venture to the partnership once commercial development is completed.



Comparability of our Financial Results



For the three and six months ended June 30, 2017 and 2016, the following discussion reflects the results of the partnership.



On January 1, 2016, we acquired the ethanol storage and certain leased railcar assets of the Hereford, Texas and Hopewell, Virginia ethanol production facilities from our sponsor in a transfer between entities under common control. The assets were recognized at historical cost and reflected retroactively along with related expenses for periods prior to the effective date of the acquisition, subsequent to the initial dates the assets were acquired by our sponsor, on October 23, 2015, and November 12, 2015, for Hopewell and Hereford, respectively. Revenues and expenses related to these assets are included in the operating results of the partnership for the three and six months ended June 30, 2017 and 2016.



On September 23, 2016, we acquired ethanol storage assets located in Madison, Illinois; Mount Vernon, Indiana and York, Nebraska related to three ethanol plants, which occurred concurrently with the acquisition of these facilities by Green Plains from subsidiaries of Abengoa S.A. The transaction was accounted for as a transfer between entities under common control and the assets were recognized at the preliminary value recorded in Green Plains’ purchase accounting. No retroactive adjustments were required. Revenue and expenses related to these assets are included in the operating results of the partnership for the three and six months ended June 30, 2017.



In accordance with GAAP, when transferring assets between entities under common control, the entity receiving the net assets initially recognizes the carrying amounts of the assets and liabilities at the date of transfer and the prior period financial statements of the transferee are recast for all periods the transferred operations were part of the parent’s consolidated financial statements. 



Selected Financial Information and Operating Data



The following table reflects selected financial information (unaudited, in thousands):









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The following table reflects selected operating data (unaudited):







Three Months Ended June 30, 2017, Compared with the Three Months Ended June 30, 2016



Consolidated revenues decreased $0.4 million for the three months ended June 30, 2017, compared with the same period for 2016. Revenues generated from our rail transportation services agreement with Green Plains Trade decreased $0.6 million as a result of a reduction in the average rate charged for the railcar volumetric capacity provided. This decrease was partially offset by revenues generated from our storage and throughput agreement and terminal agreements with Green Plains Trade, which increased $0.6 million due to higher throughput volumes as a result of the ethanol storage assets acquired in September 2016, reduced by lower system-wide throughput volumes by Green Plains Trade, which was driven by the weak margin environment during the three months ended June 30, 2017. Revenue generated from terminal agreements with other customers decreased $0.4 million as a result of lower ethanol and biodiesel throughput volumes by other customers at our Birmingham facility and other terminals.



Operations and maintenance expenses decreased $0.2 million for the three months ended June 30, 2017, compared with the same period for 2016, primarily due to lower railcar lease expense.



Selling, general and administrative expenses increased $0.1 million for the three months ended June 30, 2017, compared with the same period for 2016, as a result of higher accounting expenses, as well as higher expenses allocated by our parent under the secondment agreement.



Distributable cash flow for the three months ended June 30, 2017 was comparable with the same period for 2016.



Six Months Ended June 30, 2017, Compared with the Six Months Ended June 30, 2016



Consolidated revenues increased $3.0 million for the six months ended June 30, 2017, compared with the same period for 2016. Revenues generated from our storage and throughput agreement and terminal agreements with Green Plains Trade increased $5.0 million due to higher throughput volumes as a result of the ethanol storage assets acquired in September 2016, partially offset by lower capacity utilization by Green Plains Trade driven by the weak margin environment during the three months ended June 30, 2017.  Revenues generated from our rail transportation services agreement with Green Plains Trade decreased $0.9 million as a result of a reduction in the average rate charged for the railcar volumetric capacity provided. Revenue generated from our terminal agreements with other customers decreased $0.9 million as a result of lower ethanol and biodiesel throughput volumes by other customers at our Birmingham facility and other terminals.



Operations and maintenance expenses decreased $0.3 million for the six months ended June 30, 2017, compared with the same period for 2016, primarily due to lower railcar lease expense, partially offset by higher repairs and maintenance expenses and higher labor costs.



Selling, general and administrative expenses for the six months ended June 30, 2017 were comparable with the same period for 2016.



Distributable cash flow increased $2.8 million for the six months ended June 30, 2017, compared with the same period for 2016 primarily due to increased net income as a result of higher throughput volumes associated with the ethanol storage assets acquired in 2016 and higher production capacity utilization by Green Plains.



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Liquidity and Capital Resources



Our principal sources of liquidity include cash generated from operating activities and borrowings under our revolving credit facility. We consider opportunities to repay, redeem, repurchase or refinance our debt, depending on market conditions, as part of our normal course of doing business. Our ability to meet our debt service obligations and other capital requirements depends on our future operating performance, which is subject to general economic, financial, business, competitive, legislative, regulatory and other conditions, many of which are beyond our control. We plan to fund future expansion capital expenditures primarily from external sources, including borrowings under our revolving credit facility and issuances of debt and equity securities. We expect these sources will be adequate for both our short-term and long-term liquidity needs. 



On January 1, 2016, we purchased the ethanol storage and leased railcar assets related to the Hereford and Hopewell production facilities from our sponsor by drawing $48.0 million on our revolving credit facility and using $14.3 million of cash on hand.



On August 25, 2016, the partnership filed a universal shelf registration statement with the SEC, registering an indeterminate number of equity and debt securities with a total offering price not to exceed $500,000,250 that was declared effective September 2, 2016. The partnership also registered 13,513,500 common units, consisting of 4,389,642 common units and 9,123,858 common units that may be issued upon conversion of subordinated units, in each case, currently held by Green Plains.



On September 16, 2016, Green Plains Operating Company increased its revolving credit facility agreement from $100.0 million to $155.0 million, which it used to fund the $90.0 million purchase of ethanol storage assets associated with the Madison, Illinois; Mount Vernon, Indiana and York, Nebraska production facilities on September 23, 2016.



At June 30, 2017, we had $2.9 million of cash and cash equivalents and $27.1 million available under our revolving credit facility.



Net cash provided by operating activities was $32.8 million for the six months ended June 30, 2017, compared with net cash provided by operating activities of $28.2 million for the six months ended June 30, 2016.  Increased cash flows from operating activities resulted primarily from increased operating profits. Net cash used by investing activities was $1.1 million for the six months ended June 30, 2017, compared to net cash used by investing activities of $62.6 million for the six months ended June 30, 2016, primarily due to the acquisitions of ethanol storage and leased railcar assets on January 1, 2016. Net cash used by financing activities was $29.3 million for the six months ended June 30, 2017, primarily due to quarterly cash distributions of $28.2 million, compared with net cash provided by financing activities of $20.8 million for the six months ended June 30, 2016, primarily due to additional net borrowings on the revolving credit facility.



We also incurred capital expenditures of $1.2 million for the six months ended June 30, 2017, of which $0.2 million was related to maintenance capital expenditures and $1.0 million was related to expansion of our truck and tanker fleet. Capital spending for 2017 is expected to be approximately $1.7 million related to our continued investment in fleet expansion.



Revolving Credit Facility



Green Plains Operating Company has a $155.0 million secured revolving credit facility to fund working capital, acquisitions, distributions, capital expenditures and other general partnership purposes. The facility can be increased by up to $100.0 million without the consent of the lenders. The facility matures on July 1, 2020. At June 30, 2017, the outstanding principal balance was $127.9 million with an average interest rate of 3.78%. For more information related to our debt, see Note 3 – Debt to the consolidated financial statements in this report.



Distributions to Unitholders



The partnership agreement provides for a minimum quarterly distribution of $0.40 per unit, which equates to approximately $13.0 million per quarter, or $51.9 million per year, based on the 2% general partner interest and the number of common and subordinated units currently outstanding. For more information, see Note 5 – Partners’ Capital to the consolidated financial statements included in this report.



On February 14, 2017, the partnership distributed $14.0 million to unitholders of record as of February 3, 2017, related to the quarterly cash distribution of $0.43 per unit that was declared on January 23, 2017, for the quarter ended December 31, 2016.



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On May 15 2017, the partnership distributed $14.3 million to unitholders of record as of May 5, 2017, related to the quarterly cash distribution of $0.44 per unit that was declared on April 20, 2017, for the quarter ended March 31, 2017.



On July 20, 2017, the board of directors of the general partner declared a quarterly cash distribution of $0.45 per unit, or approximately $14.6 million, for the quarter ended June 30, 2017. The distribution will be paid on August 11, 2017, to unitholders of record as of August 4, 2017.



Contractual Obligations



Our contractual obligations as of June 30, 2017, were as follows (in thousands):







(1) Includes the current portion of long-term debt and excludes the effect of any debt discounts.

(2) Interest amounts are calculated over the terms of the loans using current interest rates, assuming scheduled principal and interest amounts are paid pursuant to the debt agreements. Includes administrative and/or commitment fees on debt obligations.

(3) Operating lease costs are primarily for property and railcar leases.

(4) Service agreements are primarily related to minimum commitments on railcar unloading contracts at our fuel terminals.

(5) Includes asset retirement obligations to return property to its original condition at the termination of lease agreements.



Critical Accounting Policies and Estimates



Key accounting policies, including those relating to depreciation of property and equipment, asset retirement obligations, and impairment of long-lived assets and goodwill are impacted significantly by judgments, assumptions and estimates used to prepare our consolidated financial statements. Information about our critical accounting policies and estimates are included in our annual report.



Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements other than operating leases that are entered into during the ordinary course of business and disclosed in the Contractual Obligations section above.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.



Market risk is the risk of loss arising from adverse changes in market rates and prices. At this time, we conduct all of our business in U.S. dollars and are not exposed to foreign currency risk.



Interest Rate Risk



We are exposed to interest rate risk through our revolving credit facility, which bears interest at variable rates. At June 30, 2017, we had $127.9 million outstanding under our revolving credit facility. A 10% change in interest rates would affect our interest expense by approximately $483 thousand per year, assuming no changes in the amount outstanding or other variables under our revolving credit facility.



Other details about our outstanding debt are discussed in the notes to the consolidated financial statements included in this report and in our annual report.



Commodity Price Risk



We do not have any direct exposure to risks associated with fluctuating commodity prices because we do not own the ethanol and other fuels that are stored at our facilities or transported by our railcars and trucks.

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Item 4.   Controls and Procedures.



Evaluation of Disclosure Controls and Procedures



We maintain disclosure controls and procedures designed to ensure information that must be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required financial disclosure.



Under the supervision and participation of our chief executive officer and chief financial officer, management carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2017, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act and concluded that our disclosure controls and procedures were effective.



Changes in Internal Control over Financial Reporting



There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



Emerging Growth Company Status



As an emerging growth company,  we are not required to provide an auditor’s attestation report on the effectiveness of our system of internal control over financial reporting, adopt new or revised financial accounting standards until they apply to private companies, comply with any new requirements adopted by the PCAOB to rotate audit firms or supplement the auditor’s report with additional information about the audit and financial statements of the issuer, or disclose the same level of information about executive compensation required of larger public companies.



We have elected to take advantage of these provisions except for the exemption that allows us to extend the transition period for compliance with new or revised financial accounting standards. This election is irrevocable.

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PART II – OTHER INFORMATION



Item 1.   Legal Proceedings.



We may be involved in litigation that arises during the ordinary course of business. We are not, however, involved in any material litigation at this time.



Item 1A.  Risk Factors. 



Investors should carefully consider the discussion of risks and the other information in our annual report on Form 10-K for the year ended December 31, 2016, in Part I, Item 1A, “Risk Factors,” and the discussion of risks and other information in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under “Cautionary Information Regarding Forward-Looking Statements” of this report. Although we have attempted to discuss key factors, our investors need to be aware that other risks may prove to be important in the future. New risks may emerge at any time and we cannot predict such risks or estimate the extent to which they may affect our financial performance. The following risk factor supplements and/or updates risk factors previously disclosed and should be considered in conjunction with the other information included in, or incorporated by reference in, this quarterly report on Form 10-Q.



Government mandates affecting ethanol usage could change and impact the ethanol market.



Our operations could be adversely impacted by legislation or EPA actions, as set forth below or otherwise, that may reduce the RFS II mandate. Similarly, should federal mandates regarding oxygenated gasoline be repealed, the market for domestic ethanol could be adversely impacted. Economic incentives to blend based on the relative value of gasoline versus ethanol, taking into consideration the octane value of ethanol, environmental requirements and the RFS II mandate, may affect future demand. A significant increase in supply beyond the RFS II mandate could have an adverse impact on ethanol prices. Moreover, changes to RFS II could negatively impact the price of ethanol or cause imported sugarcane ethanol to become more economical than domestic ethanol.



Flexible-fuel vehicles, which are designed to run on a mixture of fuels such as E85, are eligible for vehicle manufacturer incentives in the form of CAFE credits. Flexible-fuel vehicle credits have been decreasing since 2014 and will be completely phased out by 2020, which may impact manufacturers’ willingness to continue building flexible-fuel vehicles and ultimately result in slower E85 growth and lower ethanol prices.



Under the provisions of the EISA, Congress established a mandate setting the minimum volume of renewable fuels that must be blended with gasoline under the RFS II, which affects the domestic market for ethanol. The EPA has the authority to waive the requirements, in whole or in part, if there is inadequate domestic renewable fuel supply or the requirement severely harms the economy or the environment. After 2022, volumes shall be determined by the EPA in coordination with the Secretaries of Energy and Agriculture, taking into account such factors as impact on environment, energy security, future rates of production, cost to consumers, infrastructure, and other factors such as impact on commodity prices, job creation, rural economic development, or impact on food prices.



On June 14, 2017, the Senate Environment and Public Works Committee held a hearing about the Consumer and Fuel Retailer Choice Act (S. 517). The bill was introduced to the Senate and House of Representatives (H.R. 1311) on March 2, 2017, proposing to lift restrictions on the sale of gasoline blended with 15% ethanol between June 1 and September 15 by extending the RVP waiver to E15. The RVP waiver would allow the sale of E15 in a manner consistent with E10 year-round, potentially reducing consumer confusion.

 

On July 5, 2017, the EPA proposed maintaining the RVOs for conventional ethanol at 15.0 billion gallons, in line with our expectations, while lowering the volume obligations for advanced alternatives, reducing the overall biofuel target to 19.24 billion gallons in 2018. According to RFS II, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022.  With the 2018 being the first year the total proposed RVOs are more than 20% below statutory levels, the Administrator has directed the EPA staff to initiate the required technical analysis to inform a reset rule. If 2019 RVOs are also more than 20% below statutory levels, an RVO reset will be triggered under RFS II.  This will require the EPA to modify statutory volumes through 2022 within one year of the trigger event, with the standard for review based on the same factors to be utilized when the EPA sets RVOs post-2022.



The U.S. Federal District Court for the D.C. Circuit ruled on July 28, 2107 in favor of the Americans for Clean Energy and its aligned petitioners against the EPA.  The decision concluded the EPA erred in how it interpreted the “inadequate domestic supply” waiver provision of RFS II which authorizes the EPA to consider supply-side factors affecting the volume

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of renewable fuel that is available to refiners, blenders, and importers to meet the statutory volume requirements, but as the Court concluded it does not allow the EPA to consider the volume of renewable fuel that is available to ultimate consumers or the demand-side constraints that affect the consumption of renewable fuel by consumers.  As a result, the Court vacated the EPA’s decision to reduce the total renewable fuel volume requirements for 2016 through use of its “inadequate domestic supply” waiver authority, and remanded to the EPA to address the 2016 total renewable fuels volume requirements. While we anticipate no direct impact from the decision, we expect the primary impact will be on the RINs market. However, we believe it should benefit our industry overall with the EPA's waiver analysis now limited to the supply-side of the equation only.



While we currently believe the new presidential administration will support the environmental laws that are currently in place, to the extent federal or state laws or regulations are modified, the demand for ethanol may be reduced, which could negatively and materially affect our ability to operate profitably.



Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.



None.



Item 3.  Defaults Upon Senior Securities.



None.



Item 4.  Mine Safety Disclosures.



Not applicable.



Item 5.  Other Information.



None.

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Item 6. Exhibits. 









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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





 



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