Table
of Contents
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-Q
x
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
for the quarterly period ended September 30, 2008
OR
o
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
for the transition period from
to .
COMMISSION
FILE NUMBER 001-32922
AVENTINE
RENEWABLE ENERGY HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
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05-0569368
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(State of Incorporation)
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(IRS Employer Identification No.)
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120 North Parkway
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Pekin, Illinois
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61554
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(Address of Principal Executive Offices)
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(Zip Code)
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(309) 347-9200
(Registrants Telephone Number, including Area Code)
Indicate by checkmark
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
x
NO
o
Indicate by checkmark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer
o
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Accelerated filer
x
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Non-accelerated
filer
o
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Smaller reporting company
o
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|
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|
(Do not check if a smaller reporting company)
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Indicate by checkmark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). YES
o
NO
x
Indicate
the number of shares outstanding of each class of Common Stock, as of the
latest practicable date
Class
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Outstanding
as of November 5, 2008
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Common Stock, $0.001 Par Value
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42,970,988 Shares
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Table
of Contents
PART I.
FINANCIAL INFORMATION
Item 1. Financial
Statements
Aventine
Renewable Energy Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
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Three months ended
September 30,
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Nine months ended
September 30,
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(In thousands except per share amounts)
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2008
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2007
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2008
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2007
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|
|
|
|
|
|
|
|
|
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Net sales
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$
|
599,520
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$
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360,674
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$
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1,711,059
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$
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1,192,250
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Cost of goods
sold
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605,990
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362,401
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1,660,586
|
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1,138,133
|
|
Gross profit
(loss)
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|
(6,470
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)
|
(1,727
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)
|
50,473
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|
54,117
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|
Selling, general
and administrative expenses
|
|
8,763
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9,384
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27,771
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27,761
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Loss related to
auction rate securities
|
|
|
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31,601
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|
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Other (income)
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(405
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)
|
(169
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)
|
(2,799
|
)
|
(847
|
)
|
Operating income
(loss)
|
|
(14,828
|
)
|
(10,942
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)
|
(6,100
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)
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27,203
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|
Other income
(expense):
|
|
|
|
|
|
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|
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Interest income
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254
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|
3,576
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|
2,999
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|
9,111
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|
Interest expense
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(235
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)
|
(5,359
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)
|
(3,751
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)
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(12,716
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)
|
Other
non-operating income (loss)
|
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18,367
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|
(953
|
)
|
6,114
|
|
5,055
|
|
Minority
interest
|
|
725
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|
(103
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)
|
1,230
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|
(1,346
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)
|
Income (loss)
before income taxes
|
|
4,283
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|
(13,781
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)
|
492
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|
27,307
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|
Income tax
expense (benefit)
|
|
1,797
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|
(16,776
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)
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10,719
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|
(3,235
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)
|
Net income
(loss)
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|
$
|
2,486
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|
$
|
2,995
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$
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(10,227
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)
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$
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30,542
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Per
share data:
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Income (loss)
per common share basic:
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$
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0.06
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$
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0.07
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$
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(0.24
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)
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$
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0.73
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|
Basic weighted
average number of common shares
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41,971
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41,949
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41,927
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41,891
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Income (loss)
per common share diluted:
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$
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0.06
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$
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0.07
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$
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(0.24
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)
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$
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0.72
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|
Diluted weighted
average number of common and common equivalent shares
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42,010
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42,385
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41,958
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42,497
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
1
Table
of Contents
Aventine
Renewable Energy Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands except share amounts)
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September 30,
2008
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December 31,
2007
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(Unaudited)
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Assets
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|
|
|
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Current assets
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|
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Cash and cash
equivalents
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$
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36,255
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$
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17,171
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Short-term
investments
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211,500
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Accounts
receivable
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77,491
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73,058
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Inventories
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119,644
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81,488
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Income tax
receivable
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1,850
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11,962
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Prepaid expenses
and other current assets
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9,756
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|
12,816
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Total current
assets
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244,996
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407,995
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Property, plant
and equipment, net
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102,821
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111,867
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Construction in
process
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444,683
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226,410
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Net deferred tax
assets
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1,196
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Other assets
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14,851
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14,717
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Total assets
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$
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807,351
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$
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762,185
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Liabilities
and Stockholders Equity
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Current
liabilities
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Accounts payable
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$
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124,929
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$
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91,871
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Accrued interest
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15,000
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7,500
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Accrued
liabilities
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4,184
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3,625
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Other current
liabilities
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10,449
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1,622
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Total current
liabilities
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154,562
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104,618
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Senior unsecured
10% notes due April 2017
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300,000
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300,000
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Minority
interest
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8,601
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9,832
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Net deferred tax
liabilities
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1,048
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Other long-term
liabilities
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3,577
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3,864
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Total
liabilities
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467,788
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418,314
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Stockholders
equity
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Common stock,
par value $0.001 per share; 185,000,000 shares authorized; 41,970,988 and
41,734,223 shares issued and outstanding as of September 30, 2008 and
December 31, 2007, respectively, net of 21,548,640 shares held in
treasury as of September 30, 2008 and December 31, 2007
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42
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42
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Preferred stock,
50,000,000 shares authorized, no shares issued or outstanding
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Additional
paid-in capital
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285,123
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279,218
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Retained
earnings
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54,708
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64,935
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Accumulated
other comprehensive loss
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(310
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)
|
(324
|
)
|
Total
stockholders equity
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|
339,563
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|
343,871
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|
Total
liabilities and stockholders equity
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$
|
807,351
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|
$
|
762,185
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|
The accompanying notes are an integral part of
these condensed consolidated financial statements.
2
Table
of Contents
Aventine
Renewable Energy Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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Nine Months Ended September 30,
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(In thousands)
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2008
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2007
|
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Operating
Activities
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(10,227
|
)
|
$
|
30,542
|
|
Adjustments to
reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
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Loss related to
auction rate securities
|
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31,601
|
|
|
|
Depreciation and
amortization
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10,726
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|
9,765
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|
Lower of cost or
market adjustment related to inventory
|
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4,538
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|
1,600
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|
Minority
interest
|
|
(1,230
|
)
|
1,346
|
|
Stock-based
compensation expense
|
|
4,510
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|
5,258
|
|
Deferred income
tax
|
|
2,244
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|
(7,939
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)
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Other
|
|
(376
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)
|
139
|
|
Changes in
operating assets and liabilities:
|
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|
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Accounts
receivable, net
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(4,433
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)
|
31,929
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|
Inventories
|
|
(42,694
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)
|
4,664
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|
Accounts payable
and other liabilities
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49,944
|
|
(29,235
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)
|
Other changes in
operating assets and liabilities
|
|
12,009
|
|
5,835
|
|
Net cash
provided by operating activities
|
|
56,612
|
|
53,904
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
Additions to
property, plant and equipment, net
|
|
(221,980
|
)
|
(149,898
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)
|
Investment in
short-term securities
|
|
|
|
(183,943
|
)
|
Sale of
short-term securities
|
|
179,899
|
|
|
|
Indemnification
proceeds
|
|
3,039
|
|
|
|
Proceeds from
the sale of property, plant and equipment
|
|
14
|
|
|
|
Net cash (used
for) investing activities
|
|
(39,028
|
)
|
(333,841
|
)
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
Proceeds from
issuance of senior unsecured notes
|
|
|
|
300,000
|
|
Purchase of
treasury stock
|
|
|
|
(991
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)
|
Payment of debt
issuance costs
|
|
|
|
(8,220
|
)
|
Proceeds from
stock option exercises
|
|
|
|
508
|
|
Proceeds from the
issuance of common stock
|
|
1,500
|
|
|
|
Distributions to
minority shareholders
|
|
|
|
(1,727
|
)
|
Net cash
provided by financing activities
|
|
1,500
|
|
289,570
|
|
Net increase in
cash and cash equivalents
|
|
19,084
|
|
9,633
|
|
Cash and cash
equivalents at beginning of period
|
|
17,171
|
|
29,791
|
|
Cash and cash
equivalents at end of period
|
|
$
|
36,255
|
|
$
|
39,424
|
|
The accompanying notes are an
integral part of these condensed consolidated financial statements.
3
Table
of Contents
Aventine
Renewable Energy Holdings, Inc. and Subsidiaries
Notes to Unaudited
Condensed Consolidated Financial Statements
(1)
Basis of Reporting for Interim
Financial Statements
The
accompanying unaudited condensed consolidated financial statements include the
accounts of Aventine Renewable Energy Holdings, Inc. and its subsidiaries,
which are collectively referred to as Aventine, the Company, we, our or us, unless
the context otherwise requires. All
significant intercompany transactions have been eliminated in consolidation.
We have prepared the
unaudited condensed consolidated financial statements included herein pursuant
to the rules and regulations of the Securities and Exchange
Commission. Certain information and
footnote disclosures normally included in statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to
such rules and regulations, although we believe that the disclosures are
adequate to make the information presented not misleading. These financial statements should be read in
conjunction with the financial statements and notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2007.
The
accompanying unaudited condensed consolidated financial statements presented
herewith reflect all adjustments (consisting of only normal and recurring
adjustments) which, in the opinion of management, are necessary for a fair
presentation of the results of operations for the three and nine month periods
ended September 30, 2008 and 2007.
The results of operations for interim periods are not necessarily
indicative of results to be expected for an entire year.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could
differ materially from those estimates.
As of September 30,
2008, the Companys Summary of Critical Accounting Policies for the year ended December 31,
2007, which are detailed in the Companys Annual Report on Form 10-K, have
not changed.
The Company adopted
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards No. 157 (SFAS 157),
Fair Value Measurements,
and
FASB Statement of Financial Accounting Standards No. 159 (SFAS 159),
The Fair Value Option for Financial Assets and Financial Liabilities
Including an amendment of FASB Statement No. 115
, effective on January 1,
2008. See Note 9 for additional
information regarding the adoption of SFAS 157 and SFAS 159 by the Company.
(2)
Recent Accounting Pronouncements
In June 2008, the FASB issued FASB
Staff Position (FSP) EITF Issue No. 03-6-1 (FSP EITF 03-6-1),
Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities
. FSP EITF 03-6-1 requires that unvested
share-based payment awards that contain rights to receive non-forfeitable
dividends or dividend equivalents to be included in the two-class method of
computing earnings per share as described in SFAS No. 128,
Earnings per Share
.
This FSP is effective for financial statements issued for fiscal years
beginning after Dec. 15, 2008, and interim
4
Table of Contents
periods
within those years. Accordingly, we will
adopt FSP EITF 03-6-1 in fiscal year 2009.
We are currently evaluating the impact of FSP EITF 03-6-1 on the
consolidated financial statements.
In March 2008,
the FASB issued Statement of Financial Accounting Standards No. 161 (SFAS
161),
Disclosures about Derivative Instruments and
Hedging Activities An Amendment of FASB Statement No. 133
.
SFAS 161 requires entities to provide greater transparency in
derivative disclosures by requiring qualitative disclosure about objectives and
strategies for using derivatives and quantitative disclosures about fair value
amounts of and gains and losses on derivative instruments. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008.
The Company is currently evaluating SFAS 161, but does
not expect it will have a material impact on the Companys financial position
or results of operations.
(3)
Inventories
Inventories
are as follows:
(In thousands)
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Finished
products
|
|
$
|
109,092
|
|
$
|
73,530
|
|
Work-in-process
|
|
3,904
|
|
2,035
|
|
Raw materials
|
|
3,785
|
|
2,757
|
|
Supplies
|
|
2,863
|
|
3,166
|
|
Totals
|
|
$
|
119,644
|
|
$
|
81,488
|
|
(4)
Prepaid Expenses and Other
Current Assets
Prepaid
expenses and other current assets are as follows:
(In thousands)
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Prepaid motor
fuel taxes
|
|
$
|
1,041
|
|
$
|
5,061
|
|
Margin deposits
on derivative instruments
|
|
3,952
|
|
4,013
|
|
Prepaid
insurance
|
|
2,292
|
|
1,107
|
|
Prepaid ethanol
|
|
281
|
|
1,050
|
|
Current portion
of deferred income taxes
|
|
827
|
|
854
|
|
Other prepaid
expenses
|
|
1,363
|
|
731
|
|
Totals
|
|
$
|
9,756
|
|
$
|
12,816
|
|
(5)
Other Assets
Other
assets are as follows:
(In thousands)
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Deferred debt
issuance costs
|
|
$
|
6,902
|
|
$
|
7,533
|
|
Investments in
marketing alliances
|
|
6,000
|
|
6,000
|
|
Funded status of
pension plan
|
|
1,949
|
|
1,184
|
|
Totals
|
|
$
|
14,851
|
|
$
|
14,717
|
|
5
Table
of Contents
Deferred
debt issuance costs are subject to amortization. Original deferred debt issuance costs
totaling $7.2 million relating to our 10% senior unsecured notes are being
amortized utilizing a method which approximates the effective interest method
over the life of the notes of 10 years, resulting in amortization expense of
$0.7 million in 2008 and each year thereafter.
Original deferred debt issuance costs totaling $0.9 million relating to
our secured revolving credit facility are being amortized utilizing a method
which approximates the effective interest method over the five year life of the
facility, resulting in amortization expense of $0.2 million in 2008 and each
year thereafter.
(6)
Debt
The
following table summarizes the Companys long-term debt:
(In thousands)
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Senior unsecured
10% notes due April 2017
|
|
$
|
300,000
|
|
$
|
300,000
|
|
Secured
revolving credit facility
|
|
|
|
|
|
|
|
300,000
|
|
300,000
|
|
Less short-term
borrowings
|
|
|
|
|
|
Total long-term
debt
|
|
$
|
300,000
|
|
$
|
300,000
|
|
Secured
Revolving Credit Facility
Our
liquidity facility consists of a five year secured revolving credit facility
with JPMorgan Chase Bank, N.A., as administrative agent and a lender, of up to
$200 million, subject to collateral availability, which, under certain
circumstances, can be increased up to $300 million. Our secured revolving credit facility
includes a $25 million sub-limit for letters of credit. The credit facility expires in March 2012,
and, at September 30, 2008, was secured by substantially all of the
Companys assets, with the exception of the assets of Nebraska Energy, LLC.
Collateral
availability is determined via a borrowing base, which includes a percentage of
eligible receivables and inventory, and no more than $50 million of property,
plant and equipment. The amount of
property, plant and equipment which can be included in the borrowing base
reduces at a rate of $1.8 million each quarter beginning with the quarter
ending December 31, 2007. At September 30,
2008, the amount of property, plant and equipment which was eligible for
inclusion in the calculation of the borrowing base was $42.9 million.
Borrowings
generally bear interest, at our option, at the following rates (i) the
Eurodollar rate plus a margin between 1.25% to 1.75%, depending on the average
availability, or (ii) the greater of the prime rate or the federal funds
rate plus 0.50%, plus a margin between 0.00% to 0.50%, depending on the average
availability. Accrued interest is
payable monthly on outstanding principal amounts, provided that accrued
interest on Eurodollar loans is payable at the end of each interest period, but
in no event less frequently than quarterly.
In addition, fees and expenses are payable based on unused borrowing
availability (0.25% to 0.375% per annum, depending on the average
availability), outstanding letters of credit (1.375% to 1.875%, depending on
the average availability) and administrative and legal costs.
Availability
under our secured revolving credit facility is subject to customary conditions,
including the accuracy of representations and warranties, the absence of any
material adverse change and compliance with certain covenants, which, among
other things, may limit our ability to incur additional indebtedness and liens;
enter into transactions with affiliates; make acquisitions; pay dividends;
redeem or repurchase capital stock or senior notes; make investments or loans;
consolidate, merge or effect asset sales; or change the nature of our business. In addition, if availability under the
facility falls below $50
6
Table
of Contents
million, we must maintain a fixed charge
coverage ratio of EBITDA (as defined under the agreement) less non-financed
capital expenditures and taxes to fixed charges (scheduled payments of
principal, interest expense and certain types of dividend and other payments)
of at least 1.1 to 1.
The
secured revolving credit facility contains customary events of default for
credit facilities of this size and type, and includes, without limitation,
payment defaults; defaults in performance of covenants or other agreements
contained in the transaction documents; inaccuracies in representations and
warranties; certain defaults, termination events or similar events; certain
defaults with respect to any other Company indebtedness in excess of
$5.0 million; certain bankruptcy or insolvency events; the rendering of
certain judgments in excess of $5.0 million; certain ERISA events; certain
change in control events and the defectiveness of any liens under the secured
revolving credit facility. Obligations
under the secured revolving credit facility may be accelerated upon the
occurrence of an event of default.
As of September 30,
2008, we were in compliance with all covenants under our secured revolving
credit facility, including the fixed charge coverage ratio. If we continue with our building expansion on
our current timetable and within the expected cost and given our expectations
for future EBITDA, we would not expect to be in compliance with the fixed
charge coverage ratio covenant before the end of 2009 at the earliest and,
therefore, would not have access to the last $50 million of availability.
Failing to satisfy the fixed charge ratio does not constitute an event of
default nor does it affect our ability to borrow amounts under the facility
other than the last $50 million of commitments.
We had no borrowings
outstanding under our secured revolving credit facility at September 30,
2008, and $22.2 million of standby letters of credit outstanding, thereby
leaving approximately $132.9 million in borrowing availability under our
secured revolving credit facility as of that date (including the $50 million
which we have said we do not expect to be able to access).
Senior
Notes
In
March 2007, we issued $300 million aggregate principal amount of senior
unsecured 10% fixed-rate notes due April 2017 (Notes). Our Notes were issued pursuant to an indenture,
dated as of March 27, 2007, between us and Wells Fargo Bank, N.A., as
trustee. The Notes are general unsecured
obligations of the Company and certain of its guarantor subsidiaries, initially
limited to $300 million aggregate principal amount. We may, subject to the covenants and
applicable law, issue additional notes under the indenture. Any additional notes would be treated as a
single class with the previously issued Notes for all purposes under the indenture.
The
Notes have interest payments due semi-annually on April 1 and October 1
of each year, and are redeemable after the dates and at prices (expressed in
percentages of principal amount on the redemption date), as set forth below:
Year
|
|
Percentage
|
|
April 1,
2012
|
|
105.000
|
%
|
April 1, 2013
|
|
103.330
|
%
|
April 1,
2014
|
|
101.667
|
%
|
April 1,
2015 and thereafter
|
|
100.000
|
%
|
In
addition, at any time prior to April 1, 2010, we may redeem up to 35% of
the principal amount of the Notes from time to time originally issued with the
net cash proceeds of one or more sales of qualifying capital stock of the
Company at a redemption price of 100% of the principal amount, together with
accrued and unpaid interest to the redemption date, provided that at least 65%
of the aggregate principal amount of the Notes originally issued remains
outstanding immediately after such redemption and notice of any such redemption
is mailed within 60 days of each such sale of capital stock. The terms
7
Table
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of the Notes also contain restrictive
covenants that limit our ability to, among other things, incur additional debt,
sell or transfer assets, make certain investments or guarantees, enter into
transactions with shareholders and affiliates, and pay future dividends.
On
August 10, 2007, we exchanged all of the outstanding Notes for an issue of
registered unsecured senior notes, with terms identical to the Notes.
(7)
Other Current Liabilities
Other
current liabilities are as follows:
(In thousands)
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Income taxes
payable
|
|
$
|
2,454
|
|
$
|
|
|
Deferred revenue
|
|
6,400
|
|
|
|
Accrued property
taxes
|
|
441
|
|
578
|
|
Current portion
of unearned commissions
|
|
424
|
|
424
|
|
Accrued sales
tax
|
|
52
|
|
184
|
|
Current portion
of deferred income taxes
|
|
556
|
|
379
|
|
Other accrued
operating expenses
|
|
122
|
|
57
|
|
Totals
|
|
$
|
10,449
|
|
$
|
1,622
|
|
(8)
Other Long-Term Liabilities
Other
long-term liabilities are as follows:
(In thousands)
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Accrued
postretirement obligations
|
|
$
|
2,341
|
|
2,310
|
|
Unearned
commissions
|
|
1,236
|
|
1,554
|
|
Totals
|
|
$
|
3,577
|
|
$
|
3,864
|
|
|
|
|
|
|
|
|
|
(9)
Fair Value Measurements
SFAS
157
The Company adopted SFAS 157 effective January 1,
2008 for financial assets and liabilities measured at fair value on a recurring
basis. SFAS 157 applies to all financial
assets and financial liabilities that are being measured and reported on a fair
value basis. There was no impact of
adoption of SFAS 157 to the consolidated financial statements. SFAS 157 establishes a framework for
measuring fair value and expands disclosure about fair value measurements. The statement requires that fair value
measurements be classified and disclosed in one of the following three
categories:
·
|
Level 1: Unadjusted quoted prices in active
markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities;
|
·
|
Level 2: Quoted prices in markets that are not
active, or inputs which are observable, either directly or indirectly, for
substantially the full term of the asset or liability;
|
·
|
Level 3: Prices or valuation techniques that
require inputs that are both significant to the fair value measurement and
unobservable (i.e., supported by little or no market activity).
|
8
Table
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In October 2008, the FASB issued FSP 157-3
(FSP 157-3),
Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active
. FSP 157-3 clarifies the application of SFAS No. 157
in a market that is not active, and addresses application issues such as the
use of internal assumptions when relevant observable data does not exist, the
use of observable market information when the market is not active, and the use
of market quotes when assessing the relevance of observable and unobservable
data. FSP 157-3 is effective for all
periods presented in accordance with SFAS No. 157. There was no impact upon the adoption of FSP
157-3 to the consolidated financial statements or the fair values of our
financial assets and liabilities.
The following table summarizes the
valuation of our financial instruments which are carried at fair value by the
above SFAS 157 pricing levels as of September 30, 2008:
|
|
|
|
Fair Value Measurements at the Reporting Date Using
|
|
|
|
Fair Value
at
September 30,
2008
|
|
Quoted Prices in
Active Markets
Using Identical
Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
36,255
|
|
$
|
36,255
|
|
|
|
|
|
Commodity
futures contracts
|
|
$
|
2,865
|
|
$
|
2,865
|
|
|
|
|
|
The
following table represents a reconciliation of the change in assets measured at
fair value on a recurring basis using significant unobservable inputs (Level 3)
during the nine months ended September 30, 2008.
|
|
Fair Value Measurements
Using
Significant Unobservable
Inputs
(Level 3)
|
|
Balance at
December 31, 2007
|
|
$
|
|
|
Net transfers to
Level 3 category from Level 1 category
|
|
127,200
|
|
Sales of Level 3
category assets
|
|
97,099
|
|
Total realized
losses recognized in net income
|
|
(30,101
|
)
|
Balance at
September 30, 2008
|
|
$
|
|
|
In 2008, the Company recorded losses from
Level 3 assets (auction rate securities) of $30.1 million. In addition, the Company also sold auction
rate securities prior to these assets being classified as Level 3 assets
incurring a loss of $1.5 million. The
total losses incurred by the Company in 2008 related to auction rate securities
were $31.6 million. This loss is
included in loss related to auction rate securities in the unaudited
Condensed Consolidated Statement of Operations.
The Company holds no auction rate securities as of September 30,
2008.
The fair value of our derivative
contracts are primarily measured based on closing market prices for commodities
as quoted on the Chicago Board of Option Trading (CBOT) or the New York
Mercantile Exchange (NYMEX).
The Company recorded net gains of $18.4
million and $6.1 million, respectively, for the three and nine month periods
ended September 30, 2008 and net losses of $1.0 million for the three
month period ended September 30, 2007 and net gains of $5.1 million for
the nine month period ended
9
Table
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September 30,
2007 under other non-operating income in the unaudited Condensed Consolidated
Statements of Operations for the changes in the fair value of its derivative
financial instrument positions.
SFAS 159
The Company adopted SFAS 159 effective January 1,
2008. We have not elected the fair value
option for any of our financial assets or liabilities.
The carrying value of other financial
instruments, including cash, accounts receivable and accounts payable and
accrued liabilities approximate fair value due to their short maturities or
variable-rate nature of the respective balances. The following table presents the other
financial instruments that are not carried at fair value but which require fair
value disclosure as of September 30, 2008 and December 31, 2007.
|
|
As of September 30, 2008
|
|
As of December 31, 2007
|
|
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Investments at
cost
|
|
6,000
|
|
n/a
|
|
6,000
|
|
n/a
|
|
Long-term debt
|
|
300,000
|
|
159,000
|
|
300,000
|
|
274,500
|
|
The Companys investments accounted for
under the cost method consist of minority positions in equity securities of
other ethanol operating companies. These
equity investments are recorded at cost, and it is not practical to estimate a
fair value for these non-publicly traded companies. The Company monitors its investments for
impairment by considering current factors, including the economic environment,
market conditions, operational performance and other specific factors relating
to the business underlying the investment, and records reductions in carrying
values when necessary. Any impairment
loss is reported under Other income (expense) in the consolidated statement
of operations.
The fair value of our senior secured
floating rate notes are based upon quoted closing market prices at the end of
the period.
(10)
Stock-Based Compensation Plans
The
Company values its share-based payment awards using a form of the Black-Scholes
option-pricing model (the option pricing model). The determination of fair value of
share-based payment awards on the date of grant using the option pricing model
is affected by our stock price as well as the input of other subjective
assumptions. The option-pricing model
requires a number of assumptions, of which the most significant are expected
stock price volatility, the expected pre-vesting forfeiture rate and the
expected option term (the amount of time from the grant date until the options are
exercised or expire). Expected
volatility is normally calculated based upon actual historical stock price
movements over the expected option term.
Since we have a short-term history of stock price volatility as a public
company, we calculate volatility by considering, among other things, the
expected volatilities of public companies engaged in similar industries. Pre-vesting forfeitures had previously been
estimated using a 3% forfeiture rate.
However, beginning in the quarter ended September 30, 2008, we
revised our estimated forfeiture rate to 6.4%, reflecting a higher actual
experience rate since becoming a public company in 2006. The expected option term is calculated using
the simplified method permitted by SAB 107.
Our options have characteristics significantly different from those of
traded options, and changes in the assumptions can materially affect the fair
value estimates.
Pre-tax
stock-based compensation expense for the three month periods ended September 30,
2008 and 2007 was approximately $0.6 million and $1.9 million,
respectively. For the three month period
ended September 30, 2008, the $0.6 million expense was charged to SG&A
expense. For the
10
Table
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three month period ended September 30,
2007, $1.8 million was charged to selling, general and administrative expense
and $0.1 million was charged to cost of goods sold. Stock-based compensation expense was reduced
in the three month period ended September 30, 2008 by approximately $1.2
million as a result of updating our expected forfeiture rate and the number of
performance shares expected to vest. The
adjustment made to stock-based compensation expense increased earnings per
share by $0.02 per basic and fully diluted share for the three month period
ended September 30, 2008.
Stock-based compensation expense reduced earnings per share by $0.01 per
basic and diluted share and by $0.03 per basic and diluted share for the three
month periods ended September 30, 2008 and 2007, respectively. Pre-tax stock-based compensation expense for
the nine month periods ended September 30, 2008 and 2007 was approximately
$4.5 million and $5.3 million, respectively.
For the nine month period ended September 30, 2008, $4.3 million
was charged to SG&A expense and $0.2 million was charged to cost of goods
sold. For the nine month period ended September 30,
2007, $5.2 million was charged to selling, general and administrative expense
and $0.1 million was charged to cost of goods sold. Stock-based compensation expense reduced
earnings per share by $0.07 per basic and fully diluted share for the nine
month period ended September 30, 2008 and by $0.08 per basic and fully
diluted share for the nine month period ended September 30, 2007. The Company recognized a tax benefit on its
condensed consolidated statement of operations from stock-based compensation
expense in the amount of $0.2 million and $0.7 million for the three month
periods ended September 30, 2008 and 2007, respectively. For the nine month period ended September 30,
2008 and 2007, the Company recognized a tax benefit on its condensed
consolidated statement of operations from stock-based compensation expense in
the amount of $1.7 million and $2.1 million, respectively. The Company recorded pre-tax stock-based
compensation expense for the three and nine month periods ended September 30,
2008 and 2007 as follows:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
(in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense:
|
|
|
|
|
|
|
|
|
|
Non-qualified
stock options
|
|
$
|
0.8
|
|
$
|
1.7
|
|
$
|
4.1
|
|
$
|
4.8
|
|
Restricted stock
|
|
0.1
|
|
0.1
|
|
0.3
|
|
0.3
|
|
Restricted stock
units
|
|
0.1
|
|
|
|
0.1
|
|
0.1
|
|
Long-term
incentive stock plan
|
|
(0.4
|
)
|
0.1
|
|
|
|
0.1
|
|
Totals
|
|
$
|
0.6
|
|
$
|
1.9
|
|
$
|
4.5
|
|
$
|
5.3
|
|
As
of September 30, 2008 and 2007, the Company had not yet recognized
compensation expense on the following non-vested awards:
|
|
2008
|
|
2007
|
|
(in millions)
|
|
Non-
recognized
Compensation
|
|
Weighted Average
Remaining
Recognition
Period (years)
|
|
Non-
recognized
Compensation
|
|
Weighted Average
Remaining
Recognition
Period (years)
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified
options
|
|
$
|
13.1
|
|
2.5
|
|
$
|
19.6
|
|
2.4
|
|
Restricted stock
|
|
0.8
|
|
3.3
|
|
1.1
|
|
4.1
|
|
Restricted stock
units
|
|
0.3
|
|
1.6
|
|
0.2
|
|
1.0
|
|
Long-term
incentive stock plan
|
|
0.4
|
|
1.3
|
|
1.4
|
|
1.7
|
|
Total
|
|
$
|
14.6
|
|
2.5
|
|
$
|
22.3
|
|
2.4
|
|
The
determination of the fair value of the stock option awards, using the option
pricing model, incorporated the assumptions in the following table for stock
options granted during the quarter ended
11
Table
of Contents
September 30, 2007. The risk-free rate is based on the U.S.
Treasury yield curve in effect at the time of grant over the expected
term. Expected volatility is calculated
by considering, among other things, the expected volatilities of public
companies engaged in similar industries.
The expected option term is calculated using the simplified method
permitted by SAB 107. The Company did
not grant any stock options during the quarter ended September 30,
2008. Assumptions for options granted in
the quarter ended September 30, 2007 are as follows:
|
|
2007
|
|
Expected stock
price volatility
|
|
58.0
|
%
|
Expected life
(in years)
|
|
6.5
|
|
Risk-free
interest rate
|
|
4.92
|
%
|
Expected
dividend yield
|
|
0.0
|
%
|
Weighted average
fair value
|
|
$
|
9.97
|
|
|
|
|
|
|
The
following table summarizes stock options outstanding and changes during the
nine month period ended September 30, 2008:
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Life
|
|
Aggregate
Intrinsic Value
|
|
|
|
(in thousands)
|
|
|
|
(years)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding January 1, 2008
|
|
3,516
|
|
$
|
8.10
|
|
7.4
|
|
$
|
|
|
Granted
|
|
568
|
|
6.85
|
|
10.0
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Cancelled or
expired
|
|
190
|
|
14.31
|
|
|
|
|
|
Options
outstanding September 30, 2008
|
|
3,894
|
|
$
|
7.62
|
|
6.9
|
|
$
|
|
|
Options
exercisable September 30, 2008
|
|
1,988
|
|
$
|
4.83
|
|
5.9
|
|
$
|
|
|
The
range of exercise prices of the exercisable options and outstanding options at September 30,
2008 are as follows:
Weighted Average Exercise Price
|
|
Number of
Exercisable
Options
|
|
Number of
Outstanding
Options
|
|
Weighted
Average
Remaining
Life
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
(years)
|
|
|
|
|
|
|
|
|
|
$0.23
|
|
992
|
|
1,006
|
|
4.8
|
|
$2.36 - $4.80
|
|
670
|
|
1,410
|
|
6.9
|
|
$7.05
|
|
|
|
478
|
|
9.4
|
|
$15.26 - $17.29
|
|
66
|
|
330
|
|
8.5
|
|
$22.15 - $22.50
|
|
244
|
|
630
|
|
7.5
|
|
$43.00
|
|
16
|
|
40
|
|
7.8
|
|
Totals
|
|
1,988
|
|
3,894
|
|
6.9
|
|
Restricted
stock award activity for the nine months ended September 30, 2008 is
summarized below:
12
Table
of Contents
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
per Award
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Unvested
restricted stock awards January 1, 2008
|
|
76
|
|
$
|
16.29
|
|
Granted
|
|
|
|
|
|
Vested
|
|
17
|
|
17.41
|
|
Cancelled or
expired
|
|
|
|
|
|
Unvested
restricted stock awards September 30, 2008
|
|
59
|
|
$
|
15.97
|
|
Restricted stock unit award
activity for the nine months ended September 30, 2008 is summarized below:
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
per Award
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Unvested
Restricted stock unit awards January 1, 2008
|
|
18
|
|
$
|
15.85
|
|
Granted
|
|
46
|
|
6.88
|
|
Vested
|
|
15
|
|
15.85
|
|
Cancelled or
expired
|
|
|
|
|
|
Unvested
restricted stock unit awards September 30, 2008
|
|
49
|
|
$
|
7.79
|
|
(11)
Interest Expense
The
following table summarizes interest expense:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
(in thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
7,502
|
|
$
|
7,500
|
|
$
|
22,534
|
|
$
|
15,336
|
|
Amortization of
deferred debt issuance costs
|
|
233
|
|
229
|
|
710
|
|
458
|
|
Capitalized
interest
|
|
(7,500
|
)
|
(2,370
|
)
|
(19,493
|
)
|
(3,078
|
)
|
Interest
expense, net
|
|
$
|
235
|
|
$
|
5,359
|
|
$
|
3,751
|
|
$
|
12,716
|
|
(12)
Pension Expense
Defined
Contribution Plans
We
have 401(k) plans covering substantially all of our employees. We recognized expense with respect to these
plans of $0.3 million and $0.2 million for the three month periods ended September 30,
2008 and 2007, respectively, and expense of $0.9 million for the nine month
periods ended September 30, 2008 and 2007.
Contributions made under our defined contribution plans include a match,
at the Companys discretion, of employee salaries contributed to the plans.
13
Table
of Contents
Qualified Retirement Plan
The Company provides a
non-contributory qualified defined benefit pension plan for its unionized
employees at our Pekin, IL production facilities. The following table summarizes the components
of net periodic pension cost for the qualified pension plan:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
67
|
|
$
|
88
|
|
$
|
221
|
|
$
|
264
|
|
Interest cost
|
|
124
|
|
124
|
|
372
|
|
372
|
|
Expected return
on plan assets
|
|
(179
|
)
|
(180
|
)
|
(538
|
)
|
(540
|
)
|
Amortization of
prior service costs
|
|
10
|
|
11
|
|
32
|
|
33
|
|
Amortization of
net actuarial loss
|
|
0
|
|
6
|
|
|
|
18
|
|
Net periodic
pension cost
|
|
$
|
22
|
|
$
|
49
|
|
$
|
87
|
|
$
|
147
|
|
Postretirement Benefit Obligation
We
sponsor a healthcare plan that provides postretirement medical benefits to
certain grandfathered unionized employees.
The plan is contributory, with contributions required at the same rate
as active employees. Benefit eligibility
under the plan terminates at age 65.
The
following table summarizes the components of the net periodic costs for postretirement
benefits:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
38
|
|
$
|
38
|
|
$
|
114
|
|
$
|
114
|
|
Interest cost
|
|
34
|
|
34
|
|
102
|
|
102
|
|
Net periodic
postretirement cost
|
|
$
|
72
|
|
$
|
72
|
|
$
|
216
|
|
$
|
216
|
|
(13)
Income
Taxes
As
of September 30, 2008, the Company has no uncertain tax positions
outstanding. We include the interest
expense or income, as well as potential penalties on unrecognized tax benefits,
as components of income tax expense in the Condensed Consolidated Statement of
Operations. As of September 30,
2008, because we had no uncertain tax positions outstanding, we also had no
liability for accrued interest on unrecognized tax benefits.
Our
federal income tax returns for 2006 and 2007 are open for examination under the
federal statute of limitations. We file
in numerous state and foreign jurisdictions with varying statutes of
limitations open from 2003 to 2006.
We
have accrued a deferred income tax benefit of $12.3 million related to the
$31.6 million realized loss on the sale of auction rate securities for the nine
month period ended September 30, 2008.
Because we do not expect to have sufficient capital gains to offset the
$31.6 million capital loss, we have also recorded a valuation allowance for the
full amount of the income tax benefit accrued.
14
Table
of Contents
(14)
Earnings (Loss) Per Share
Basic earnings (loss) per share are computed by
dividing net income by the weighted average number of common shares outstanding
during each period. Diluted earnings
(loss) per share are calculated using the treasury stock method in accordance
with SFAS 128, and includes the effect of all dilutive securities, including
non-qualified stock options and restricted stock units awards (RSUs).
The
following table sets forth the computation of basic and diluted earnings (loss)
per share:
|
|
Three Months Ended
September 30,
|
|
Nine months ended
September 30,
|
|
(In thousands, except per share data)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
2,486
|
|
$
|
2,995
|
|
$
|
(10,227
|
)
|
$
|
30,542
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares and share equivalents outstanding:
|
|
|
|
|
|
|
|
|
|
Basic shares
|
|
41,971
|
|
41,949
|
|
41,927
|
|
41,891
|
|
Dilutive
non-qualified stock options and RSUs
|
|
39
|
|
436
|
|
31
|
|
606
|
|
Diluted weighted
average shares and share equivalents
|
|
42,010
|
|
42,385
|
|
41,958
|
|
42,497
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
per common share - basic:
|
|
$
|
0.06
|
|
$
|
0.07
|
|
$
|
(0.24
|
)
|
$
|
0.73
|
|
Income (loss)
per common share - diluted:
|
|
$
|
0.06
|
|
$
|
0.07
|
|
$
|
(0.24
|
)
|
$
|
0.72
|
|
We had additional potentially dilutive
securities outstanding representing options on 3.9 million common shares at September 30,
2008 that were not included in the computation of potentially dilutive
securities because the options exercise prices were greater than the average
market price of the common shares or because the options were anti-dilutive,
and were excluded from the calculation of diluted earnings per share in
accordance with SFAS 128.
(15)
Industry Segment
The Company operates in one
reportable business segment, the manufacture and marketing of fuel-grade
ethanol.
(16)
Litigation
We
are from time to time involved in various legal proceedings, including legal
proceedings relating to the extensive environmental laws and regulations that
apply to our facilities and operations.
We are not involved in any legal proceedings that we believe could have
a material adverse effect upon our business, operating results or financial
condition.
On
November 6, 2008, the Company commenced an action against JP Morgan Securities,
Inc. and JP Morgan Chase Bank, N.A. (hereinafter collectively referred to as
JP Morgan) in the Tenth Judicial Circuit in Tazewell County, Illinois. The
Companys complaint relates to losses incurred in excess of $31 million as a
result of investments in Student Loan Auction Rate Securities purchased through
JP Morgan.
(17)
Unaudited Condensed Consolidating Financial Information
The
following tables present unaudited condensed consolidating financial information
for: (a) Aventine Renewable Energy Holdings, Inc. (the Parent) on a
stand-alone basis; (b) on a combined basis, the guarantors of the 10%
senior unsecured Notes (Subsidiary Guarantors), which include Aventine
Renewable Energy, LLC; Aventine Renewable Energy, Inc.; Aventine Power,
LLC; Aventine Renewable Energy Aurora West, LLC; and Aventine Renewable
Energy Mt. Vernon, LLC; and (c) the Non-Guarantor Subsidiary, Nebraska
Energy, LLC. Each Subsidiary Guarantor
is wholly-owned by Aventine Renewable Energy Holdings, Inc. The guarantees of each of the Subsidiary
Guarantors are full, unconditional, joint and several. Accordingly, separate financial statements of
the wholly-owned
15
Table
of Contents
Subsidiary Guarantors are not presented
because the Subsidiary Guarantors are jointly, severally and unconditionally
liable under the guarantees, and the Company believes that separate financial
statements and other disclosures regarding the Subsidiary Guarantors are not
material to investors. Furthermore,
there are no significant legal restrictions on the Parents ability to obtain
funds from its subsidiaries by dividend or loan.
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Condensed Consolidating Statements of Operations
For the Three Months Ended September 30, 2008
(Unaudited)
(In thousands)
|
|
Parent
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
|
|
$
|
671,525
|
|
$
|
30,581
|
|
$
|
(102,586
|
)
|
$
|
599,520
|
|
Cost of goods
sold
|
|
|
|
675,663
|
|
32,615
|
|
(102,288
|
)
|
605,990
|
|
Gross profit
(loss)
|
|
|
|
(4,138
|
)
|
(2,034
|
)
|
(298
|
)
|
(6,470
|
)
|
Selling, general
and administrative expenses
|
|
33
|
|
8,338
|
|
690
|
|
(298
|
)
|
8,763
|
|
Other (income)
expense
|
|
|
|
(409
|
)
|
4
|
|
|
|
(405
|
)
|
Operating income
(loss)
|
|
(33
|
)
|
(12,067
|
)
|
(2,728
|
)
|
|
|
(14,828
|
)
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
251
|
|
3
|
|
|
|
254
|
|
Interest expense
|
|
(182
|
)
|
(53
|
)
|
|
|
|
|
(235
|
)
|
Equity in
undistributed (income) loss of subsidiaries
|
|
4,498
|
|
(2,000
|
)
|
|
|
(2,498
|
)
|
|
|
Other
non-operating income (expense)
|
|
|
|
18,367
|
|
|
|
|
|
18,367
|
|
Minority
interest
|
|
|
|
|
|
|
|
725
|
|
725
|
|
Income (loss)
before income taxes
|
|
4,283
|
|
4,498
|
|
(2,725
|
)
|
(1,773
|
)
|
4,283
|
|
Income tax
expense (benefit)
|
|
1,797
|
|
1,462
|
|
|
|
(1,462
|
)
|
1,797
|
|
Net income
(loss)
|
|
$
|
2,486
|
|
$
|
3,036
|
|
$
|
(2,725
|
)
|
$
|
(311
|
)
|
$
|
2,486
|
|
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Condensed Consolidating Statements of Operations
For the Three Months Ended September 30, 2007
(Unaudited)
(In thousands)
|
|
Parent
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
|
|
$
|
353,879
|
|
$
|
20,475
|
|
$
|
(13,680
|
)
|
$
|
360,674
|
|
Cost of goods
sold
|
|
|
|
357,065
|
|
18,863
|
|
(13,527
|
)
|
362,401
|
|
Gross profit
(loss)
|
|
|
|
(3,186
|
)
|
1,612
|
|
(153
|
)
|
(1,727
|
)
|
Selling, general
and administrative expenses
|
|
35
|
|
8,906
|
|
596
|
|
(153
|
)
|
9,384
|
|
Other (income)
expense
|
|
|
|
(168
|
)
|
(1
|
)
|
|
|
(169
|
)
|
Operating income
(loss)
|
|
(35
|
)
|
(11,924
|
)
|
1,017
|
|
|
|
(10,942
|
)
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
3,546
|
|
30
|
|
|
|
3,576
|
|
Interest expense
|
|
(5,310
|
)
|
(49
|
)
|
|
|
|
|
(5,359
|
)
|
Equity in
undistributed (income) loss of subsidiaries
|
|
(8,436
|
)
|
944
|
|
|
|
7,492
|
|
|
|
Other
non-operating income (expense)
|
|
|
|
(953
|
)
|
|
|
|
|
(953
|
)
|
Minority
interest
|
|
|
|
|
|
|
|
(103
|
)
|
(103
|
)
|
Income before
income taxes
|
|
(13,781
|
)
|
(8,436
|
)
|
1,047
|
|
7,389
|
|
(13,781
|
)
|
Income tax
expense (benefit)
|
|
(16,776
|
)
|
(14,591
|
)
|
|
|
14,591
|
|
(16,776
|
)
|
Net income
|
|
$
|
2,995
|
|
$
|
6,155
|
|
$
|
1,047
|
|
$
|
(7,202
|
)
|
$
|
2,995
|
|
16
Table
of Contents
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Condensed Consolidating Statements of Operations
For the Nine Months Ended September 30, 2008
(Unaudited)
(In thousands)
|
|
Parent
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
|
|
$
|
1,821,514
|
|
$
|
79,895
|
|
$
|
(190,350
|
)
|
$
|
1,711,059
|
|
Cost of goods
sold
|
|
|
|
1,768,508
|
|
81,671
|
|
(189,593
|
)
|
1,660,586
|
|
Gross profit
|
|
|
|
53,006
|
|
(1,776
|
)
|
(757
|
)
|
50,473
|
|
Selling, general
and administrative expenses
|
|
132
|
|
26,363
|
|
2,033
|
|
(757
|
)
|
27,771
|
|
Loss on the sale
of securities
|
|
|
|
31,601
|
|
|
|
|
|
31,601
|
|
Other income
|
|
|
|
(2,835
|
)
|
36
|
|
|
|
(2,799
|
)
|
Operating income
(loss)
|
|
(132
|
)
|
(2,123
|
)
|
(3,845
|
)
|
|
|
(6,100
|
)
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
2,981
|
|
18
|
|
|
|
2,999
|
|
Interest expense
|
|
(3,553
|
)
|
(198
|
)
|
|
|
|
|
(3,751
|
)
|
Equity in
undistributed loss (earnings) of subsidiaries
|
|
4,177
|
|
(2,597
|
)
|
|
|
(1,580
|
)
|
|
|
Other
non-operating income (expense)
|
|
|
|
6,114
|
|
|
|
|
|
6,114
|
|
Minority
interest
|
|
|
|
|
|
|
|
1,230
|
|
1,230
|
|
Income (loss)
before income taxes
|
|
492
|
|
4,177
|
|
(3,827
|
)
|
(350
|
)
|
492
|
|
Income tax
expense (benefit)
|
|
10,719
|
|
1,358
|
|
|
|
(1,358
|
)
|
10,719
|
|
Net income
(loss)
|
|
$
|
(10,227
|
)
|
$
|
2,819
|
|
$
|
(3,827
|
)
|
$
|
1,008
|
|
$
|
(10,227
|
)
|
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Condensed Consolidating Statements of Operations
For the Nine Months Ended September 30, 2007
(Unaudited)
(In thousands)
|
|
Parent
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
|
|
$
|
1,185,834
|
|
$
|
69,044
|
|
$
|
(62,628
|
)
|
$
|
1,192,250
|
|
Cost of goods
sold
|
|
|
|
1,140,836
|
|
59,272
|
|
(61,975
|
)
|
1,138,133
|
|
Gross profit
|
|
|
|
44,998
|
|
9,772
|
|
(653
|
)
|
54,117
|
|
Selling, general
and administrative expenses
|
|
271
|
|
26,073
|
|
2,070
|
|
(653
|
)
|
27,761
|
|
Other income
|
|
|
|
(842
|
)
|
(5
|
)
|
|
|
(847
|
)
|
Operating loss
|
|
(271
|
)
|
19,767
|
|
7,707
|
|
|
|
27,203
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
9,024
|
|
87
|
|
|
|
9,111
|
|
Interest expense
|
|
(12,618
|
)
|
(98
|
)
|
|
|
|
|
(12,716
|
)
|
Equity in
undistributed loss (earnings) of subsidiaries
|
|
40,196
|
|
6,589
|
|
|
|
(46,785
|
)
|
|
|
Other
non-operating income (expense)
|
|
|
|
4,914
|
|
141
|
|
|
|
5,055
|
|
Minority
interest
|
|
|
|
|
|
|
|
(1,346
|
)
|
(1,346
|
)
|
Income (loss) before
income taxes
|
|
27,307
|
|
40,196
|
|
7,935
|
|
(48,131
|
)
|
27,307
|
|
Income tax
expense (benefit)
|
|
(3,235
|
)
|
1,214
|
|
|
|
(1,214
|
)
|
(3,235
|
)
|
Net income
(loss)
|
|
$
|
30,542
|
|
$
|
38,982
|
|
$
|
7,935
|
|
$
|
(46,917
|
)
|
$
|
30,542
|
|
17
Table
of Contents
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Condensed Consolidating Balance Sheets
September 30, 2008
(Unaudited)
(In thousands)
|
|
Parent
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
|
|
$
|
34,640
|
|
$
|
1,615
|
|
$
|
|
|
$
|
36,255
|
|
Accounts
receivable, net
|
|
|
|
76,954
|
|
537
|
|
|
|
77,491
|
|
Inventories
|
|
|
|
116,948
|
|
2,696
|
|
|
|
119,644
|
|
Intercompany
receivable
|
|
317,832
|
|
|
|
|
|
(317,832
|
)
|
|
|
Income tax
receivable
|
|
|
|
1,850
|
|
|
|
|
|
1,850
|
|
Prepaid expenses
and other assets
|
|
6
|
|
9,213
|
|
537
|
|
|
|
9,756
|
|
Total current
assets
|
|
317,838
|
|
239,605
|
|
5,385
|
|
(317,832
|
)
|
244,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant
and equipment, net
|
|
|
|
85,723
|
|
17,098
|
|
|
|
102,821
|
|
Construction in
process
|
|
|
|
442,896
|
|
1,787
|
|
|
|
444,683
|
|
Investments in
subsidiaries
|
|
330,542
|
|
41,750
|
|
|
|
(372,292
|
)
|
|
|
Other assets
|
|
6,183
|
|
8,668
|
|
|
|
|
|
14,851
|
|
Total assets
|
|
$
|
654,563
|
|
$
|
818,642
|
|
$
|
24,270
|
|
$
|
(690,124
|
)
|
$
|
807,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
$
|
117,605
|
|
$
|
7,324
|
|
$
|
|
|
$
|
124,929
|
|
Accrued interest
|
|
15,000
|
|
|
|
|
|
|
|
15,000
|
|
Accrued
liabilities
|
|
|
|
3,781
|
|
403
|
|
|
|
4,184
|
|
Other current
liabilities
|
|
|
|
10,219
|
|
230
|
|
|
|
10,449
|
|
Intercompany
payable
|
|
|
|
317,717
|
|
115
|
|
(317,832
|
)
|
|
|
Total current
liabilities
|
|
15,000
|
|
449,322
|
|
8,072
|
|
(317,832
|
)
|
154,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
300,000
|
|
|
|
|
|
|
|
300,000
|
|
Minority
interest
|
|
|
|
|
|
|
|
8,601
|
|
8,601
|
|
Net deferred tax
liabilities
|
|
|
|
1,048
|
|
|
|
|
|
1,048
|
|
Other long-term
liabilities
|
|
|
|
3,577
|
|
|
|
|
|
3,577
|
|
Total
liabilities
|
|
315,000
|
|
453,947
|
|
8,072
|
|
(309,231
|
)
|
467,788
|
|
Stockholders
equity
|
|
339,563
|
|
364,695
|
|
16,198
|
|
(380,893
|
)
|
339,563
|
|
Total
liabilities and stockholders equity
|
|
$
|
654,563
|
|
$
|
818,642
|
|
$
|
24,270
|
|
$
|
(690,124
|
)
|
$
|
807,351
|
|
18
Table
of Contents
Aventine Renewable Energy
Holdings, Inc. and Subsidiaries
Condensed Consolidating
Balance Sheet
December 31, 2007
(In thousands)
|
|
Parent
|
|
Subsidiary
Guarantors
|
|
Non-Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
|
|
$
|
13,640
|
|
$
|
3,531
|
|
$
|
|
|
$
|
17,171
|
|
Short-term
investments
|
|
|
|
211,500
|
|
|
|
|
|
211,500
|
|
Accounts
receivable, net
|
|
|
|
72,695
|
|
363
|
|
|
|
73,058
|
|
Inventories
|
|
|
|
80,909
|
|
1,705
|
|
(1,126
|
)
|
81,488
|
|
Income tax
receivable
|
|
|
|
11,962
|
|
|
|
|
|
11,962
|
|
Intercompany
receivable
|
|
318,272
|
|
|
|
1,361
|
|
(319,633
|
)
|
|
|
Prepaid expenses
and other assets
|
|
6
|
|
12,642
|
|
168
|
|
|
|
12,816
|
|
Total current
assets
|
|
318,278
|
|
403,348
|
|
7,128
|
|
(320,759
|
)
|
407,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant
and equipment, net
|
|
|
|
93,001
|
|
18,866
|
|
|
|
111,867
|
|
Construction in
process
|
|
|
|
225,122
|
|
1,288
|
|
|
|
226,410
|
|
Investments in
subsidiaries
|
|
326,365
|
|
44,347
|
|
|
|
(370,712
|
)
|
|
|
Net deferred tax
assets
|
|
|
|
1,196
|
|
|
|
|
|
1,196
|
|
Other assets
|
|
6,728
|
|
7,989
|
|
|
|
|
|
14,717
|
|
Total assets
|
|
$
|
651,371
|
|
$
|
775,003
|
|
$
|
27,282
|
|
$
|
(691,471
|
)
|
$
|
762,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
$
|
88,675
|
|
$
|
4,322
|
|
$
|
(1,126
|
)
|
$
|
91,871
|
|
Accrued interest
|
|
7,500
|
|
|
|
|
|
|
|
7,500
|
|
Accrued
liabilities
|
|
|
|
3,361
|
|
264
|
|
|
|
3,625
|
|
Other current
liabilities
|
|
|
|
1,317
|
|
305
|
|
|
|
1,622
|
|
Intercompany
payable
|
|
|
|
319,633
|
|
|
|
(319,633
|
)
|
|
|
Total current
liabilities
|
|
7,500
|
|
412,986
|
|
4,891
|
|
(320,759
|
)
|
104,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
300,000
|
|
|
|
|
|
|
|
300,000
|
|
Minority
interest
|
|
|
|
|
|
|
|
9,832
|
|
9,832
|
|
Other long-term
liabilities
|
|
|
|
3,864
|
|
|
|
|
|
3,864
|
|
Total
liabilities
|
|
307,500
|
|
416,850
|
|
4,891
|
|
(310,927
|
)
|
418,314
|
|
Stockholders
equity
|
|
343,871
|
|
358,153
|
|
22,391
|
|
(380,544
|
)
|
343,871
|
|
Total
liabilities and stockholders equity
|
|
$
|
651,371
|
|
$
|
775,003
|
|
$
|
27,282
|
|
$
|
(691,471
|
)
|
$
|
762,185
|
|
19
Table
of Contents
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2008
(Unaudited)
(In thousands)
|
|
Parent
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used for) operating activities
|
|
$
|
(1,500
|
)
|
$
|
57,480
|
|
$
|
632
|
|
$
|
|
|
$
|
56,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
Additions to
property, plant and equipment
|
|
|
|
(219,419
|
)
|
(2,562
|
)
|
|
|
(221,981
|
)
|
Sale of
investment securities
|
|
|
|
179,900
|
|
|
|
|
|
179,900
|
|
Indemnification
proceeds
|
|
|
|
3,039
|
|
|
|
|
|
3,039
|
|
Proceeds from
the sale of fixed asset
|
|
|
|
|
|
14
|
|
|
|
14
|
|
Net cash
provided by (used for) investing activities
|
|
|
|
(36,480
|
)
|
(2,548
|
)
|
|
|
(39,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
issuance of common stock
|
|
1,500
|
|
|
|
|
|
|
|
1,500
|
|
Net cash
provided by financing activities
|
|
1,500
|
|
|
|
|
|
|
|
1,500
|
|
Net increase
(decrease) in cash and cash equivalents
|
|
|
|
21,000
|
|
(1,916
|
)
|
|
|
19,084
|
|
Cash and cash
equivalents at beginning of period
|
|
|
|
13,640
|
|
3,531
|
|
|
|
17,171
|
|
Cash and cash
equivalents at end of period
|
|
$
|
|
|
$
|
34,640
|
|
$
|
1,615
|
|
$
|
|
|
$
|
36,255
|
|
Aventine Renewable Energy Holdings, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2007
(Unaudited)
(In thousands)
|
|
Parent
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used for) operating activities
|
|
$
|
(291,297
|
)
|
$
|
334,823
|
|
$
|
10,378
|
|
$
|
|
|
$
|
53,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
Additions to
property, plant and equipment
|
|
|
|
(148,023
|
)
|
(1,875
|
)
|
|
|
(149,898
|
)
|
Investment in
short-term securities
|
|
|
|
(183,943
|
)
|
|
|
|
|
(183,943
|
)
|
Net cash used
for investing activities
|
|
|
|
(331,966
|
)
|
(1,875
|
)
|
|
|
(333,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
issuance of senior unsecured notes
|
|
300,000
|
|
|
|
|
|
|
|
300,000
|
|
Payment of debt
issuance costs
|
|
(8,220
|
)
|
|
|
|
|
|
|
(8,220
|
)
|
Proceeds from
stock option exercises
|
|
508
|
|
|
|
|
|
|
|
508
|
|
Purchase of
Treasury stock
|
|
(991
|
)
|
|
|
|
|
|
|
(991
|
)
|
Distribution to
minority stockholders
|
|
|
|
6,273
|
|
(8,000
|
)
|
|
|
(1,727
|
)
|
Net cash
provided by (used for) financing activities
|
|
291,297
|
|
6,273
|
|
(8,000
|
)
|
|
|
289,570
|
|
Net increase in
cash and cash equivalents
|
|
|
|
9,130
|
|
503
|
|
|
|
9,633
|
|
Cash and cash
equivalents at beginning of period
|
|
|
|
26,413
|
|
3,378
|
|
|
|
29,791
|
|
Cash and cash
equivalents at end of period
|
|
$
|
|
|
$
|
35,543
|
|
$
|
3,881
|
|
$
|
|
|
$
|
39,424
|
|
20
Table
of Contents
(18)
Subsequent Event
On October 13, 2008, the Company completed its
purchase of the 21.58% of Nebraska Energy, LLC (NELLC) that it did not
already own from Nebraska Energy Cooperative, Inc. The Company issued 1 million shares of its
common stock, with an estimated value of approximately $6.6 million, in
exchange for the 21.58% interest. The
aggregate value of $6.6 million, or $6.62 per share, was based on the average
of Aventines closing stock price for the four trading days immediately before
the acquisition announcement date, the acquisition announcement date and the four
trading days immediately after the acquisition announcement date on July 31,
2008.
The purchase
will be accounted for under the purchase method of accounting in accordance
with the provisions of Statement of Financial Accounting Standards No. 141,
Business Combinations.
As a result of our acquisition of the remaining
interest in NELLC, NELLC became a guarantor under our secured revolving credit
facility and senior unsecured bond indenture on October 22, 2008. As of this same date, all of the assets of
NELLC are now collateral under our secured revolving credit facility.
21
Table
of Contents
Item 2.
Managements
Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking
statements include all statements that do not relate solely to current or
historical fact, but address events or developments that we anticipate will
occur in the future. Forward-looking
statements include statements regarding our goals, beliefs, plans or current
expectations, taking into account the information currently available to our
management. When we use words such as anticipate,
intend, expect, believe, plan, may, should or would or other
words that convey uncertainty of future events or outcome, we are making
forward-looking statements. Statements
relating to future sales, earnings, operating performance, restructuring
strategies, plant expansions, capital expenditures and sources and uses of
cash, for example, are forward-looking statements.
These forward-looking statements are subject to various
risks and uncertainties which could cause actual results to differ materially
from those stated or implied by such forward-looking statements. We undertake no obligation to publicly
release any revision of any forward-looking statements contained herein to
reflect events and circumstances occurring after the date hereof, or to reflect
the occurrence of unanticipated events.
Information concerning risk factors is contained under Item 1A - Risk
Factors in our Annual Report on Form 10-K for the fiscal year ended December 31,
2007 and under Part II, Item 1A of this Quarterly Report on Form 10-Q. You should carefully consider all of the
risks and all other information contained in or incorporated by reference in
this report and in our filings with the SEC.
These risks are not the only ones we face. Additional risks and uncertainties not presently
known to us, or which we currently consider immaterial, also may adversely
affect us. If any of these risks
actually occur, our business, financial condition and results of operations
could be materially and adversely affected.
Company
Overview
Aventine
is a leading producer and marketer of ethanol.
Through our own production facilities, marketing alliances with other
ethanol producers and our purchase/resale operations, we market and distribute
ethanol to many of the leading energy companies in the U.S. We have a comprehensive national distribution
network utilizing trucks, a leased railcar and barge fleet and a terminal
network at critical points on the nations transportation grid where our
ethanol is blended with our customers gasoline. In addition to producing ethanol, our
facilities also produce several co-products including: corn gluten feed and
meal, corn germ, condensed corn distillers solubles, dried distillers grain
with solubles (DDGS), wet distillers grain with solubles (WDGS), carbon
dioxide and brewers yeast.
Results
of Operations
The following discussion
summarizes the significant factors affecting the consolidated operating results
of the Company for the three and nine month periods ended September 30,
2008 and 2007. This discussion should be
read in conjunction with the unaudited condensed consolidated financial
statements and notes to the unaudited condensed consolidated financial
statements contained in Item 1 above, and the consolidated financial statements
and related notes for the year ended December 31, 2007 included in the
Companys Annual Report on Form 10-K.
Our revenues are principally
derived from the sale of ethanol and from the sale of co-products (corn gluten
feed and meal, corn germ, condensed corn distillers solubles, DDGS, WDGS,
carbon dioxide, and brewers yeast) that we produce as by-products during the
production of ethanol at our plants, which we refer to as co-product
revenues. We sell ethanol obtained from
the following sources:
22
Table
of Contents
·
Ethanol which we manufacture at our plants;
·
Ethanol which we purchase from our marketing
alliance partners; and
·
Ethanol which we purchase from other
producers and marketers.
We market and sell ethanol
without regard to whether we produced it, are marketing it for our marketing
alliance partners or purchased it for resale from other producers or marketers.
Executive Summary
Net
income was $2.5 million, or $0.06 per diluted share in the third quarter of
2008, as compared to net income of $3.0 million, or $0.07 per diluted share, in
the third quarter of 2007. Net income in
the current quarter decreased primarily as a result of lower commodity spreads
and higher conversion costs, offset significantly by realized and unrealized
net gains on derivative positions, lower selling, general and administrative
costs and larger capitalized interest amounts.
Commodity spread, defined as gross ethanol selling price per gallon less
net corn cost per gallon, declined from $1.09 per gallon in the third quarter
of 2007 to $0.98 per gallon in the third quarter of 2008. The average sales price per gallon of ethanol
increased in the third quarter of 2008 to $2.47 per gallon from the $2.01
average received in the third quarter of 2007.
However, corn costs during the third quarter of 2008 averaged $5.78 per
bushel, significantly higher than our third quarter 2007 cost of $3.81 per
bushel. Conversion cost in the third
quarter of 2008 was $0.77 per gallon as compared to $0.63 per gallon in the
third quarter of 2007.
Gallons
of ethanol sold in the third quarter of 2008 increased to a record 226.6
million gallons, as compared to 162.0 million gallons in the third quarter of
2007. The increase resulted from the
continued growth of ethanol usage across the country. Ethanol prices significantly below the cost
of conventional gasoline provided economic incentives to blenders, in addition
to the blenders credit, to blend more ethanol. We were able to source and sell additional
gallons of ethanol primarily as a result of an increase in the number of
gallons available to sell from marketing alliance partners and purchase/resale
transactions. Gallons produced during
the quarter increased to 47.4 million gallons from 46.8 million gallons in the
third quarter of 2007.
The
economic impact of selling gallons held in inventory at the end of the second
quarter of 2008 with a $2.28 per gallon value as prices decreased during the
third quarter of 2008 was a negative impact to cost of goods sold of
approximately $7.3 million (including a $4.7 million lower of cost or market
adjustment). The average inventory cost
of $2.08 per gallon at the end of the third quarter of 2008 versus $2.28 at the
end of the second quarter of 2008 reflects the decrease in ethanol prices
during the quarter using our weighted average FIFO approach to calculating
inventory. Similarly, declining prices throughout the third quarter of 2007
had a negative economic impact on cost of goods sold of $10.6 million.
Our inventory is
valued based upon a weighted average price we pay for ethanol that we purchase
from our marketing alliance partners and our purchase/resale transactions,
along with our own cost to produce ethanol. Changes, either upward or
downward, in our purchased cost of ethanol or our own production costs, will
cause the inventory value to fluctuate from period to period, perhaps
significantly. These changes in value flow through our statement of
operations as the inventory is sold and can significantly increase or decrease
our profitability.
Other
non-operating income (loss) for the third quarter of 2008 includes $18.4
million of realized and unrealized net gains on derivative contracts, including
the effect of marking to market derivative contracts, versus net losses in the
third quarter of 2007 of $1.0 million.
Derivative gains and losses for Q308 are composed of net realized gains
on CBOT corn positions of $0.3 million, net realized losses on
23
Table
of Contents
short gasoline future
positions of $4.8 million, net unrealized gains on CBOT corn positions of $12.3
million and net unrealized gains on short gasoline positions of $10.6
million. All of our derivative positions
require cash settlement on a daily basis.
Without such cash settlement on the derivative contracts, cash flows
from operations would have been significantly lower. Offsetting our short gasoline positions, are
forward ethanol sales contracts that are indexed to gasoline. Such
contracts are not marked to market. Also not marked to market are forward
contracts to purchase corn that are either stand alone, or are taken against
short futures positions.
For the
Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30,
2007
Total
gallons of ethanol sold in the third quarter of 2008 increased to 226.6 million
gallons, versus 162.0 million gallons sold in the third quarter of 2007. Gallons of ethanol were sourced as follows:
|
|
For the Three Months Ended September 30,
|
|
(In thousands, except for percentages)
|
|
2008
|
|
2007
|
|
Increase/
(Decrease)
|
|
% Increase/
(Decrease)
|
|
Equity
production
|
|
47,381
|
|
46,824
|
|
557
|
|
1.2
|
%
|
Marketing
alliance purchases
|
|
130,278
|
|
84,638
|
|
45,640
|
|
53.9
|
%
|
Purchase/resale
|
|
54,495
|
|
28,821
|
|
25,674
|
|
89.1
|
%
|
Decrease
(increase) in inventory
|
|
(5,584
|
)
|
1,746
|
|
(7,330
|
)
|
N.M.
|
*
|
Total
|
|
226,570
|
|
162,029
|
|
64,541
|
|
39.8
|
%
|
* Not meaningful
Net
sales in the third quarter of 2008 increased 66.2% from the third quarter of
2007. Net sales were $599.5 million in
the third quarter of 2008 versus $360.7 million in the third quarter of 2007. Overall, the increase in net sales was the
result of the increase in the number of gallons of ethanol sold and an increase
in the average sales price of ethanol sold.
Ethanol prices averaged $2.47 per gallon in the third quarter of 2008
versus $2.01 in the third quarter of 2007.
Co-product revenues for the third quarter of 2008 totaled $33.7
million, an increase of $9.7 million or 40.4%, from the third quarter 2007
total of $24.0 million. Co-product
revenues increased during the third quarter of 2008 as a result of higher
co-product pricing, principally germ, meal, yeast and DDGS caused by the
significant increase in corn prices. In
the third quarter of 2008, we sold 284.1 thousand tons, versus 284.8 thousand
tons in the third quarter of 2007.
Co-product revenues, as a percentage of corn costs, were 32.3% during
the third quarter of 2008, versus 35.8% in the third quarter of 2007. Co-product revenues, as a percentage of corn
costs, decreased in the third quarter of 2008 as compared to 2007 as the result
of selling co-products into the spot market in a declining corn environment
where we had previously fixed the price on about 63% of our corn in the third
quarter.
Cost
of goods sold for the quarter ended September 30, 2008 was $606.0 million,
compared to $362.4 million for the quarter ended September 30, 2007, an
increase of $243.6 million or 67.2%. As
a percentage of net sales, cost of goods sold increased to 101.1% from
100.5%. Cost of goods sold consists of
the cost to produce ethanol at our own facilities, the cost of purchasing
ethanol from our marketing alliance partners and the cost of purchasing ethanol
from other producers and marketers, freight and logistics costs to ship ethanol
and co-products, and the cost of motor fuel taxes which have been billed to
customers. The increase in cost of goods
sold is principally the result of increased corn costs, increased conversion
costs, and higher prices paid for purchased ethanol.
24
Table
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Purchased
ethanol in the third quarter of 2008 totaled $419.8 million, versus $214.8
million in the third quarter of 2007.
The increase in purchased ethanol resulted from both the increase in the
number of gallons of ethanol purchased and from an increase in the cost per
gallon of ethanol purchased. In the
third quarter of 2008, we purchased 184.8 million gallons of ethanol at an
average cost of $2.27 per gallon as compared to 113.5 million gallons of
ethanol at an average cost of $1.89 in the third quarter of 2007.
Production
costs include corn costs, conversion costs (defined as the cost of converting
the corn into ethanol, and includes production salaries, wages and stock-based
compensation costs, fringe benefits, utilities (including coal and natural
gas), maintenance, denaturant, insurance, materials and supplies and other
miscellaneous production costs) and depreciation. Corn costs in the third quarter of 2008
totaled $104.2 million or $5.78 per bushel, versus $67.1 million, or $3.81 per
bushel in the third quarter of 2007. Our
average corn costs in the third quarter of 2008 were lower than the CBOT
average price during the same period.
The increase in corn costs is due to higher corn prices as a result of
higher input costs, including oil, seed and fertilizer prices, commodity
speculation and from increased demand for grains on a global basis, including
higher expected demand created by new ethanol production facilities being
built.
Conversion
costs for the third quarter of 2008 increased to $36.7 million from $29.4
million for the third quarter of 2007.
The total dollars spent on conversion costs increased year over year
principally as a result of higher utility costs, higher denaturant costs, and
higher maintenance costs. The conversion
cost per gallon increased year over year to $0.77 per gallon in the third
quarter of 2008 versus $0.63 per gallon in the third quarter of 2007.
Depreciation
in the third quarter of 2008 totaled $3.4 million, versus $3.3 million in the
third quarter of 2007. Motor fuel taxes
were $3.8 million in the third quarter of 2008 versus $2.3 million in the third
quarter of 2007. The cost of motor fuel
taxes are recovered through billings to customers.
Freight/logistics
costs were flat year over year on a per gallon basis. Freight/logistics costs in both the third
quarter of 2008 and the third quarter of 2007 averaged $0.19 per gallon. Freight/logistics dollars spent increased in
the third quarter of 2008 to $44.0 million from $31.0 million in the third
quarter of 2007 as a result of more gallons shipped. Freight/logistics cost per gallon is
calculated by taking total freight/logistics costs incurred (including costs to
ship co-products) and dividing by the total ethanol gallons sold. Although fuel surcharges have begun to ease,
freight costs continued to be negatively impacted by such
surcharges, and from general freight increases associated with
moving product along longer supply lines to emerging new markets in the
Southeast.
The average inventory cost
of $2.08 per gallon at the end of the third quarter of 2008 versus $2.28 at the
end of the second quarter of 2008, using our weighted-average FIFO approach to
calculating inventory, reflects declining ethanol prices during the
quarter. The economic impact of selling gallons held in inventory at the
end of the second quarter of 2008 with a $2.28 per gallon value as prices
decreased during the third quarter of 2008 was a negative impact to cost of goods
sold of approximately $7.3 million (including a $4.7 million non-cash lower of
cost or market adjustment). Similarly,
declining prices throughout the third quarter of 2007 negatively impacted cost
of goods sold by $10.6 million.
Selling,
general & administrative expenses (SG&A) were $8.8 million in
the third quarter of 2008 as compared to $9.4 million in the third quarter of
2007. The lower expense in the third
quarter of 2008 primarily relates to reductions in stock-based compensation expense
as a result of changes in forfeiture estimates and the number of performance
shares expected to vest totaling $1.2 million.
In addition, legal and other outside service fees decreased by $0.6
million.
25
Table
of Contents
Interest income in the third
quarter of 2008 was $0.3 million, versus $3.6 million in the third quarter of
2007. The decrease in interest income is
due to a lower level of funds available to invest.
Interest
expense in the third quarter of 2008 was $0.2 million, as compared to $5.4
million in the third quarter of 2007.
Interest expense in the third quarter of 2008 was lower than in the same
period in 2007 due to a greater amount of interest being capitalized on our
expansion projects during the third quarter of 2008. Interest expense in the third quarter of 2008
included $7.5 million in interest on our $300 million aggregate principal 10.0%
senior unsecured notes issued March 27, 2007 and $0.2 million of
amortization of deferred financing fees, reduced by capitalized interest of
$7.5 million. Interest expense in the
third quarter of 2007 included $7.5 million in interest on our $300 million
aggregate principal 10.0% senior unsecured notes issued March 27, 2007 and
$0.2 million of amortization of deferred financing fees, reduced by capitalized
interest of $2.3 million.
Other
non-operating income (loss) for the third quarter of 2008 includes $18.4
million of realized and unrealized net gains on derivative contracts, including
the effect of marking to market derivative contracts, versus net losses in the
third quarter of 2007 of $1.0 million.
Derivative gains and losses for the third quarter of 2008 are composed
of net realized gains on CBOT corn positions of $0.3 million, net realized
losses on short gasoline future positions of $4.8 million, net unrealized gains
on CBOT corn positions of $12.3 million and net unrealized gains on short
gasoline positions of $10.6 million. All
of our derivative positions require cash settlement on a daily basis. Without such cash settlement on the
derivative contracts, cash flows from operations would have been significantly
lower. Economically offsetting some of
our short gasoline positions are forward ethanol sales contracts that are
indexed to gasoline. Such contracts are not marked to market. Also
not marked to market are below market forward contracts to purchase corn that
are either stand-alone, or are economically taken against short futures
positions.
The
minority interest for the quarter ended September 30, 2008 was a reduction
of expense of $0.7 million, compared to a charge to income of $0.1 million for
the quarter ended September 30, 2007.
This change reflects the reduced operating performance of our Nebraska
subsidiary caused primarily by the year over year significant increase in corn
costs, and the lower average price received from selling wet distillers grains.
Income
tax expense in the third quarter of 2008 totaled $1.8 million. The effective income tax rate in the third
quarter of 2008 was 42% of pre-tax income, versus an adjusted income tax rate
of approximately 23% in the third quarter of 2007 due to certain FIN 48
adjustments. In 2007, our effective
income tax rate was also lower due to the amount of tax free interest received
on our investment portfolio.
For the
Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30,
2007
Total
gallons of ethanol sold in the first nine months of 2008 increased to 658.1
million gallons, versus 513.9 million gallons sold in the first nine months of
2007. Gallons of ethanol were sourced as
follows:
26
Table
of Contents
|
|
For the Nine Months Ended September 30,
|
|
(In thousands, except for percentages)
|
|
2008
|
|
2007
|
|
Increase/
(Decrease)
|
|
% Increase/
(Decrease)
|
|
Equity
production
|
|
140,706
|
|
146,410
|
|
(5,704
|
)
|
(3.9
|
)%
|
Marketing alliance
purchases
|
|
380,392
|
|
294,452
|
|
85,940
|
|
29.2
|
%
|
Purchase/resale
|
|
142,603
|
|
72,434
|
|
70,169
|
|
96.9
|
%
|
Decrease
(increase) in inventory
|
|
(5,625
|
)
|
652
|
|
(6,277
|
)
|
N.M.
|
*
|
Total
|
|
658,076
|
|
513,948
|
|
144,128
|
|
28.0
|
%
|
* Not meaningful
Net
sales in the first nine months of 2008 increased 43.5% from the same period in
2007. Net sales were $1,711.1 million in
the first nine months of 2008 versus $1,192.3 million in the first nine months
of 2007. Overall, the increase in net
sales was the result of the increase in the number of gallons of ethanol sold
and an increase in the average sales price of ethanol sold. Ethanol prices averaged $2.40 per gallon in
the first nine months of 2008 versus $2.13 in the first nine months of 2007.
Co-product
revenues for the first nine months of 2008 totaled $104.0 million, an increase
of $33.7 million or 47.9%, from the first nine months of 2007 total of $70.3
million. Co-product revenues increased
during the first nine months of 2008 as a result of higher co-product pricing,
principally germ, meal, yeast and DDGS caused by the significant rise in corn
prices. In the first nine months of
2008, we sold 829.3 thousand tons, versus 848.9 thousand tons in the first nine
months of 2007. Co-product revenues, as
a percentage of corn costs, were 37.6% during the first nine months of 2008,
versus 34.0% in the first nine months of 2007.
Co-product revenues, as a percentage of corn costs, increased in the
first nine months of 2008 as compared to 2007 as the result of increases in co-product
pricing outpacing our corn costs in 2008 versus 2007. For the first nine months of 2008, our
average purchase price per bushel of corn was lower than the CBOT price in
effect during the same period.
Cost
of goods sold for the first nine months of 2008 was $1,660.6 million, compared
to $1,138.1 million for the first nine months of 2007, an increase of $522.5
million or 45.9%. As a percentage of net
sales, cost of goods sold increased from 95.5% to 97.1%. Cost of goods sold consists of the cost to
produce ethanol at our own facilities, the cost of purchasing ethanol from our
marketing alliance partners and the cost of purchasing ethanol from other
producers and marketers, freight and logistics costs to ship ethanol and
co-products, and the cost of motor fuel taxes which have been billed to
customers. The increase in cost of goods
sold is principally the result of increased corn costs, increased conversion
costs, and higher prices paid for purchased ethanol.
Purchased
ethanol in the first nine months of 2008 totaled $1,155.4 million, versus
$722.3 million in the first nine months of 2007. The increase in purchased ethanol results
from both the increase in the number of gallons of ethanol purchased and from
an increase in the cost per gallon of ethanol purchased. In the first nine months of 2008, we
purchased 523.0 million gallons of ethanol at an average cost of $2.21 per
gallon as compared to 366.9 million gallons of ethanol at an average cost of
$1.97 in the first nine months of 2007.
Production
costs include corn costs, conversion costs (defined as the cost of converting
the corn into ethanol, and includes production salaries, wages and stock
compensation costs, fringe benefits, utilities (including coal and natural
gas), maintenance, denaturant, insurance, materials and supplies and other
miscellaneous production costs) and depreciation. Corn costs in the first nine months of 2008
totaled $277.1 million or $5.22 per bushel, versus $206.5 million, or $3.79 per
bushel in the first nine months of 2007.
The increase in corn costs is due to higher corn prices as a result of
higher input costs, including oil, seed and fertilizer prices, commodity
speculation and from increased demand for grains on
27
Table
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a global basis, including higher expected
demand created by new ethanol production facilities being built.
Conversion
costs for the first nine months of 2008 increased to $99.5 million from $87.4
million for the first nine months of 2007.
The total dollars spent on conversion costs increased year over year
principally as a result of higher utility costs, higher denaturant costs, and
higher maintenance costs. The conversion
cost per gallon increased year over year to $0.71 per gallon in the first nine
months of 2008 versus $0.60 per gallon in the first nine months of 2007. Conversion costs per gallon in the first nine
months of 2008 were also negatively affected by the lower number of gallons
produced as a result of lowering the denaturant blending levels to 1.96% from
4.76%.
Depreciation
in the first nine months of 2008 totaled $10.0 million, versus $9.3 million in
the first nine months of 2007. Motor
fuel taxes were $11.7 million in the first nine months of 2008 versus $12.8
million in the first nine months of 2007.
The cost of motor fuel taxes are recovered through billings to
customers.
Freight/logistics
costs in the first nine months of 2008 increased to $130.5 million, or
approximately $0.20 per gallon, from $89.2 million, or $0.17 per gallon in the
first nine months of 2007.
Freight/logistics cost per gallon is calculated by taking total
freight/logistics costs incurred (including costs to ship co-products) and
dividing by the total ethanol gallons sold.
The increase in freight costs was
primarily
due to fuel surcharges resulting from record high oil prices during most of
2008, which negatively impacted general freight rates, and from general freight increases
associated with moving product along longer supply lines to emerging new
markets in the Southeast. Freight
surcharges have now begun to moderate beginning in the third quarter of 2008.
The average inventory cost
of $2.08 per gallon at the end of the first nine months of 2008 versus $1.80 at
the end of 2007 reflects the increase in ethanol prices using our weighted
average FIFO approach to calculating inventory. The economic impact of
selling gallons that were previously held in inventory at the end of 2007
during a period of generally rising prices was $10.2 million (this is net of a
$4.7 million non-cash lower of cost or market adjustment taken during the third
quarter of 2008). Similarly, declining
prices throughout the first nine months of 2007 had a negative economic impact
on cost of goods sold of $8.6 million.
Selling,
general and administrative (SG&A) expenses were basically flat year over
year at $27.8 million for both the first nine months of 2008 and 2007. Lower stock compensation expense was offset
by higher fees for legal and other outside services.
In the first nine months of
2008, the Company incurred losses totaling $31.6 million related to the sale of
its portfolio of auction rate securities.
The Company holds no auction rate securities as of September 30,
2008.
Interest
income in the first nine months of 2008 was $3.0 million, versus $9.1 million
in the first nine months of 2007. The
decrease in interest income is due to a lower level of funds available to
invest, combined with lower interest rates received on the auction rate
securities we previously held, many of which reset to zero for most of 2008
during the time period in which they were held.
Interest
expense in the first nine months of 2008 was $3.8 million, as compared to $12.7
million in the first nine months of 2007.
Interest expense in the first nine months of 2008 was lower than in the
same period in 2007 due to a greater amount of interest being capitalized on
our expansion projects during 2008.
Interest expense in the first nine months of 2008 included $22.5 million
in interest on our $300 million aggregate principal 10.0% senior unsecured
notes issued March 27, 2007 and $0.8 million
28
Table
of Contents
of
amortization of deferred financing fees, reduced by capitalized interest of
$19.5 million. Interest expense in the
first nine months of 2007 included $15.3 million in interest on our $300
million aggregate principal 10.0% senior unsecured notes issued March 27,
2007 and $0.5 million of amortization of deferred financing fees, reduced by
capitalized interest of $3.1 million.
Other
non-operating income for the first nine months of 2008 includes $6.1 million of
realized and unrealized net gains on derivative contracts, including the effect
of marking to market derivative contracts, versus net gains in the first nine
months of 2007 of $5.1 million.
Derivative gains and losses for the first nine months of 2008 are
composed of net realized gains on CBOT corn positions of $7.9 million, net
realized losses on short gasoline future positions of $9.3 million, net
unrealized gains on CBOT corn positions of $3.9 million and net unrealized
gains on short gasoline positions of $3.6 million. All of our derivative positions require cash
settlement on a daily basis.
Economically offsetting our short gasoline positions are forward ethanol
sales contracts that are indexed to gasoline. Such contracts are not
marked to market. Also not marked to market are below market forward
contracts to purchase corn that are either stand-alone, or are economically
taken against short futures positions.
The
minority interest for the first nine months of 2008 was a reduction of expense
of $1.2 million, compared to a charge to income of $1.3 million for the first
nine months of 2007. This change
reflects the reduced operating performance of our Nebraska subsidiary caused
primarily by the year over year significant increase in corn costs, and the
lower average price received from selling wet distillers grains.
Income
tax expense in the first nine months of 2008 totaled $10.7 million. The Company does not expect to receive an
income tax benefit related to the losses incurred on the sale of auction rate
securities as it does not expect to have sufficient capital gains to offset the
$31.6 million capital loss. As a result,
the Company recorded a valuation allowance equal to the amount of the income
tax benefit it recorded resulting from the loss on the sale of auction rate
securities. Excluding the effects of the
loss on the sale of auction rate securities, the effective income tax rate in
the first nine months of 2008 was 33% of pre-tax income, versus an adjusted
income tax rate of 23% in the first nine months of 2007. The Company in 2007 recognized a previously
unrecognized favorable tax benefit of $9.6 million.
Trends
and Factors that May Affect Future Operating Results
Ethanol Pricing
While ethanol pricing increased year to date in 2008
versus 2007, ethanol pricing in the third quarter of 2008 began to decline
significantly along with falling oil and other commodity prices, including
corn. This decline in ethanol prices
during the third quarter of 2008, however, outpaced the decline in corn prices
during the same period, thereby producing lower gross margins than had been
experienced earlier in 2008. As the
supply of ethanol from plants which are currently under construction begins to
make its way into the marketplace, we expect ethanol pricing to remain soft,
and gross margins to remain near breakeven.
As
of September 30, 2008, we had contracts for delivery of ethanol totaling
143.1 million gallons through September 2009. These contracts are shared for the benefit of
the marketing alliance pool as a whole, of which Aventine is a part, and are
not solely applicable to Aventine. These
commitments were for 14.9 million gallons at an average fixed price of $2.26
per gallon, 17.2 million gallons at an average spread to wholesale gasoline of
a negative 42 cents per gallon (based upon the NYMEX, Chicago and NY harbor
indices), and 111.0 million gallons at spot prices (using various Platt, OPIS
and AXXIS indices).
29
Table of Contents
For the fourth quarter of 2008, we have contracts for delivery of
ethanol totaling 137.9 million gallons. These commitments are for 14.9 million
gallons at an average fixed price of $2.26, 13.6 million gallons at an average
spread to wholesale gasoline of a negative 39 cents (based upon the NYMEX, Chicago
and NY harbor indices), and 109.4 million gallons at spot prices (using various
Platt, OPIS and AXXIS indices).
At the end of the third quarter of 2008, we also had short gasoline
positions outstanding using swap agreements where we sold 3.9 million gallons
of gasoline at an average fixed price of $2.06 per gallon for delivery through December 2008.
We did this to hedge a portion of our gasoline indexed contracts from
potentially falling gasoline prices. The fair value of these positions at September 30,
2008 was a loss of approximately $1.5 million.
Corn
Corn prices have risen significantly since 2006 and reached record
levels during the second quarter of 2008. Beginning in the third quarter of
2008, corn prices, along with most other commodities, began to decline in value.
We believe that this is in response to larger than expected corn production
during 2008, along with concerns of global recession and reductions in global
demand. However, we continue to believe that corn prices are likely to remain
above historical levels for the foreseeable future.
We continuously purchase corn for physical delivery from suppliers
using forward purchase contracts in order to assure supply. As we do this, we
have in the past often shorted a like amount of CBOT corn futures with similar
dates to lock in the basis differential. We also occasionally use CBOT futures
contracts to lock in the price of corn by taking long positions in CBOT
contracts in order to reduce our risk of price increases. Exchange traded
forward contracts for commodities are marked to market each period. Our forward
physical purchases of corn are not marked to market.
At September 30, 2008, we had fixed the price of 9.3 million
bushels of corn through December 2008 at an average of $5.25 per bushel,
representing approximately 39% percent of our corn requirements for the
remainder of 2008.
Marketing Alliance
Our
marketing alliance annualized volume at the end of the third quarter of 2008
was 639 million gallons. With our own equity production, our marketing alliance
partner volumes, and purchase/resale volumes, we distributed approximately 900
million gallons of ethanol on an annualized basis in the third quarter of 2008.
Our expectation for the remainder 2008 is that another 215 million gallons of
annualized marketing alliance partner production will come online in the fourth
quarter. Offsetting this increase in volumes in the fourth quarter will be
disruptions in supply from marketing alliance partners as a result of poor
industry economics. We have, in the fourth quarter, already seen reductions in
production levels and gallons available for distribution from marketing
alliance partners and may see additional supply disruptions in the future.
In addition
to curtailments in supply from lower production volumes caused by current
industry economics, a few existing marketing alliance partners have indicated
that they are exploring alternative marketing arrangements. To this end, we
have received termination notices from some of our marketing alliance partners
for our services.
30
Table of Contents
Supply and Demand
According to the Renewable Fuels Association, the annual ethanol
production capacity in the U.S. of plants currently in operation and those
under construction is almost 13.8 billion gallons annually. This volume of
ethanol production exceeds the mandate for renewable biofuel consumption
required in 2012. Ethanol produced in the United States competes with
sugar-based ethanol produced in Brazil. This domestic production capacity,
along with imports, may cause supply to exceed demand. If additional demand for
ethanol is not created, either through additions to discretionary blending
(through increased penetration rates in areas that blend ethanol today or
through the establishment of new markets where little or no ethanol is blended
today), or through additional state level mandates, the excess supply may cause
ethanol prices to decrease, perhaps substantially.
Expansion
We have
identified opportunities to increase our equity production capacity through the
development of new production facilities. We are currently building 113 million
gallon annualized capacity ethanol production facilities at both Mt. Vernon,
Indiana and Aurora, Nebraska. We expect the Mt. Vernon facility to begin
ramping up ethanol production in the first quarter of 2009 and the Aurora,
Nebraska facility to begin ramping up ethanol in the second quarter of 2009. In
addition, w
e are
obligated to add an additional 113 million gallons of capacity through a phase
II expansion in Mt. Vernon, Indiana, and would be subject to material penalties
if we do not. We also intend to add an additional 113 million gallons of
capacity through a phase II expansion at Aurora, Nebraska, along with
potentially expanding our existing Pekin, Illinois campus. The timing of these
expansions will be based upon, among other factors, market conditions and the
availability of financing on attractive terms. We anticipate that the aggregate
capital expenditures to build our phase I expansion at each of Mt. Vernon and
Aurora, excluding capitalized interest, will be approximately $250 million per
plant, which includes approximately $15 million of additional infrastructure at
each plant to facilitate the construction of the phase II expansions. We have
not yet entered into agreements for any of our additional expansions. The cost
to build these additional expansions will depend on market conditions at the
time construction is commenced and may be higher or lower than the cost of the
phase I expansions. There can be no assurance that we can raise additional
funds to complete these projects.
We may be subject to material penalties if we do not timely complete
phase I of the Aurora expansion or either phase of the Mt. Vernon expansion. If
phase I of the Aurora plant is not completed and fully operational by July 1,
2009 we will be responsible for liquidated damages to the Aurora Cooperative of
$138,889 per month (up to a maximum of $5 million) until the plant is fully
operational. If we do not pay these damages, the counterparty has the right to
repurchase the property at cost (subject to adjustment for any expenses which
we have paid with respect to infrastructure construction). Our lease with the
Indiana Port Commission requires substantial completion of phase I of the Mt.
Vernon expansion (an initial 110 million gallons of capacity) by March 1,
2009 and substantial completion of phase II of the Mt. Vernon expansion (an
additional 110 million gallons of capacity) by January 1, 2011, subject in
the case of phase II of the Mt. Vernon expansion to specified extension rights.
If we do not achieve these milestones, the State of Indiana may, subject to
specified cure rights, take over construction and complete the facility at our
expense. In addition, if we fail to achieve these milestones we will, subject
to specified cure rights or our ability to negotiate an extension, be in
default under our lease and the State of Indiana may also, at its election, (i) without
terminating the lease re-let the premises to a third party and charge us for
any necessary repairs and alterations, (ii) without terminating the lease,
require us to pay all amounts we are obligated to pay under the lease as they
become payable, less any amount received from any re-letting of the premises or
(iii) terminate the lease. If the State of Indiana terminates the lease it
can require that we pay liquidated damages in the amount by which the lease
payments we are obligated to make under the lease exceed the fair and
reasonable rental value of the premises, each
31
Table of Contents
discounted to present value (but in no event
being less than two years of basic rent and minimum guaranteed wharfage under
the lease). In addition, upon any termination or expiration of the lease, the
State does not have to pay us for the value of the plant or any other
improvements that we made to the premises and can require us to restore the leased
premises to their original condition at our cost and expense. In addition,
under the design build agreements for the initial 113 million gallon capacity
expansion at each of Mt Vernon and Aurora, we have the ability to delay
construction by up to 180 days. If we do so, we will be responsible for certain
increased costs and foregone profit of the contractor (potentially including an
early completion bonus). If we were to delay construction beyond 180 days the
contractor would be entitled to treat the delay as a termination by us for
convenience and we would be responsible for certain costs and expenses of the
contractor in connection with such termination.
Liquidity
and Capital Resources
Overview
and Outlook
The following table sets forth selected information concerning our
financial condition:
(In thousands)
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
36,255
|
|
$
|
17,171
|
|
Short-term investments
|
|
|
|
211,500
|
|
Working capital
|
|
90,434
|
|
303,377
|
|
Total debt
|
|
300,000
|
|
300,000
|
|
Current ratio
|
|
1.59
|
|
3.90
|
|
|
|
|
|
|
|
|
|
The
Company has made commitments for the construction of new ethanol facilities. We
began construction on the initial phase I expansions in Mt. Vernon, Indiana and
Aurora, Nebraska in 2007. It is expected that each phase I project will cost
approximately $250 million. Through September 30, 2008, approximately
$391.6 million has been spent on these two projects. We expect to spend an
additional $109.9 million to complete these projects, excluding capitalized
interest.
During the third quarter, the Company amended its
engineering, procurement and construction contract for the
ethanol
facility currently under construction in Aurora, Nebraska. The amendment
extends the construction and payment schedules for the ethanol facility.
These changes should allow Aventines other ethanol facility currently under
construction in Mt. Vernon, Indiana to begin producing ethanol and operating
cash flows before the Aurora West facility begins production.
Also during the third quarter, we amended our existing
five-year secured revolving credit facility to clarify certain ambiguities
relating to the treatment of capital expenditures in the calculation of the
fixed charge coverage ratio included therein. The amendment changed the
definition of Non-Financed Capital Expenditures contained in Section 1.01
of facility, which is used in the calculation of the fixed charge coverage
ratio. If availability under the facility falls below $50 million, we must
maintain a fixed charge coverage ratio of at least 1.1 to 1. At September 30,
2008, we were in compliance with the fixed charge coverage ratio covenant. Based
on our current expectations regarding EBITDA and planned capital expenditures,
we do not expect to satisfy the fixed charge coverage ratio before the end of
2009 at the earliest and as a result do not expect to be able to access the
last $50 million of commitments under the facility. Failing to satisfy the
fixed charge ratio does not constitute an event of default nor does it affect
our ability to borrow amounts under the facility other than the last $50
million of commitments.
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Table of Contents
Total liquidity at
September 30, 2008 was $119.2 million, comprised of $36.3 million in cash
and cash equivalents and $82.9 million (which is net of the last $50 million
which we do not expect to be able to access) under our existing secured
revolving credit facility.
In
early October, we drew down $60 million on our secured revolving credit
facility. We have invested these funds in cash equivalents until needed. Proforma
cash on hand at September 30, 2008 would have been $96.3 million,
including this $60 million borrowing.
We believe that, under current industry conditions,
our existing sources of liquidity will be sufficient to enable us to complete
and start-up our phase I expansions at Aurora, Nebraska and Mt. Vernon, Indiana.
We also
expect that our existing sources of liquidity, including
cash flows from operations, will be sufficient to allow us to satisfy existing
anticipated working capital needs, debt service obligations, capital
expenditures and other anticipated cash requirements for 2008. However, we do
not expect to
have a meaningful
amount of excess liquidity to withstand unanticipated liquidity needs. In
particular, our inventory, accounts receivable and accounts payable levels can
vary materially as a result of changes in commodity prices, particularly corn
and ethanol prices, as well as the number of gallons in inventory, the number
of gallons of ethanol purchased in purchase resale transactions or from
marketing alliance partners and days sales outstanding of receivables.
In addition to extending the construction period and
pushing out the start-up date for our ethanol facility expansion in Aurora,
Nebraska as previously announced, we continue to evaluate a number of other
actions designed to increase the amount of liquidity available to us,
including; reducing inventory levels, seeking additional debt and equity
financing, potentially delaying construction or start-up of our Mt. Vernon,
Indiana expansion and other strategic initiatives. We cannot assure you that
any of these initiatives will generate additional liquidity for us on
acceptable terms or at all.
On October 26, 2006, Aventines Board of Directors approved a
common stock share buyback program of up to $50 million. Under the repurchase
program, the Company may buy back shares from time to time on the open market. The
program has no minimum share repurchase amounts, and there is no fixed time
period under which any share repurchases must take place. This share repurchase
program is not expected to impact the Companys expansion plans. From program
inception through the end of the third quarter of 2008, the Company has
repurchased a total of 369,615 shares of its common stock. The amount remaining
under the authorization to repurchase stock is approximately $45.9 million. The
amounts the Company may repurchase under this program in the future may be
affected by cash required to complete current facility expansions, as well as
cash provided by operations.
Sources
of Liquidity
Our principal sources of liquidity are cash, cash equivalents,
short-term investments, cash provided by operations, and cash available under
our secured revolving credit facility.
Cash, cash equivalents and short-term investments.
For the first nine months of 2008, cash, cash
equivalents and short-term investments as a whole decreased by $192.4 million. Cash,
cash equivalents and short-term investments as of September 30, 2008 and December 31,
2007 were $36.3 million and $228.7 million, respectively. The decrease in cash,
cash equivalents and short-term investments is principally the result of
expenditures related to our on-going plant expansion program and losses
incurred on the sale of our auction rate security portfolio, all offset by cash
provided by our operations.
C
ash provided by operations.
Net cash provided
by operating activities in the first nine months of 2008 was $56.6
million, as compared to cash provided by operating
activities of $53.9 million for the first nine months of 2007. Cash provided by
operations in 2008 was reduced by a regularly scheduled $15 million semi-annual
interest payment made in the second quarter of 2008 on our 10% senior
33
Table of Contents
unsecured bonds. We issued these bonds in March 2007.
As a result, no interest payment on these bonds was required until October 2007.
Cash available under our liquidity facility
. In March 2007, we established a new
five year secured revolving credit facility with JPMorgan Chase Bank, N.A., as
administrative agent and a lender, of up to $200 million, subject to collateral
availability, which, under certain circumstances, can be increased to $300
million. See Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operation - Secured Revolving Credit Facility below
for more information about our secured revolving credit facility.
We had no borrowings outstanding under our secured revolving credit
facility at September 30, 2008, and $22.2 million of standby letters of
credit outstanding, thereby leaving approximately $132.9 million in borrowing
availability under our secured revolving credit facility as of that date
(including the $50 million which we have said we do not expect to be able to
access).
In early October 2008, we drew down $60 million on our secured
revolving credit facility. We have invested these funds in cash equivalents
until needed.
Uses of
Liquidity
Our principal uses
of liquidity are capital expenditures, payments related to our outstanding debt
and liquidity facility and working capital.
Capital expenditures.
During the first nine months of 2008, we spent approximately $202.3
million, exclusive of capitalized interest of $19.5 million, on capital
projects. Of this amount, $9.0 million was spent on maintenance and
environmental projects, while $193.3 million was spent on capacity expansion
projects. The amount we expect to spend to complete our two new ethanol
production facilities through the second quarter of 2009 is approximately
$109.9 million, exclusive of capitalized interest. Expected capital
expenditures on non-expansion related maintenance and environmental items
should be approximately $1.5 million for the remainder of 2008.
Payments related to our outstanding debt and liquidity facility.
In the first nine months of 2008, we made a
regularly scheduled $15 million semi-annual payment on our 10% senior unsecured
bonds on April 1. Interest payments of $15 million on our 10% senior
unsecured notes are due on April 1 and October 1.
Working capital.
Our working capital declined from $303.4 million at December 31,
2007 to $90.4 million at September 30, 2008 as we used current assets to
fund our capital expenditures.
Secured
Revolving Credit Facility
Our liquidity facility consists of a five year secured revolving credit
facility with JPMorgan Chase Bank, N.A., as administrative agent and a lender,
of up to $200 million, subject to collateral availability, which, under certain
circumstances, can be increased up to $300 million. Our secured revolving
credit facility includes a $25 million sub-limit for letters of credit. The
credit facility expires in March 2012, and, at September 30, 2008, is
secured by substantially all of the Companys assets, with the exception of the
assets of Nebraska Energy, LLC.
Collateral availability is determined via a borrowing base, which
includes a percentage of eligible receivables and inventory, and no more than
$50 million of property, plant and equipment. The amount of property, plant and
equipment which can be included in the borrowing base reduces at a rate
34
Table of Contents
of $1.8 million each quarter beginning with
the quarter ended December 31, 2007. At September 30, 2008, the
amount of property, plant and equipment which was eligible for inclusion in the
calculation of the borrowing base was $42.9 million.
Borrowings generally bear interest, at our option, at the following
rates (i) the Eurodollar rate plus a margin between 1.25% to 1.75%,
depending on the average availability, or (ii) the greater of the prime
rate or the federal funds rate plus 0.50%, plus a margin between 0.00% to
0.50%, depending on the average availability. Accrued interest is payable
monthly on outstanding principal amounts, provided that accrued interest on
Eurodollar loans is payable at the end of each interest period, but in no event
less frequently than quarterly. In addition, fees and expenses are payable
based on unused borrowing availability (0.25% to 0.375% per annum, depending on
the average availability), outstanding letters of credit (1.375% to 1.875%,
depending on the average availability) and administrative and legal costs.
Availability under our secured revolving credit facility is subject to
customary conditions, including the accuracy of representations and warranties,
the absence of any material adverse change and compliance with certain
covenants, which, among other things, may limit our ability to incur additional
indebtedness and liens; enter into transactions with affiliates; make
acquisitions; pay dividends; redeem or repurchase capital stock or senior
notes; make investments or loans; consolidate, merge or effect asset sales; or
change the nature of our business. In addition, if availability under the
facility falls below $50 million, we must maintain a fixed charge coverage
ratio of EBITDA (as defined under the agreement) less non-financed capital
expenditures and taxes to fixed charges (scheduled payments of principal,
interest expense and certain types of
dividend and other payments) of at least 1.1 to 1.
The secured revolving credit facility contains customary events of
default for credit facilities of this size and type, and includes, without
limitation, payment defaults; defaults in performance of covenants or other
agreements contained in the transaction documents; inaccuracies in
representations and warranties; certain defaults, termination events or similar
events; certain defaults with respect to any other Company indebtedness in
excess of $5.0 million; certain bankruptcy or insolvency events; the
rendering of certain judgments in excess of $5.0 million; certain ERISA
events; certain change in control events and the defectiveness of any liens
under the secured revolving credit facility. Obligations under the secured
revolving credit facility may be accelerated upon the occurrence of an event of
default.
As of September 30, 2008, we are in compliance with all covenants
under our secured revolving credit facility, including the fixed charge
coverage ratio. If we continue with our building expansion on our current
timetable and within the expected cost and given our expectations for future
EBITDA, we do not expect to be in compliance with the fixed charge coverage
ratio covenant before the end of 2009 at the earliest and, therefore, would not
have access to the last $50 million of availability.
Failing to satisfy the fixed charge ratio does
not constitute an event of default nor does it affect our ability to borrow
amounts under the facility other than the last $50 million of commitments. We had no borrowings outstanding under our
secured revolving credit facility at September 30, 2008, and $22.2 million
of standby letters of credit outstanding, thereby leaving approximately $132.9
million in borrowing availability under our secured revolving credit facility
as of that date (including the $50 million which we have said we do not expect
to be able to access).
Environmental
Matters
We are subject to extensive federal, state and local environmental
laws, regulations and permit conditions (and interpretations thereof),
including those relating to the discharge of materials into the air, water and
ground, the generation, storage, handling, use, transportation and disposal of
hazardous materials, and the health and safety of our employees. These laws,
regulations, and permits require us to incur significant capital and other
costs, including costs to obtain and maintain expensive pollution
35
Table of Contents
control equipment. They may also require us
to make operational changes to limit actual or potential impacts to the
environment. A violation of these laws, regulations or permit conditions can
result in substantial fines, natural resource damages, criminal sanctions,
permit revocations and/or facility shutdowns. In addition, environmental laws
and regulations (and interpretations thereof) change over time, and any such
changes, more vigorous enforcement policies or the discovery of currently
unknown conditions may require substantial additional environmental
expenditures.
We
are also subject to potential liability for the investigation and cleanup of
environmental contamination at each of the properties that we own or operate
and at off-site locations where we arranged for the disposal of hazardous
wastes. For instance, soil and groundwater contamination has been identified in
the past at our Illinois campus. If any of these sites are subject to
investigation and/or remediation requirements, we may be responsible under the
Comprehensive Environmental Response, Compensation and Liability Act or other
environmental laws for all or part of the costs of such investigation and/or
remediation, and for damages to natural resources. We may also be subject to
related claims by private parties alleging property damage or personal injury
due to exposure to hazardous or other materials at or from such properties. While
costs to address contamination or related third-party claims could be
significant, based upon currently available information, we are not aware of
any material liability relating to contamination or such third party claims. We
have not accrued any amounts for environmental matters as of September 30,
2008. The ultimate costs of any liabilities that may be identified or the
discovery of additional contaminants could adversely impact our results of
operation or financial condition.
In addition, the hazards and risks associated with
producing and transporting our products (such as fires, natural disasters,
explosions, abnormal pressures and spills) may result in spills or releases of
hazardous substances, and may result in claims from governmental authorities or
third parties relating to actual or alleged personal injury, property damage,
or damages to natural resources. We maintain insurance coverage against some,
but not all, potential losses caused by our operations. Our coverage includes,
but is not limited to, physical damage to assets, employers liability,
comprehensive general liability, automobile liability and workers compensation.
We do not carry environmental insurance. We believe that our insurance is
adequate for our industry, but losses could occur for uninsurable or uninsured
risks or in amounts in excess of existing insurance coverage. The occurrence of
events which result in significant personal injury or damage to our property,
natural resources or third parties that is not covered by insurance could have
a material adverse impact on our results of operations and financial condition.
Our air emissions are subject to the federal Clean Air Act, as amended,
and similar state laws which generally require us to obtain and maintain air
emission permits for our ongoing operations as well as for any expansion of
existing facilities or any new facilities. Obtaining and maintaining those
permits requires us to incur costs, and any future more stringent standards may
result in increased costs and may limit or interfere with our operating
flexibility. In addition, the permits ultimately issued may impose conditions
which are more costly to implement than we had anticipated. These costs could
have a material adverse effect on our financial condition and results of
operations. Because other ethanol manufacturers in the U.S. are and will
continue to be subject to similar laws and restrictions, we do not currently
believe that our costs to comply with current or future environmental laws and
regulations will adversely affect our competitive position. However, because
ethanol is produced and traded internationally, these costs could adversely
affect us in our efforts to compete with foreign producers not subject to such
stringent requirements.
Federal and state environmental authorities have been investigating
alleged excess VOC emissions and other air emissions from many U.S. ethanol
plants, including our Illinois and Nebraska facilities. The matter relating to
our Illinois wet mill facility is still pending, and we could be required to
36
Table of Contents
install additional air pollution control
equipment or take other measures to control air pollutant emissions at that
facility. If authorities require us to install controls, we would anticipate
that costs would be higher than the approximately $3.4 million we incurred for
this matter at our Nebraska facility due to the larger size of the Illinois wet
mill facility. In addition, if the authorities determine our emissions were in
violation of applicable law, we would likely be required to pay fines that
could be material. In February 2008, we received an indemnification
payment from the former owner of our Nebraska facility relating to the cost of
installing environmental controls at that facility in connection with an April 2005
consent decree with state authorities.
We
have made, and expect to continue making, significant capital expenditures on
an ongoing basis to comply with increasingly stringent environmental laws,
regulations and permits, including compliance with the U.S. Environmental
Protection Agencys (EPA) National Emissions Standard for Hazardous Air
Pollutants, or NESHAP, for industrial, commercial and institutional boilers and
process heaters. This NESHAP was issued, but subsequently vacated. The vacated
version of the rule required us to implement maximum achievable control
technology at our Illinois wet mill facility to reduce hazardous air pollutant
emissions from our boilers. We expect the EPA will revise the rule to
impose more stringent requirements than were contained in the vacated version. In
the absence of a final EPA NESHAP for industrial, commercial and institutional
boilers and process heaters, we are working with state authorities to determine
what technology will be required at our Illinois wet mill facility and when
such technology must be installed. We currently cannot estimate the amount that
will be needed to comply with any future federal or state technology
requirement regarding air emissions from our boilers.
We currently generate revenue from the sale of
carbon dioxide, which is a co-product of the ethanol production process at each
of our Illinois and Nebraska facilities. New laws or regulations relating to
the production, disposal or emissions of carbon dioxide may require us to incur
significant additional costs and may also adversely affect our ability to
continue generating revenue from carbon dioxide sales. In particular, Illinois
and five other Midwestern States have entered into the Midwestern Greenhouse
Gas Reduction Accord, a program which directs participating states to develop a
multi-sector cap-and-trade mechanism to help achieve reductions in greenhouse
gases, including carbon dioxide. It is possible this program could require
carbon dioxide emissions reductions from our Pekin, Illinois plants, which
could result in significant costs. In addition, it is possible that other
states in which we conduct or plan to conduct business, including Nebraska and
Indiana, could join this accord or that federal, state or local regulators
could require other costly carbon dioxide emissions reductions or offsets.
Item 3.
Quantitative and Qualitative
Disclosures About Market Risk
We are exposed to various market risks, including changes in commodity
prices. Market risk is the potential loss arising from adverse changes in
market rates and prices. In the ordinary course of business, we enter into
various types of transactions involving financial instruments to manage and
reduce the impact of changes in commodity prices. We do not enter into
derivatives or other financial instruments for trading or speculative purposes.
Commodity Price Risks
We are subject to market risk with respect to the price and
availability of corn, the principal raw material we use to produce ethanol and
ethanol by-products. In general, rising corn prices result in lower profit
margins and, therefore, represent unfavorable market conditions. This is
especially true when market conditions do not allow us to pass along increased
corn costs to our customers. The availability and price of corn is subject to
wide fluctuations due to unpredictable factors such as weather conditions,
farmer planting decisions, governmental policies with respect to agriculture
and international trade and
37
Table of Contents
global demand and supply. Our weighted
average gross corn costs for the three months ended September 30, 2008 and
2007 was $5.78 and $3.81 per bushel, respectively. For the nine months ended September 30,
2008 and 2007, our weighted average corn costs were $5.22 and $3.79,
respectively.
We have firm-price purchase commitments with some of our corn suppliers
under which we agree to buy corn at a price set in advance of the actual
delivery of that corn to us. At September 30, 2008, we had commitments to
purchase approximately 14.7 million bushels of corn through December 2009
at an average price of $5.47 per bushel from these corn suppliers. Under these
arrangements, we assume the risk of a price decrease in the market price of
corn between the time this price is fixed and the time the corn is delivered. In
order to reduce our market exposure to price decreases, at the time we enter
into a firm-price purchase commitment, we also often enter into commodity forward
contracts to sell a certain amount of corn at the then-current price for
delivery to the counterparty at a later date. We account for these commodity
forward transactions under Statement of Financial Accounting Standard No. 133,
Accounting for Derivative Instruments and Hedging
Activities
, as amended by Statement of Financial Accounting Standard
No. 138,
Accounting for Certain Derivative
Instruments and Certain Hedging Activities
, and by Statement of
Financial Accounting Standard No. 149,
Amendment of Statement 133
on Derivative Instruments and Hedging Activities
, (hereinafter
collectively referred to as SFAS 133). These forward contracts are not
designated as hedges and, therefore, are marked to market each period, with
corresponding gains and losses recorded in other non-operating income. The fair
value of these derivative assets is recognized in other current assets in the
Condensed Consolidated Balance Sheet, net of any cash received from the brokers.
Information on this type of derivative transaction is as follows:
(In millions)
|
|
September 30,
2008
|
|
|
|
|
|
Realized and unrealized gain included in earnings in
2008
|
|
$
|
3.8
|
|
|
|
|
|
|
(In millions)
|
|
September 30,
2008
|
|
|
|
|
|
Net bushels sold
|
|
5.9
|
|
Aggregate notional value of derivatives outstanding
|
|
$
|
34.7
|
|
Period through which derivative positions currently
exist
|
|
December 2009
|
|
Unrealized gain on the fair value of outstanding
derivative positions
|
|
$
|
5.0
|
|
The change in fair value due to the effect of a 10%
adverse change in commodity prices to current fair value
|
|
$
|
(3.0
|
)
|
We have also entered into commodity futures contracts in connection
with the purchase of corn to reduce our risk of future price increases. We
account for these transactions under SFAS 133. These futures contracts are not
designated as hedges and, therefore, are marked to market each period, with
corresponding gains and losses recorded in other non-operating income. The fair
value of these derivative contracts are recognized in other current assets in
the Condensed Consolidated Balance Sheet, net of any cash received from the
brokers. Information on this type of derivative transaction is as follows:
|
|
September 30,
|
|
(In millions)
|
|
2008
|
|
|
|
|
|
Realized and unrealized net gain included in
earnings in 2008
|
|
$
|
8.0
|
|
|
|
|
|
|
38
Table
of Contents
|
|
September 30,
|
|
(In millions)
|
|
2008
|
|
|
|
|
|
Net bushels bought
|
|
0.1
|
|
Aggregate notional value of derivatives outstanding
|
|
$
|
0.4
|
|
Period through which derivative positions currently
exist
|
|
December 2008
|
|
Unrealized gain on fair value of derivatives
|
|
$
|
|
|
The change in fair value due to the effect of a 10%
adverse change in commodity prices to current fair value
|
|
$
|
|
|
We
are also subject to market risk with respect to ethanol pricing. Our ethanol
sales are priced using contracts that can either be fixed; based upon the price
of wholesale gasoline plus or minus a fixed amount; or based upon a market
price at the time of shipment. These ethanol contracts are for the benefit of
our marketing alliance pool. We sometimes fix the price at which we sell
ethanol using fixed price physical delivery contracts. These fixed price
ethanol contracts are shared with our marketing alliance pool, and are not
applicable only to our equity gallons. At September 30, 2008, we had fixed
contracts to sell approximately 14.9 million gallons of ethanol at an average
fixed price of $2.26 per gallon through December 2008. These normal sale
transactions are not marked to market.
We
also sell forward ethanol using contracts where the price is determined at a
point in the future based upon an index plus or minus a fixed amount. At
September 30, 2008, we had sold forward approximately 17.2 million gallons of
ethanol using wholesale gasoline as an index plus a fixed spread that averaged
a negative $0.42 per gallon. Under these arrangements, we assume the risk of a
price decrease in the market price of gasoline. In order to reduce our market
exposure to price decreases, at the time we enter into a firm sales commitment,
we may also enter into commodity forward contracts to sell a like amount of
gasoline at the then-current price for delivery to the counterparty at a later
date. These contracts are entered into only to protect the value of our own
equity gallons, and are not shared with our marketing alliance. We account for
these transactions under SFAS 133. These forward contracts are not designated
as hedges and, therefore, are marked to market each period, with corresponding
gains and losses recorded in other non-operating income. The fair value of
these derivative liabilities is recognized in other current liabilities in the
Condensed Consolidated Balance Sheet, net of any cash paid to brokers. Information
on this type of derivative transaction is as follows:
(In millions)
|
|
September 30,
2008
|
|
|
|
|
|
Realized and unrealized loss included in earnings
|
|
$
|
5.7
|
|
|
|
|
|
|
(In millions)
|
|
September 30,
2008
|
|
|
|
|
|
Gallons sold
|
|
3.9
|
|
Aggregate notional value of derivatives outstanding
|
|
$
|
8.0
|
|
Period through which derivative positions currently
exist
|
|
December 2008
|
|
Unrealized loss on the fair value of outstanding
derivative positions
|
|
$
|
(1.5
|
)
|
The change in fair value due to the effect of a 10%
adverse change in commodity prices to current fair value
|
|
$
|
(1.0
|
)
|
Material
Limitations
The
disclosures with respect to the above noted risks do not take into account the
underlying commitments or anticipated transactions. If the underlying items
were included in the analysis, the gains or losses on the futures contracts may
be offset. Actual results will be determined by a number of factors that are
not generally under our control and could vary significantly from those factors
disclosed.
39
Table of Contents
We
are exposed to credit losses in the event of nonperformance by counterparties
on the above instruments, as well as credit or performance risk with respect to
our hedged commitments. Although nonperformance is possible, we do not
anticipate nonperformance by any of these parties.
Subsequent Event
On
October 13, 2008, the Company completed its purchase of the 21.58% of Nebraska
Energy, LLC (NELLC) that it did not already own from Nebraska Energy
Cooperative, Inc. The Company issued 1 million shares of its common stock, with
an estimated value of approximately $6.6 million, in exchange for the 21.58%
interest. The aggregate value of $6.6 million, or $6.62 per share, was based on
the average of Aventines closing stock price for the four trading days
immediately before the acquisition announcement date, the acquisition
announcement date and the four trading days immediately after the acquisition
announcement date on July 31, 2008.
The purchase will be accounted for under the
purchase method of accounting in accordance with the provisions of Statement of
Financial Accounting Standards No. 141, Business Combinations.
As
a result of our acquisition of the remaining interest in NELLC, NELLC became a
guarantor under our secured revolving credit facility and senior unsecured bond
indenture on October 22, 2008. As of this same date, all of the assets of NELLC
are now collateral under our secured revolving credit facility.
Item 4. Controls and
Procedures
Evaluation of Disclosure
Controls and Procedures
Under
the supervision of and with the participation of management, including our
Chief Executive Officer, Ronald H. Miller, and our Chief Financial Officer,
Ajay Sabherwal, the Company carried out an evaluation of the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) as of the end of the period covered by this report. Based upon that
evaluation, Messrs. Miller and Sabherwal have concluded that, as of the
end of the period covered by this report, the Companys disclosure controls and
procedures have been designed and are effective to provide reasonable assurance
that information required to be disclosed in the reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and
Exchange Commission. These disclosure controls and procedures include, without
limitation, controls and procedures designed to provide reasonable assurance
that information required to be disclosed in such reports is accumulated and
communicated to our management, including Messrs. Miller and Sabherwal, as
appropriate to allow timely decisions regarding the required disclosure. The
design of any system of controls is based in part upon certain assumptions
about the likelihood of future events. There can be no assurance that any design
will succeed in achieving its stated goal under all potential future
conditions, regardless of how remote.
Changes in Internal
Control over Financial Reporting
Based
upon evaluation by our management, which was conducted with the participation
of Messrs. Miller and Sabherwal, there has been no change in our internal
control over financial reporting during the period covered by this report that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
40
Table of Contents
PART II.
OTHER INFORMATION
Item 1.
Legal Proceedings
We are from time to
time involved in various legal proceedings, including legal proceedings
relating to the extensive environmental laws and regulations that apply to our
facilities and operations. We are not involved in any legal proceedings that we
believe could have a material adverse effect upon our business, operating
results or financial condition.
On November 6, 2008,
the Company commenced an action against
JP Morgan Securities, Inc. and JP Morgan Chase Bank, N.A. (hereinafter
collectively referred to as JP Morgan) in the Tenth Judicial Circuit in
Tazewell County, Illinois. The Companys complaint relates to losses incurred
in excess of $31 million as a result of investments in Student Loan Auction
Rate Securities purchased through JP Morgan.
Item 1A.
Risk Factors
The
Company included in its Annual Report on Form 10-K as of December 31, 2007 a
description of certain risks and uncertainties that could affect the Companys
business, future performance or financial condition (Risk Factors). The Risk
Factors as included in our Form 10-K as of December 31, 2007 are updated by
additional risk factors as described below:
Waivers or repeal of the renewable
fuels standard (RFS) minimum levels of renewable fuels included in gasoline
could have a material adverse effect on Aventines results of operations.
Subsequent to the
passage of the Energy Independence and Security Act of 2007 in December 2007
increasing the mandated required usage of renewable biofuels, there have been
several efforts by various parties to repeal or reduce the RFS through new
legislation and/or requested waivers of the current legislation. To date,
none of these efforts have been successful. However, any repeal or waiver from
the RFS may adversely affect demand for ethanol and could have a material
adverse effect on Aventines results of operations and financial condition.
Our ability to complete our ethanol plant
expansion projects in a timely manner and at the expected cost is highly
dependant upon third parties, including our engineering, procurement and
construction (EPC) contractor and their sub-contractors.
We are highly
dependant on third parties, including our EPC contractor and their
sub-contractors, for the timely completion of our new ethanol production
facilities at the expected costs. Delays in the projects, whether the result
weather, regulatory issues or other issues related to the EPC contractor or
sub-contractor, may affect our results of operations and financial condition.
A reduction in the Volumetric Ethanol Excise
Tax Credit (VEETC) may reduce the attractiveness of ethanol blended fuels
above mandated amounts. Any reduction in the amount of discretionary blending
as a result of a reduction in the VEETC may have a material adverse effect on
our results of operations and financial condition.
The amount of
ethanol production capacity in the U.S. as of September 30, 2008 is
approximately 10.5 billion gallons. This amount exceeds the 2008 mandated usage
of renewable biofuels of 9 billion gallons. Ethanol consumption above mandated
amounts is primarily based upon the economic benefit derived by blenders,
including benefits received from the VEETC. The 2008 Farm
41
Table of
Contents
Bill enacted into law reduces the VEETC from its
current 51 cents per gallon to 45 cents per gallon beginning in the first year
following ethanol production reaching 7.5 billion gallons (which we believe
will happen in 2008). Any reduction in discretionary blending as a result of
the lower VEETC may affect the demand for ethanol above mandated amounts,
thereby having a negative effect on our operations, results of operations and
our financial condition.
Item 2.
Unregistered Sales of Equity
Securities and Use of Proceeds
None
Item 3.
Defaults Upon Senior Securities
None
Item 4.
Submission of Matters to a Vote
of Security Holders
None
Item 5.
Other Information
None
Item 6.
Exhibits
(a)
Exhibits
10.1
Amendment to Engineering, Procurement and
Construction Services Fixed Price Contract, dated as of October 6, 2008.
10.2
Letter Agreement
dated September 4, 2008 amending the Credit Agreement, dated as of
March 23, 2007, by and among Aventine Renewable Energy, Inc.,
Aventine Renewable EnergyMt Vernon, LLC and Aventine Renewable
EnergyAurora West, LLC, the other Loan Parties thereto, the lenders
thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on
September 17, 2008)
31.1
Certification of the Chief Executive Officer
pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
42
Table of Contents
32.2
Certification of the Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURE
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 thereto
duly authorized.
|
AVENTINE RENEWABLE ENERGY
HOLDINGS, INC.
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Dated:
November 7, 2008
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By:
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/s/ William J. Brennan
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Name:
|
William
J. Brennan
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Title:
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Chief Accounting and
Compliance
Officer (duly authorized officer and
principal accounting officer)
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43
Aventine Renew Enrgy (NYSE:AVR)
過去 株価チャート
から 5 2024 まで 6 2024
Aventine Renew Enrgy (NYSE:AVR)
過去 株価チャート
から 6 2023 まで 6 2024