Edgar Filing: Green Plains Inc.

gpre- 20160930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2016

Commission File Number 001-32924

Green Plains Inc.

(Exact name of registrant as specified in its charter)


Iowa	84-1652107
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

450 Regency Parkway, Suite 400, Omaha, NE 68114	(402) 884-8700
(Address of principal executive offices, including zip code)	(Registrant’s telephone number, including area code)

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

☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

☒ Yes ☐ No

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

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐

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

☐ Yes ☒ No

The number of shares of common stock, par value $0.001 per share, outstanding as of October 31, 2016, was 38,368,478 shares.

TABLE OF CONTENTS



		Page
Commonly Used Defined Terms		2
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements

	Consolidated Balance Sheets	3

	Consolidated Statements of Operations	4

	Consolidated Statements of Comprehensive Income (Loss)	5

	Consolidated Statements of Cash Flows	6

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	41


PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	43

Item 4.	Mine Safety Disclosures	43

Item 5.	Other Information	43

Item 6.	Exhibits	44

Signatures		45

Commonly Used Defined Terms

Green Plains Inc. and Subsidiaries:


Green Plains; the company	Green Plains Inc. and its subsidiaries
BioProcess Algae	BioProcess Algae LLC
Fleischmann’s Vinegar	Fleischmann’s Vinegar Company, Inc.
Green Plains Cattle	Green Plains Cattle Company LLC
Green Plains Grain	Green Plains Grain Company LLC
Green Plains Partners; the partnership	Green Plains Partners LP
Green Plains Processing	Green Plains Processing LLC and its subsidiaries
Green Plains Trade	Green Plains Trade Group LLC
SCI Ingredients	SCI Ingredients Holdings, Inc.

Accounting Defined Terms:


ASC	Accounting Standards Codification
EBITDA	Earnings before interest, income taxes, depreciation and amortization
EPS	Earnings per share
Exchange Act	Securities Exchange Act of 1934, as amended
GAAP	U.S. Generally Accepted Accounting Principles
IPO	Initial public offering of Green Plains Partners LP
LIBOR	London Interbank Offered Rate
LTIP	Green Plains Partners LP 2015 Long-Term Incentive Plan
Nasdaq	The Nasdaq Global Market
SEC	Securities and Exchange Commission

Industry Defined Terms:


Bgy	Billion gallons per year
BTU	British Thermal Units
E15	Gasoline blended with up to 15% ethanol by volume
EIA	U.S. Energy Information Administration
EPA	U.S. Environmental Protection Agency
Mmg	Million gallons
Mmgy	Million gallons per year
RBOB	Reformulated blendstock for oxygenate blending
RIN	Renewable identification number
U.S.	United States
USDA	U.S. Department of Agriculture
WASDE	World Agriculture Supply and Demand Estimates

GREEN PLAINS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)



	September 30,		December 31,
	2016		2015

	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	407,359	$	384,867
Restricted cash		34,219		27,018
Accounts receivable, net of allowances of $342 and $285, respectively		132,574		96,150
Income taxes receivable		4,806		9,104
Inventories		324,287		353,957
Prepaid expenses and other		11,200		10,941
Derivative financial instruments		38,577		30,540
Total current assets		953,022		912,577
Property and equipment, net of accumulated depreciation of $397,470 and $338,558, respectively		1,139,592		922,070
Goodwill		40,877		40,877
Other assets		43,467		42,396
Total assets	$	2,176,958	$	1,917,920

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	129,317	$	166,963
Accrued and other liabilities		46,373		32,026
Derivative financial instruments		20,831		8,245
Income taxes payable		4,096		-
Short-term notes payable and other borrowings		229,086		226,928
Current maturities of long-term debt		13,244		4,507
Total current liabilities		442,947		438,669
Long-term debt		681,182		432,139
Deferred income taxes		80,932		81,797
Other liabilities		6,358		6,406
Total liabilities		1,211,419		959,011

Stockholders' equity
Common stock, $0.001 par value; 75,000,000 shares authorized; 46,051,685 and 45,281,571 shares issued, and 38,336,695 and 37,889,871 shares outstanding, respectively		46		45
Additional paid-in capital		656,522		577,787
Retained earnings		269,135		290,974
Accumulated other comprehensive loss		(54)		(1,165)
Treasury stock, 7,714,990 and 7,391,700 shares, respectively		(75,816)		(69,811)
Total Green Plains stockholders' equity		849,833		797,830
Noncontrolling interests		115,706		161,079
Total stockholders' equity		965,539		958,909
Total liabilities and stockholders' equity	$	2,176,958	$	1,917,920

See accompanying notes to the consolidated financial statements.

GREEN PLAINS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands, except per share amounts)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015

Revenues
Product revenues	$	839,786	$	740,634	$	2,472,741	$	2,219,319
Service revenues		2,066		2,163		6,042		6,356
Total revenues		841,852		742,797		2,478,783		2,225,675

Costs and expenses
Cost of goods sold		758,883		679,348		2,293,095		2,048,379
Operations and maintenance expenses		8,564		7,715		25,713		21,850
Selling, general and administrative expenses		24,264		19,280		68,225		58,473
Depreciation and amortization expenses		19,286		16,621		56,132		48,634
Total costs and expenses		810,997		722,964		2,443,165		2,177,336
Operating income		30,855		19,833		35,618		48,339

Other income (expense)
Interest income		484		319		1,263		749
Interest expense		(11,819)		(10,196)		(33,117)		(29,918)
Other, net		(1,553)		(519)		(2,050)		(2,484)
Total other expense		(12,888)		(10,396)		(33,904)		(31,653)
Income before income taxes		17,967		9,437		1,714		16,686
Income tax expense (benefit)		5,083		(604)		(4,339)		2,171
Net income		12,884		10,041		6,053		14,515
Net income attributable to noncontrolling interests		4,956		3,862		14,072		3,862
Net income (loss) attributable to Green Plains	$	7,928	$	6,179	$	(8,019)	$	10,653

Earnings per share:
Net income (loss) attributable to Green Plains - basic	$	0.21	$	0.16	$	(0.21)	$	0.28
Net income (loss) attributable to Green Plains - diluted	$	0.20	$	0.16	$	(0.21)	$	0.27
Weighted average shares outstanding:
Basic		38,282		38,066		38,301		37,966
Diluted		39,136		38,556		38,301		39,266

Cash dividend declared per share	$	0.12	$	0.12	$	0.36	$	0.28

See accompanying notes to the consolidated financial statements.

GREEN PLAINS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited and in thousands)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015

Net income	$	12,884	$	10,041	$	6,053	$	14,515
Other comprehensive income, net of tax:
Unrealized gains (losses) on derivatives arising during period, net of tax (expense) benefit of $(1,331), $(2,232), $762 and $(5,554), respectively		1,919		3,682		(1,395)		9,245
Reclassification of realized (gains) losses on derivatives, net of tax expense (benefit) of $(1,144), $547, $(1,369) and $(420), respectively		2,150		(903)		2,506		700
Total other comprehensive income, net of tax		4,069		2,779		1,111		9,945
Comprehensive income		16,953		12,820		7,164		24,460
Comprehensive income attributable to noncontrolling interests		4,956		3,862		14,072		3,862
Comprehensive income (loss) attributable to Green Plains	$	11,997	$	8,958	$	(6,908)	$	20,598

See accompanying notes to the consolidated financial statements.

GREEN PLAINS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)



	Nine Months Ended September 30,
	2016		2015
Cash flows from operating activities:
Net income	$	6,053	$	14,515
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization		56,132		48,634
Amortization of debt issuance costs and debt discount		7,588		5,756
Deferred income taxes		(16,413)		(39,645)
Stock-based compensation		4,837		3,207
Undistributed equity in loss of affiliates		2,067		2,678
Other		57		104
Changes in operating assets and liabilities before effects of business combinations:
Accounts receivable		(36,431)		(3,051)
Inventories		46,126		(8,045)
Derivative financial instruments		6,279		18,503
Prepaid expenses and other assets		(849)		6,732
Accounts payable and accrued liabilities		(23,704)		(56,636)
Current income taxes		8,089		(1,532)
Other		1,150		1,300
Net cash provided (used) by operating activities		60,981		(7,480)

Cash flows from investing activities:
Purchases of property and equipment		(35,658)		(44,464)
Acquisition of businesses, net of cash acquired		(252,488)		-
Investments in unconsolidated subsidiaries		(1,388)		(3,309)
Net cash used by investing activities		(289,534)		(47,773)

Cash flows from financing activities:
Proceeds from the issuance of long-term debt		337,000		178,400
Payments of principal on long-term debt		(40,578)		(194,819)
Proceeds from short-term borrowings		2,969,034		2,382,589
Payments on short-term borrowings		(2,967,191)		(2,391,874)
Proceeds from issuance of Green Plains Partners common units, net		-		157,422
Payments for repurchase of common stock		(6,005)		(4,003)
Payments of cash dividends and distributions		(27,837)		(10,646)
Change in restricted cash		(7,200)		13,085
Payments of loan fees		(7,810)		(5,314)
Proceeds from exercises of stock options		1,632		766
Net cash provided by financing activities		251,045		125,606

Net change in cash and cash equivalents		22,492		70,353
Cash and cash equivalents, beginning of period		384,867		425,510
Cash and cash equivalents, end of period	$	407,359	$	495,863

Continued on the following page

GREEN PLAINS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)



Continued from the previous page
	Nine Months Ended September 30,
	2016		2015

Supplemental disclosures of cash flow
Cash paid for income taxes	$	3,348	$	43,347
Cash paid for interest	$	24,280	$	23,262

See accompanying notes to the consolidated financial statements.

GREEN PLAINS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

References to the Company

References to “Green Plains” or the “company” in the consolidated financial statements and in these notes to the consolidated financial statements refer to Green Plains Inc., an Iowa corporation, and its subsidiaries.

Consolidated Financial Statements

The consolidated financial statements include the company’s accounts and all significant intercompany balances and transactions are eliminated. Unconsolidated entities are included in the financial statements on an equity basis. Interim period results are not necessarily indicative of the results to be expected for the entire year. Effective April 1, 2016, the company increased its ownership of BioProcess Algae, a joint venture formed in 2008, to 82.8% and consolidated BioProcess Algae in its consolidated financial statements beginning on that date.

The accompanying unaudited consolidated financial statements are prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Because they do not include all of the information and footnotes required by GAAP, the consolidated financial statements should be read in conjunction with the company’s annual report on Form 10-K for the year ended December 31, 2015.

The unaudited financial information reflects adjustments which are, in the opinion of management, necessary for a fair presentation of results of operations, financial position and cash flows for the periods presented. The adjustments are normal and recurring in nature, unless otherwise noted.

Reclassifications

Certain prior year amounts were reclassified to conform to the current year presentation. These reclassifications did not affect total revenues, costs and expenses, net income or stockholders’ equity.

Use of Estimates in the Preparation of Consolidated Financial Statements

The preparation of the consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The company bases its estimates on historical experience and assumptions it believes are proper and reasonable under the circumstances and regularly evaluates the appropriateness of its estimates and assumptions. Actual results could differ from those estimates. Key accounting policies, including but not limited to those relating to revenue recognition, depreciation of property and equipment, impairment of long-lived assets and goodwill, derivative financial instruments, and accounting for income taxes, are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements.

Description of Business

Green Plains is the third largest ethanol producer in North America. The company operates within four business segments: (1) ethanol production, which includes the production of ethanol, distillers grains and corn oil, (2) agribusiness, which includes grain handling and storage and cattle feedlot operations, (3) marketing and distribution, which includes marketing and merchant trading for company-produced and third-party ethanol, distillers grains, corn oil, natural gas and other commodities, and (4) partnership, which includes fuel storage and transportation services. The company is also a partner in a joint venture focused on developing technology to grow and harvest algae in commercially viable quantities.

Revenue Recognition

The company recognizes revenue when the following criteria are satisfied: persuasive evidence that an arrangement exists, title of product and risk of loss are transferred to the customer, price is fixed and determinable and collectability is reasonably assured.

Sales of ethanol, distillers grains, corn oil, natural gas and other commodities by the company’s marketing business are recognized when title of product and risk of loss are transferred to an external customer. Revenues related to marketing for third parties are presented on a gross basis when the company takes title of the product and assumes risk of loss. Unearned revenue is recorded for goods in transit when the company has received payment but the title has not yet been transferred to the customer. Revenues for receiving, storing, transferring and transporting ethanol and other fuels are recognized when the product is delivered to the customer.

The company routinely enters into fixed-price, physical-delivery energy commodity purchase and sale agreements. At times, the company settles these transactions by transferring its obligations to other counterparties rather than delivering the physical commodity. These transactions are reported net as a component of revenues. Revenues also include realized gains and losses on related derivative financial instruments, ineffectiveness on cash flow hedges and reclassifications of realized gains and losses on effective cash flow hedges from accumulated other comprehensive income or loss.

Sales of agricultural commodities, including cattle, are recognized when title of product and risk of loss are transferred to the customer, which depends on the agreed upon terms. The sales terms provide passage of title when shipment is made or the commodity is delivered. Revenues related to grain merchandising are presented gross and include shipping and handling, which is also a component of cost of goods sold. Revenues from grain storage are recognized when services are rendered.

A substantial portion of the partnership revenues are derived from fixed-fee commercial agreements for storage, terminal or transportation services. The partnership recognizes revenue when there is evidence an arrangement exists; risk of loss and title transfer to the customer; the price is fixed or determinable; and collectability is reasonably assured. Revenues from base storage, terminal or transportation services are recognized once these services are performed, which occurs when the product is delivered to the customer.

Cost of Goods Sold

Cost of goods sold includes direct labor, materials and plant overhead costs. Direct labor includes all compensation and related benefits of non-management personnel involved in ethanol plant and cattle feedlot operations. Grain purchasing and receiving costs, excluding labor costs for grain buyers and scale operators, are also included in cost of goods sold. Materials include the cost of corn feedstock, denaturant, process chemicals, cattle and veterinary supplies. Corn feedstock costs include unrealized gains and losses on related derivative financial instruments not designated as cash flow hedges, inbound freight charges, inspection costs and transfer costs as well as realized gains and losses on related derivative financial instruments, ineffectiveness on cash flow hedges and reclassifications of realized gains and losses on effective cash flow hedges from accumulated other comprehensive income or loss. Plant overhead consists primarily of plant and feedlot utilities, repairs and maintenance, yard expenses and outbound freight charges. Shipping costs incurred by the company, including railcar costs, are also reflected in cost of goods sold.

The company uses exchange-traded futures and options contracts to minimize the effect of price changes on the agribusiness segment’s grain and cattle inventories and forward purchase and sales contracts. Exchange-traded futures and options contracts are valued at quoted market prices and settled predominantly in cash. The company is exposed to loss when counterparties default on forward purchase and sale contracts. Grain inventories held for sale and forward purchase and sale contracts are valued at market prices when available or other market quotes adjusted for differences, primarily in transportation, between the exchange-traded market and local market where the terms of the contract is based. Changes in the fair value of grain inventories held for sale, forward purchase and sale contracts, and exchange-traded futures and options contracts are recognized as a component of cost of goods sold.

Operations and Maintenance Expenses

In the partnership segment, transportation expenses represent the primary component of operations and maintenance expenses. Transportation expenses includes railcar leases, freight and shipping of the company’s ethanol and co-products, as well as costs incurred storing ethanol at destination terminals.

Derivative Financial Instruments

The company uses various derivative financial instruments, including exchange-traded futures and exchange-traded and over-the-counter options contracts, to minimize risk and the effect of price changes related to corn, ethanol, cattle and natural gas. The company monitors and manages this exposure as part of its overall risk management policy to reduce the adverse effect market volatility may have on its operating results. The company may hedge these commodities as one way to mitigate risk, however, there may be situations when the hedging activities themselves result in losses.

By using derivatives to hedge exposures to changes in commodity prices, the company is exposed to credit and market risk. The company’s exposure to credit risk includes the counterparty’s failure to fulfill its performance obligations under the terms of the derivative contract. The company minimizes credit risk by entering into transactions with high quality counterparties, limiting the amount of financial exposure it has with each counterparty and monitoring their financial condition. Market risk is the risk that the value of the financial instrument might be adversely affected by a change in commodity prices or interest rates. The company manages market risk by incorporating parameters to monitor exposure within its risk management strategy which limits the types of derivative instruments and strategies the company can use and the degree of market risk it can take using derivative instruments.

The company evaluates its physical delivery contracts to determine if they qualify for normal purchase or sale exemptions which are expected to be used or sold over a reasonable period in the normal course of business. Contracts that do not meet the normal purchase or sale criteria are recorded at fair value. Changes in fair value are recorded in operating income unless the contracts qualify for, and the company elects to use, hedge accounting treatment.

Certain qualifying derivatives related to the ethanol production and agribusiness segments are designated as cash flow hedges. The company evaluates the derivative instrument to ascertain its effectiveness prior to entering into cash flow hedges. Ineffectiveness is recognized in current period results, while other unrealized gains and losses are reflected in accumulated other comprehensive income until the gain or loss from the underlying hedged transaction is realized. When it becomes probable a forecasted transaction will not occur, the cash flow hedge treatment is discontinued, which affects earnings. These derivative financial instruments are recognized in current assets or other current liabilities at fair value.

At times, the company hedges its exposure to changes in the value of inventories and designates qualifying derivatives as fair value hedges. The carrying amount of the hedged inventory is adjusted in current period results for changes in fair value. Ineffectiveness is recognized in current period results to the extent the change in fair value of the inventory is not offset by the change in fair value of the derivative.

Recent Accounting Pronouncements

Effective January 1, 2016, the company adopted the amended guidance in ASC Topic 835-30, Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a deduction from the carrying amount of the debt, consistent with debt discounts. The amended guidance has been applied on a retrospective basis, and the balance sheet of each individual period presented has been adjusted to reflect the period-specific effects of the new guidance.

Effective January 1, 2017, the company will adopt the amended guidance in ASC 718, Compensation – Stock Compensation, which requires all income tax effects of awards to be recognized in the income statement when the awards vest or settle. The amended guidance also will allow an employer to repurchase more of an employee’s shares than it can currently for tax withholding purposes without triggering liability accounting and make a policy election to account for forfeitures as they occur. Early application is permitted. The company is currently evaluating the impact the adoption of the amended guidance will have on the consolidated financial statements and related disclosures.

Effective January 1, 2017, the company will adopt the amended guidance in ASC 330, Inventory: Simplifying the Measurement of Inventory, which requires inventory to be measured at lower of cost or net realizable value. Net realizable value is the estimated selling prices during the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amended guidance will be applied prospectively.

Effective January 1, 2018, the company will adopt the amended guidance in ASC 606, Revenue from Contracts with Customers, which requires revenue recognition to reflect the transfer of promised goods or services to customers. The updated standard permits either the retrospective or cumulative effect transition method. Early application beginning January 1, 2017, is permitted. The company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.

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

2. GREEN PLAINS PARTNERS LP

Initial Public Offering of Subsidiary

On July 1, 2015, Green Plains Partners LP, or the partnership, a newly formed subsidiary of the company, closed its initial public offering, or the IPO. In conjunction with the IPO, the company contributed its downstream ethanol transportation and storage assets to the partnership. A total of 11,500,000 common units, representing limited partner interests, including 1,500,000 common units pursuant to the underwriters’ overallotment option, were sold to the public for $15.00 per common unit. The partnership received net proceeds of approximately $157.5 million, after deducting underwriting discounts, structuring fees and offering expenses. The partnership used the proceeds to make a distribution to the company of $155.3 million and to pay approximately $0.9 million in origination fees under its new $100.0 million revolving credit facility. The remaining $1.3 million was retained for general partnership purposes. The company now owns a 62.5% limited partner interest, consisting of 4,389,642 common units and 15,889,642 subordinated units, and a 2.0% general partner interest in the partnership. The public owns the remaining 35.5% limited partner interest in the partnership. As such, the partnership is consolidated in the company’s financial statements.

The partnership is a fee-based master limited partnership formed by Green Plains to provide fuel storage and transportation services by owning, operating, developing and acquiring ethanol and fuel storage tanks, terminals, transportation assets and other related assets and businesses. The partnership’s assets currently include (i) 38 ethanol storage facilities, located at or near the company’s 17 ethanol production plants, which have the ability to efficiently and effectively store and load railcars and tanker trucks with all of the ethanol produced at the company’s ethanol production plants, (ii) eight fuel terminal facilities, located near major rail lines, which enable the partnership to receive, store and deliver fuels from and to markets that seek access to renewable fuels, and (iii) transportation assets, including a leased railcar fleet of approximately 3,100 railcars, which is contracted to transport ethanol from the company’s ethanol production plants to refineries throughout the United States and international export terminals. The partnership expects to be the company’s primary downstream logistics provider to support its approximately 1.5 Bgy ethanol marketing and distribution business since the partnership’s assets are the principal method of storing and delivering the ethanol the company produces.

A substantial portion of the partnership’s revenues are derived from long-term, fee-based commercial agreements with Green Plains Trade, a subsidiary of the company. In connection with the IPO, the partnership (1) entered into (i) a ten-year fee-based storage and throughput agreement; (ii) a six-year fee-based rail transportation services agreement; and (iii) a one-year fee-based trucking transportation agreement, and (2) assumed (i) an approximately 2.5-year terminal services agreement for the partnership’s Birmingham, Alabama-unit train terminal; and (ii) various other terminal services agreements for its other fuel terminal facilities, each with Green Plains Trade. The partnership’s storage and throughput agreement, and certain terminal services agreements, including the terminal services agreement for the Birmingham facility, are supported by minimum volume commitments. The partnership’s rail transportation services agreement is supported by minimum take-or-pay capacity commitments. The company also has agreements which establish fees for general and administrative, and operational and maintenance services it provides. These transactions are eliminated in the presentation of consolidated financial results.

3. ACQUISITIONS

Acquisition of Abengoa Ethanol Plants

On September 23, 2016, the company acquired three ethanol plants located in Madison, Illinois, Mount Vernon, Indiana, and York, Nebraska from subsidiaries of Abengoa S.A. for approximately $237.4 million for the ethanol plant assets and $15.2 million for working capital acquired or assumed, subject to certain post-closing adjustments. These ethanol facilities have a combined annual production capacity of 236 mmgy. The company recorded $0.8 million of acquisition costs for the Abengoa ethanol plants to selling, general and administrative expenses during the three months ended September 30, 2016.

The purchase price allocation is based on the preliminary results of an independent valuation. The purchase price and purchase price allocation are preliminary until contractual post-closing working capital adjustments are finalized and the final independent valuation report is issued. The following is a summary of the preliminary purchase price of assets acquired and liabilities assumed (in thousands):


Amounts of Identifiable Assets Acquired and Liabilities Assumed
Inventory		$	16,456
Accounts receivable, net			1,588
Prepaid expenses and other			457
Property and equipment, net			235,395
Other assets			60

Current liabilities			(1,403)
	Total identifiable net assets	$	252,553

Concurrently with the company’s acquisition of the Abengoa ethanol plants, on September 23, 2016, the partnership acquired the storage assets of the Abengoa ethanol plants from the company for $90 million in a transfer between entities under common control and entered into amendments to the related commercial agreements with Green Plains Trade.

Disclosure of pro forma combined total revenues and net income (loss) information for the acquisition of the Abengoa ethanol plants is not currently practicable because financial statements for the acquired plants are currently under audit and have not yet been provided by the sellers. The company expects to report pro forma financial information in the annual report on Form 10-K for the year ending December 31, 2016.

Acquisition of Hereford Ethanol Plant

On November 12, 2015, the company acquired an ethanol production facility in Hereford, Texas, with an annual production capacity of approximately 100 mmgy for approximately $78.8 million for the ethanol plant assets, as well as working capital acquired or assumed of approximately $19.4 million.

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


Amounts of Identifiable Assets Acquired and Liabilities Assumed
Inventory		$	20,487
Derivative financial instruments			2,625
Property and equipment, net			78,786

Current liabilities			(2,542)
Other liabilities			(1,128)
	Total identifiable net assets	$	98,228

Effective January 1, 2016, the partnership acquired the storage and transportation assets of the Hereford and Hopewell production facilities in a transfer between entities under common control for approximately $62.3 million and entered into amendments to the related commercial agreements with Green Plains Trade.

4. FAIR VALUE DISCLOSURES

The following methods, assumptions and valuation techniques were used to estimate the fair value of the company’s financial instruments:

Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities the company can access at the measurement date. Level 1 unrealized gains and losses on commodity derivatives relate to exchange-traded open trade equity and option values in the company’s brokerage accounts.

Level 2 – directly or indirectly observable inputs such as quoted prices for similar assets or liabilities in active markets other than quoted prices included within Level 1, quoted prices for identical or similar assets in markets that are not active, and other inputs that are observable or can be substantially corroborated by observable market data through correlation or other means. Grain inventories held for sale in the agribusiness segment are valued at nearby futures values, plus or minus nearby basis.

Level 3 – unobservable inputs that are supported by little or no market activity and comprise a significant component of the fair value of the assets or liabilities. The company currently does not have any recurring Level 3 financial instruments.

There have been no changes in valuation techniques and inputs used in measuring fair value. The company’s assets and liabilities by level are as follows (in thousands):


	Fair Value Measurements at September 30, 2016
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Reclassification for Balance Sheet
	(Level 1)		(Level 2)		Presentation		Total

Assets:
Cash and cash equivalents	$	407,359	$	-	$	-	$	407,359
Restricted cash		34,219		-		-		34,219
Margin deposits		8,792		-		(8,792)		-
Inventories carried at market		-		45,199		-		45,199
Unrealized gains on derivatives		26,098		17,468		(4,989)		38,577
Other assets		116		-		-		116
Total assets measured at fair value	$	476,584	$	62,667	$	(13,781)	$	525,470

Liabilities:
Unrealized losses on derivatives	$	10,938	$	23,674	$	(13,781)	$	20,831
Other		-		15		-		15
Total liabilities measured at fair value	$	10,938	$	23,689	$	(13,781)	$	20,846


	Fair Value Measurements at December 31, 2015
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Reclassification for Balance Sheet
	(Level 1)		(Level 2)		Presentation		Total

Assets:
Cash and cash equivalents	$	384,867	$	-	$	-	$	384,867
Restricted cash		27,018		-		-		27,018
Margin deposits		7,658		-		(7,658)		-
Inventories carried at market		-		43,936		-		43,936
Unrealized gains on derivatives		19,756		7,145		3,639		30,540
Other assets		117		-		-		117
Total assets measured at fair value	$	439,416	$	51,081	$	(4,019)	$	486,478

Liabilities:
Unrealized losses on derivatives	$	4,492	$	7,772	$	(4,019)	$	8,245
Total liabilities measured at fair value	$	4,492	$	7,772	$	(4,019)	$	8,245

The company believes the fair value of its debt was approximately $913.8 million compared with a book value of $923.5 million at September 30, 2016, and the fair value of its debt was approximately $661.8 million compared with a book value of $663.6 million at December 31, 2015. The company estimated the fair value of its outstanding debt using Level 2 inputs. The company believes the fair values of its accounts receivable and accounts payable approximated book value, which were $132.6 million and $129.3 million, respectively, at September 30, 2016, and $96.2 million and $167.0 million, respectively, at December 31, 2015.

Although the company currently does not have any recurring Level 3 financial measurements, the fair values of tangible assets and goodwill acquired and the equity component of convertible debt represent Level 3 measurements which were derived using a combination of the income approach, market approach and cost approach for the specific assets or liabilities being valued.

5. SEGMENT INFORMATION

Company management reports the financial and operating performance in the following four operating segments: (1) ethanol production, which includes the production of ethanol, distillers grains and corn oil, (2) agribusiness, which includes grain handling and storage and cattle feedlot operations, (3) marketing and distribution, which includes marketing and merchant trading for company-produced and third-party ethanol, distillers grains, corn oil, natural gas and other commodities, and (4) partnership, which includes fuel storage and transportation services.

Under GAAP, when transferring assets between entities under common control, the entity receiving the net assets initially recognizes the carrying amounts of the assets and liabilities at the date of transfer. The transferee’s prior period financial statements are restated for all periods its operations were part of the parent’s consolidated financial statements. On July 1, 2015, Green Plains Partners received ethanol storage and railcar assets and liabilities in a transfer between entities under common control. Effective January 1, 2016, the partnership acquired the storage and transportation assets of the Hereford and Hopewell production facilities in a transfer between entities under common control and entered into amendments to the related commercial agreements with Green Plains Trade. The transferred assets and liabilities are recognized at our historical cost and reflected retroactively in the segment information of the consolidated financial statements presented in this Form 10-Q. The assets of Green Plains Partners were previously included in the ethanol production and marketing and distribution segments. Expenses related to the ethanol storage and railcar assets, such as depreciation, amortization and railcar lease expenses, are also reflected retroactively in the following segment information. There were no revenues related to the operation of the ethanol storage and railcar assets in the partnership segment prior to their respective transfers to the partnership, when the related commercial agreements with Green Plains Trade became effective.

Corporate activities include selling, general and administrative expenses, consisting primarily of compensation, professional fees and overhead costs not directly related to a specific operating segment.

During the normal course of business, the operating segments do business with each other. For example, the ethanol production segment sells ethanol to the marketing and distribution segment, the agribusiness segment sells grain to the ethanol production segment and the partnership segment provides fuel storage and transportation services for the marketing and distribution segment. These intersegment activities are treated like third-party transactions and recorded at market values. Consequently, these transactions affect segment performance; however, they do not impact the company’s consolidated results since the revenues and corresponding costs are eliminated in consolidation.

The following tables set forth certain financial data for the company’s operating segments (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015

Revenues (1):
Ethanol production:
Revenues from external customers	$	74,892	$	37,702	$	222,424	$	140,640
Intersegment revenues		457,549		352,215		1,249,333		1,145,879
Total segment revenues		532,441		389,917		1,471,757		1,286,519
Agribusiness:
Revenues from external customers		83,615		54,519		242,049		191,495
Intersegment revenues		359,715		255,671		1,058,813		783,388
Total segment revenues		443,330		310,190		1,300,862		974,883
Marketing and distribution:
Revenues from external customers		681,279		648,413		2,008,268		1,887,184
Intersegment revenues		54,704		21,914		165,558		93,176
Total segment revenues		735,983		670,327		2,173,826		1,980,360
Partnership:
Revenues from external customers		2,066		2,163		6,042		6,356
Intersegment revenues		24,139		19,247		69,445		21,895
Total segment revenues		26,205		21,410		75,487		28,251
Revenues including intersegment activity		1,737,959		1,391,844		5,021,932		4,270,013
Intersegment eliminations		(896,107)		(649,047)		(2,543,149)		(2,044,338)
Revenues as reported	$	841,852	$	742,797	$	2,478,783	$	2,225,675

(1)

Revenues from external customers include realized gains and losses from derivative financial instruments.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015

Cost of goods sold:
Ethanol production	$	494,225	$	365,348	$	1,410,720	$	1,184,595
Agribusiness		434,582		307,995		1,278,211		962,979
Marketing and distribution		726,323		656,934		2,147,803		1,950,327
Intersegment eliminations		(896,247)		(650,929)		(2,543,639)		(2,049,522)
	$	758,883	$	679,348	$	2,293,095	$	2,048,379


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015

Operating income (loss):
Ethanol production	$	15,311	$	5,528	$	(7,385)	$	43,139
Agribusiness		6,251		365		15,039		5,833
Marketing and distribution		5,252		9,406		13,908		17,446
Partnership		15,084		11,030		42,958		416
Intersegment eliminations		141		1,882		491		5,264
Corporate activities		(11,184)		(8,378)		(29,393)		(23,759)
	$	30,855	$	19,833	$	35,618	$	48,339

The following table sets forth third-party revenues by product line (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015

Revenues:
Ethanol	$	550,724	$	468,005	$	1,622,168	$	1,381,203
Distillers grains		129,345		121,273		357,070		359,164
Corn oil		49,844		28,949		111,727		67,649
Grain		30,003		47,106		145,800		199,982
Cattle		70,012		56,904		201,423		168,381
Service revenues		2,066		2,163		6,042		6,356
Other		9,858		18,397		34,553		42,940
	$	841,852	$	742,797	$	2,478,783	$	2,225,675

The following table sets forth total assets by operating segment (in thousands):


	September 30,		December 31,
	2016		2015

Total assets (1):
Ethanol production	$	1,199,374	$	1,002,270
Agribusiness		271,290		300,364
Marketing and distribution		279,368		230,651
Partnership		75,541		81,430
Corporate assets		362,121		314,068
Intersegment eliminations		(10,736)		(10,863)
	$	2,176,958	$	1,917,920

(1)

Asset balances by segment exclude intercompany payable and receivable balances.

6. INVENTORIES

Inventories are carried at lower of cost or market, except for commodities held for sale and fair-value hedged inventories, which are reported at market value.

The components of inventories are as follows (in thousands):


	September 30,		December 31,
	2016		2015

Finished goods	$	68,654	$	71,595
Commodities held for sale		35,880		43,936
Raw materials		94,080		116,673
Work-in-process		95,303		96,950
Supplies and parts		30,370		24,803
	$	324,287	$	353,957

7. GOODWILL

The company did not have any changes in the carrying amount of goodwill, which was $40.9 million at September 30, 2016, and December 31, 2015. Goodwill of $30.3 million is attributable to the ethanol production segment and $10.6 million is attributable to the partnership segment.

8. DERIVATIVE FINANCIAL INSTRUMENTS

At September 30, 2016, the company’s consolidated balance sheet reflected unrealized losses of $0.1 million, net of tax, in accumulated other comprehensive income (loss). The company expects these losses will be reclassified in operating income over the next 12 months as a result of hedged transactions that are forecasted to occur. The amount realized in operating income will differ as commodity prices change.

Fair Values of Derivative Instruments

The fair values of the company’s derivative financial instruments and the line items on the consolidated balance sheets where they are reported are as follows (in thousands):


	Asset Derivatives'						Liability Derivatives'
	Fair Value						Fair Value
	September 30,			December 31,			September 30,		December 31,
	2016			2015			2016		2015
Derivative financial instruments (1)	$	29,785	(2)	$	22,882	(3)	$	-	$	-
Accrued and other liabilities		-			-			20,831		8,245
Other liabilities		-			-			15		-
Total	$	29,785		$	22,882		$	20,846	$	8,245

(1) Derivative financial instruments as reflected on the consolidated balance sheets are net of related margin deposit assets of $8.8 million and $7.7 million at September 30, 2016 and December 31, 2015, respectively.

(2) Balance at September 30, 2016 includes $4.2 million of net unrealized gains on derivative financial instruments designated as cash flow hedging instruments.

(3)Balance at December 31, 2015 includes $2.3 million of net unrealized losses on derivative financial instruments designated as cash flow hedging instruments.

Refer to Note 4 - Fair Value Disclosures, which contains fair value information related to derivative financial instruments.

Effect of Derivative Instruments on Consolidated Statements of Operations and Consolidated Statements of Stockholders’ Equity and Comprehensive Income

The gains or losses recognized in income and other comprehensive income related to the company’s derivative financial instruments and the line items on the consolidated financial statements where they are reported are as follows (in thousands):


Gains (Losses) on Derivative Instruments Not	Three Months Ended September 30,				Nine Months Ended September 30,
Designated in a Hedging Relationship	2016		2015		2016		2015
Revenues	$	(1,084)	$	(9,431)	$	6,187