Add
AVR to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| AVR > SEC Filings for AVR > Form 10-K on 16-Mar-2009 | All Recent SEC Filings |
16-Mar-2009
Annual Report
The following discussion of our consolidated operating results and financial condition for the three years ended December 31, 2008 should be read in conjunction with the Consolidated Financial Statements, and related notes beginning on page F-1.
Overview
Our financial statements have been prepared on the going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As a result of ethanol industry conditions that have negatively affected our business, we do not currently have sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs. In particular, we do not expect to have adequate liquidity to satisfy the $15 million interest payment due on April 1, 2009 on our outstanding senior unsecured 10% fixed-rate notes or the $24.4 million due to our EPC contractor, Kiewit Energy Company ("Kiewit"). In addition, we are currently in default under our outstanding 10% fixed-rate notes which permits the holders thereof to accelerate the $300 million principal amount thereof upon 60 days notice. The default under our 10% fixed rate notes constitutes an event of default under our secured revolving credit facility, which has been waived by lenders under our secured revolving credit facility until April 15, 2009. As a result, our 2008 financial statements include an explanatory paragraph by our independent registered public accounting firm describing the substantial doubt as to our ability to continue as a going concern.
On March 10, 2009, we amended our secured revolving credit facility. See "Item 7
- Management's Discussion and Analysis of Financial Condition and Results of
Operations - Secured Revolving Credit Facility'' for a more detailed description
of our amended secured revolving credit facility.
As of March 12, 2009, $22.2 million in letters of credit and $16.5 million in revolving loans were outstanding under the amended secured revolving credit facility. After giving effect to the recent amendment to our secured revolving credit facility, we had $0.7 million of cash and $6.6 million of additional borrowing availability thereunder as of such date. All of our cash receipts are automatically applied to reduce amounts outstanding under our amended secured revolving credit facility and to cash collateralize our letters of credit. As we continue to reduce the number of gallons of ethanol we sell and hold in inventory, working capital available to support borrowings under our secured revolving credit facility will reduce proportionately.
The amendment to our secured revolving credit facility requires us to successfully complete an exchange offer of our outstanding senior unsecured 10% fixed-rate notes for a like principal amount of a new series of "pay-in-kind" notes. We expect the "pay in kind" notes to (i) require no cash interest prior to April 1, 2010, (ii) require an increase in the interest rate to 12% per annum and (iii) grant a second lien on substantially all of our assets which must be contractually subordinated to the obligations under our secured revolving credit facility. In addition, to encourage holders of our senior unsecured 10% fixed-rate notes to participate in the exchange offer, we expect to need to offer the holders of our senior unsecured 10% fixed-rate notes 8.4 million shares of our common stock (representing approximately 19.9% of our currently outstanding shares of common stock). There can be no assurances, however, that the required percentage or any holders of the senior unsecured 10% fixed-rate notes will agree to an exchange on these terms or at all. Failure to have the holders of 80% of the existing senior unsecured 10% fixed-rate notes commit to participate in the exchange by March 31, 2009 or the failure to consummate the exchange for 90% of the existing senior unsecured 10% fixed-rate notes by April 15, 2009 would be an event of default under our secured revolving credit facility.
Even if we are successful with the senior unsecured 10% fixed-rate note exchange offer, we do not expect to have sufficient liquidity to meet anticipated working capital, debt service and other liquidity needs during the current year unless we experience a significant improvement in ethanol margins or obtain other
sources of liquidity. Based on the current spread between corn and ethanol prices, the industry is operating at or near breakeven cash margins. We experienced negative gross margins during the second half of 2008 and expect negative gross margins to continue through the first quarter of 2009 due in part to our fixed price obligations to purchase corn and natural gas at above current market prices. The current spread between ethanol and corn prices cannot support the long-term viability of the U.S. ethanol industry in general or us in particular.
In addition, although we suspended construction at both Aurora West and Mt. Vernon during the fourth quarter, we continue to have construction payment obligations to Kiewit. On March 9, 2009, the Company received a notice from Kiewit cancelling the engineering, construction and procurement contracts for Aurora West and Mt. Vernon, referencing our failure to make a recent payment under the change order agreements dated December 31, 2008. As a result, all remaining payments due to it and its sub-contractors totaling $24.4 million at February 28, 2009 are due and payable. We are currently engaged in discussions with Kiewit to negotiate a payment schedule that falls within the economic constraints with which we are currently operating. We cannot give you any assurance that we will reach an agreement with Kiewit that works within our existing liquidity constraints.
Because our obligations to Kiewit are past due, the liens securing these obligations violate the terms of our 10% fixed rate notes and constitute a default thereunder. Unless such default is cured through payment, the release of the liens, a negotiated resolution or otherwise, the holders of our 10% fixed rate notes may accelerate the $300 million principal amount thereof upon 60 days notice. In addition, the default under our 10% fixed rate notes constitutes an event of default under our secured revolving credit facility, which is our only current source of liquidity. We have obtained a waiver from the lenders under our secured revolving credit facility until April 15, 2009. Any foreclosure on such liens by Kiewit would constitute an event of default under our amended secured revolving credit facility that is not covered by the waiver.
We remain contractually obligated to complete the suspended plants at Aurora and Mt. Vernon as well as an additional plant at Mt. Vernon capable of producing 110 million gallons of ethanol annually and may incur significant penalties because of our failure to complete these facilities as previously scheduled.
Although we are actively pursuing a number of liquidity alternatives, including seeking additional debt and equity financing and a potential sale of all or part of the company, there can be no assurance we will be successful. If we cannot obtain sufficient liquidity in the very near-term, we may need to seek to restructure under Chapter 11 of the U.S. Bankruptcy Code.
We are a producer and marketer of fuel-grade ethanol in the U.S. Our own production facilities produced 188.8 million gallons of ethanol in 2008 and 192.0 million gallons of ethanol in 2007. We have also been a large marketer of ethanol, distributing ethanol purchased from other third-party producers in addition to our own ethanol production. In 2008 and 2007, we distributed 754.3 million gallons and 506.5 million gallons, respectively, of ethanol produced by others. Taken together, we marketed and distributed 936.0 million gallons of ethanol in 2008 and 690.2 million gallons of ethanol in 2007. For the years ended December 31, 2008 and 2007, this represents approximately 11% and 10%, respectively, of the total volume of ethanol sold in the U.S. Because of the challenges facing the ethanol industry in general and us in particular, we expect to sharply decrease the number of gallons of ethanol we sell that are produced by others in 2009. We market and distribute ethanol to many of the leading energy companies in the U.S., including Royal Dutch Shell and its affiliates, Marathon Petroleum, BP, ConocoPhillips, Valero Marketing and Supply Company, Exxon/Mobil and Chevron. In addition to producing ethanol, our facilities also produce several co-products, such as distillers grain, corn gluten feed and meal, corn germ and brewers' yeast, which generate incremental revenue and allow us to help offset a significant portion of our corn costs.
Because we market and sell ethanol without regard to the source, our general ledger system does not track or report ethanol revenue by source or the gallons of ethanol we sell by source. Our general ledger does track the number of gallons produced, the number of gallons purchased and the total number of gallons
sold. We arrive at the change in inventory by subtracting the gallons produced and the gallons purchased from the total gallons sold. The difference is the amount of gallons taken from or put into inventory. We reconcile our calculated ethanol gallons in inventory to records kept by independent terminal operators on a monthly basis.
Our plants may operate at a capacity which is less than our stated capacity primarily because of scheduled and unscheduled outages and the amount of denaturant we blend into ethanol. For example, our plants ran at 94% of capacity for both 2008 and 2007 after adjusting for differences in denaturant blending levels.
Besides our own equity ethanol production, we also generate revenue by selling ethanol that we purchase from our marketing alliance partners. We expect ethanol sourced from marketing alliance partners to decline sharply going forward. See "Item 1 - Business - Marketing Alliances."
We also resell ethanol that we purchase from unrelated producers and marketers which we also expect to decline sharply in 2009.
We generate additional revenue through the sale of by-products (both bio-products and co-products) that result from our ethanol production process. These by-products include brewers' yeast, corn gluten feed and meal, corn germ, condensed corn distillers solubles, carbon dioxide, DDGS and WDGS. The volume of by-products we produce varies with the level of our equity production. Scheduled maintenance, along with other non-scheduled operational issues, may affect the volume of by-products produced. We may also shift the mix of these by-products, to optimize our revenue, by altering the production process. By-product revenue is driven by both the quantity of by-products produced and from the market price received for our by-products which have historically tracked the price of corn.
We increased our equity production capacity in early 2007 through the development of a 57 million gallon dry mill expansion of our Pekin, Illinois facility. We have also nearly completed construction of 113 million gallon annualized capacity ethanol production facilities at both Mt. Vernon, Indiana and Aurora, Nebraska. The construction of these facilities was suspended in the fourth quarter of 2008 due to our liquidity constraints and the economic issues facing the ethanol industry generally.
We continue to be obligated to build the plants at Aurora and Mt. Vernon where we have suspended construction as well as a second 110 million gallons of capacity at Mt. Vernon, Indiana through a phase II expansion and may incur significant penalties because of our failure to complete these facilities as previously scheduled. In addition, our long-term strategic plan originally envisioned us adding an additional 113 million gallons of capacity through a phase II expansion at Aurora, Nebraska, along with potentially expanding our existing Pekin, Illinois campus. In light of current market conditions and our liquidity position, we do not intend to pursue any of these expansions in the near term. Any future decisions regarding expansions will be based upon, among other factors, market conditions and the availability of financing on attractive terms.
Executive Summary
We generated net loss of $47.1 million, or $1.12 per diluted share in 2008, as compared to net income of $33.8 million, or $0.80 per diluted share, in 2007. Net income decreased primarily as a result of significantly higher corn costs, higher conversion costs, losses incurred on the sale of auction rate securities, valuation allowances established or increased for deferred tax assets, charges incurred from suspending construction at our expansion sites, the impairment of plant development costs and a loss recognized on one of our marketing alliance investments. Revenue in 2008 increased to $2.2 billion as compared to $1.6 billion in 2007.
Gallons of ethanol sold in 2008 increased to 936.0 million from 690.2 million in 2007. Ethanol production for 2008 totaled 188.8 million gallons, a slight decrease from 192.0 million gallons in 2007. The decrease in production gallons was primarily due to blending at 1.96% denaturant for the entire year as opposed to 2007 where we blended at the higher rate for the first seven months. In 2008, the volume of ethanol purchased from marketing alliance partners increased due to marketing alliance partners coming on-line with new or expanded production facilities. Ethanol purchased from other producers and marketers was higher in 2008 versus 2007. We expect ethanol shipments in 2009 to decline sharply as we rationalize our supply sourcing in light of the current ethanol economic environment and as a result of our liquidity constraints.
Gross profit for 2008 fell to $9.0 million, a decrease of $64.8 million from 2007. The decline in gross profit was principally the result of higher corn prices, higher conversion costs and higher freight costs. This decline was partially offset by increased ethanol pricing, increased volumes of ethanol sold and increased co-product revenue. The average sales price per gallon of ethanol in 2008 was $2.22 per gallon, up from $2.08 per gallon in 2007. Positive gross margins in the first half of 2008 were partially offset by negative gross margins in the second half of 2008. We experienced negative gross margin of $41.5 million in the fourth quarter of 2008.
In 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 December 31, 2008. As a result of the Company's decision to suspend construction at Aurora, Nebraska and Mount Vernon, Indiana, we incurred demobilization charges totaling $9.9 million.
Income in 2008 also benefited significantly from $17.1 million in gains from derivative transactions.
General
The following general factors should be considered in analyzing our results of operations:
Variability of Gross Profit
Our gross profit has fluctuated and may continue to fluctuate substantially from period to period. Gross profit from ethanol sales is mainly affected by changes in selling prices for ethanol, the cost to us of purchasing ethanol from marketing alliance partners and unaffiliated producers, along with the cost of corn, freight and the cost to convert corn to ethanol. The rise and fall of ethanol and corn prices affects the levels of our costs of goods, gross profit and inventory values, even in the absence of any increases or decreases in business activity. Selling prices for ethanol are affected principally by industry oversupply concerns, the price and availability of competing and complimentary fuels and the price of corn. All of these factors are beyond our control.
Our most volatile manufacturing costs are natural gas and corn. See "Item 1A - Risk Factors - Our business is dependent upon the availability and price of corn. Significant disruptions in the supply of corn will materially affect our operating results. In addition, since we generally cannot pass on increases in corn prices to our customers, continued periods of historically high corn prices will also materially adversely affect our operating results," and "Item 1A - Risk Factors - The market for natural gas is subject to market conditions that create uncertainty in the price and availability of the natural gas that we utilize in our manufacturing process." Since both natural gas and ethanol are energy-related products, there has been significant, although not perfect, correlation between their market prices. As a result, at times when natural gas prices had increased, thereby increasing our costs, ethanol prices have typically increased, thereby increasing our revenues and offsetting some of the impact on our results of operations.
Conversion Costs
Conversion costs per gallon are an important metric in determining our profitability. Conversion costs represent the cost of converting the corn into ethanol, and include 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. It does not include depreciation and amortization expense.
Summary of Critical Accounting Policies
We base this discussion and analysis of results of operations, cash flow and financial condition on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S.
Share-based Compensation Expense
Effective January 1, 2006, we adopted, on a modified prospective transition
method, Statement of Financial Accounting Standards No. 123(R), Share-Based
Payment ("SFAS 123(R)"), which requires measurement and recognition of
compensation expense for all share-based payment awards made to employees and
directors, including stock options, based on fair values. Share-based
compensation expense recognized is based on the value of the portion of
share-based payment awards that is ultimately expected to vest. Share-based
compensation expense recognized in our Consolidated Statements of Operations for
the years ended December 31, 2008, 2007 and 2006 include compensation expense
for unvested share-based payment awards granted prior to December 31, 2005,
based on the grant date fair value estimated in accordance with the minimum
value method as outlined in Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), and compensation expense
for the share-based payment awards granted subsequent to December 31, 2005 based
on the grant date fair value estimated in accordance with the provisions of SFAS
123(R). In conjunction with the adoption of SFAS 123(R), we elected to attribute
the value of share-based compensation to expense over the periods of requisite
service using the straight-line method.
Upon adoption of SFAS 123(R), we elected to value our share-based payment awards
granted beginning in fiscal year 2006 using a form of the Black-Scholes
option-pricing model (the "Option-Pricing Model"), which was previously used to
calculate stock-based compensation expense using the minimum value method as
outlined in SFAS 123. 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, 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 no considerable history of stock price volatility as
a public company at the time of the grants, we calculated volatility by
considering, among other things, the expected volatilities of public companies
engaged in similar industries. Pre-vesting forfeitures prior to 2008 were
estimated using a 3% forfeiture rate. During 2008, we adjusted the forfeiture
rate to 6.4% to reflect our experience with actual forfeitures. 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.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined using a weighted-average first-in-first-out ("FIFO") method for gallons produced at our plants, gallons purchased from our marketing alliance partners and other gallons purchased for resale. In assessing the ultimate realization of inventories, we perform a periodic analysis of market price and compare that to our weighted-average FIFO cost to ensure that our inventories are properly stated at the lower of cost or market.
Derivatives and Hedging Activities
Our operations and cash flows are subject to fluctuations due to changes in commodity prices. We use derivative financial instruments from time-to-time to manage commodity prices. Derivatives used are primarily commodity futures contracts, swaps and option contracts.
We apply the provisions of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, and by Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (hereinafter collectively referred to as "SFAS 133"), for our derivatives. These derivative contracts are not designated as hedges and, therefore, except for contracts that meet the normal purchase or normal sale exception, are marked to market each period, with corresponding gains and losses recorded in other non-operating income (loss). The fair value of these derivative contracts are recognized in other current assets or other current liabilities in the Consolidated Balance Sheets, net of any cash received from the relevant brokers.
SFAS 133 requires a company to evaluate contracts to determine whether the contracts are derivatives. Certain contracts that meet the literal definition of a derivative under SFAS 133 may be exempted from the accounting and reporting requirements of SFAS 133 as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. The Company elects to designate its forward purchases of corn and forward sales of ethanol as normal purchases and sales under SFAS 133. Accordingly, these contracts are not recorded in our financial results until performance under them occurs.
Income Taxes
Under Statement of Financial Accounting Standards No. 109 ("SFAS 109"), Accounting for Income Taxes, deferred tax liabilities and assets are recorded for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. Property, plant and equipment, stock-based compensation expense and investments in marketing alliance partners are the primary sources of these temporary differences. Deferred income taxes also includes net operating loss and capital loss carryforwards. The Company establishes valuation allowances to reduce deferred tax assets to amounts it believes are realizable and contingency reserves for implemented tax planning strategies. These valuation allowances and contingency reserves are adjusted based upon changing facts and circumstances.
Pension and Postretirement Benefit Costs
Net pension and postretirement costs were $0.3 million for the year ended December 31, 2008 and $0.5 million for the years ended December 31, 2007 and 2006. Total estimated pension and postretirement expense in 2009 is expected to be similar to previous years. These expenses are primarily included in cost of goods sold, and in selling, general and administrative expenses. We made contributions to our defined benefit pension plan in 2008, 2007 and 2006 of $0.9 million, $0.5 million, and $2.0 million, respectively. In 2009, we expect to make contributions totaling $1.0 million to our defined benefit plan.
Our pension and postretirement benefit costs are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates and expected long-term rates of return on plan assets. Material changes in our pension and postretirement benefit costs may occur in the future due to changes in these assumptions, changes in the number of plan participants, changes in the level of benefits provided, changes to the level of contributions to these plans and other factors.
We determine our actuarial assumptions for our pension and post retirement plans, after consultation with our actuaries, on December 31 of each year to calculate liability information as of that date and pension and postretirement expense for the following year. The discount rate assumption is determined based on a spot yield curve that includes bonds that are rated Corporate AA or higher with maturities that match expected benefit payments under the plan.
The expected long-term rate of return on plan assets reflects projected returns for the investment mix that have been determined to meet the plan's investment objectives. The expected long-term rate of return on plan assets is selected by taking into account the expected weighted averages of the investments of the assets, the fact that the plan assets are actively managed to mitigate downside risks, the historical performance of the market in general and the historical performance of the retirement plan assets over the past ten years.
Revenue Recognition
Revenue is generally recognized when title to products is transferred to an unaffiliated customer as long as the sales price is fixed or determinable and collectibility is reasonably assured. For the majority of sales, this generally occurs after the product has been offloaded at the customers' site. For others, the transfer of title occurs at the shipment origination point. The majority of sales are invoiced at the final per unit price which may be a previously contracted fixed price or a market price at the time of shipment. Other sales are invoiced and the initial receipts are collected based upon a provisional price, and such sales are adjusted to a final price based upon a monthly-average spot market price. Sales are made under normal terms and usually do not require collateral.
The Company also markets ethanol for other third-party producers. Revenues from such non-Company produced gallons are generally recorded on a gross basis in the accompanying statements of operations, as the Company takes title to the product, assumes all risks associated with the purchase and sale of such gallons and is considered the primary obligor on the sale. Transactions entered into with the same counterparty which have been negotiated in contemplation of one another are recorded on a net basis.
The majority of sales are based upon a delivered price, which includes a cost . . .
|
|