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 June 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
|
|
05-0569368
|
(State of Incorporation)
|
|
(IRS Employer Identification No.)
|
|
|
|
120 North Parkway
|
|
|
Pekin, Illinois
|
|
61554
|
(Address of Principal Executive Offices)
|
|
(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
|
Accelerated filer
x
|
Non-accelerated filer
o
(Do not check if a smaller
reporting company)
|
Smaller
reporting company
o
|
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
|
|
Outstanding
as of August 5, 2008
|
Common Stock, $0.001 Par Value
|
|
41,970,988 Shares
|
Table
of Contents
PART I.
FINANCIAL INFORMATION
Item 1. Financial
Statements
Aventine
Renewable Energy Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
Three months ended June 30,
|
|
Six months ended June 30,
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|
(In thousands except per share amounts)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
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|
$
|
601,591
|
|
$
|
394,914
|
|
$
|
1,111,539
|
|
$
|
831,576
|
|
Cost of goods
sold
|
|
568,731
|
|
367,485
|
|
1,054,596
|
|
775,732
|
|
Gross profit
|
|
32,860
|
|
27,429
|
|
56,943
|
|
55,844
|
|
Selling, general
and administrative expenses
|
|
10,139
|
|
8,779
|
|
19,008
|
|
18,377
|
|
Loss related to
auction rate securities
|
|
8,476
|
|
|
|
31,601
|
|
|
|
Other (income)
|
|
(1,617
|
)
|
(514
|
)
|
(2,394
|
)
|
(678
|
)
|
Operating income
|
|
15,862
|
|
19,164
|
|
8,728
|
|
38,145
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
506
|
|
4,167
|
|
2,745
|
|
5,535
|
|
Interest expense
|
|
(1,125
|
)
|
(7,021
|
)
|
(3,516
|
)
|
(7,357
|
)
|
Other
non-operating income (loss)
|
|
(14,121
|
)
|
2,139
|
|
(12,253
|
)
|
6,008
|
|
Minority
interest
|
|
314
|
|
(725
|
)
|
505
|
|
(1,243
|
)
|
Income (loss)
before income taxes
|
|
1,436
|
|
17,724
|
|
(3,791
|
)
|
41,088
|
|
Income tax
expense
|
|
3,354
|
|
5,117
|
|
8,922
|
|
13,541
|
|
Net income
(loss)
|
|
$
|
(1,918
|
)
|
$
|
12,607
|
|
$
|
(12,713
|
)
|
$
|
27,547
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
Income (loss)
per common share basic:
|
|
$
|
(0.05
|
)
|
$
|
0.30
|
|
$
|
(0.30
|
)
|
$
|
0.66
|
|
Basic weighted
average number of common shares
|
|
41,971
|
|
41,912
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|
41,905
|
|
41,861
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
per common share diluted:
|
|
$
|
(0.05
|
)
|
$
|
0.30
|
|
$
|
(0.30
|
)
|
$
|
0.65
|
|
Diluted weighted
average number of common and common equivalent shares
|
|
41,999
|
|
42,649
|
|
41,932
|
|
42,554
|
|
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)
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
114,354
|
|
$
|
17,171
|
|
Short-term
investments
|
|
|
|
211,500
|
|
Accounts
receivable
|
|
84,158
|
|
73,058
|
|
Inventories
|
|
100,951
|
|
81,488
|
|
Income tax
receivable
|
|
2,509
|
|
11,962
|
|
Prepaid expenses
and other current assets
|
|
9,674
|
|
12,816
|
|
Total current
assets
|
|
311,646
|
|
407,995
|
|
Property, plant
and equipment, net
|
|
104,893
|
|
111,867
|
|
Construction in
process
|
|
353,553
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|
226,410
|
|
Net deferred tax
assets
|
|
|
|
1,196
|
|
Other assets
|
|
15,156
|
|
14,717
|
|
Total assets
|
|
$
|
785,248
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|
$
|
762,185
|
|
|
|
|
|
|
|
Liabilities
and Stockholders Equity
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
Accounts payable
|
|
$
|
118,623
|
|
$
|
91,871
|
|
Accrued interest
|
|
7,500
|
|
7,500
|
|
Accrued
liabilities
|
|
3,578
|
|
3,625
|
|
Other current
liabilities
|
|
4,602
|
|
1,622
|
|
Total current
liabilities
|
|
134,303
|
|
104,618
|
|
Senior unsecured
10% notes due April 2017
|
|
300,000
|
|
300,000
|
|
Minority
interest
|
|
9,327
|
|
9,832
|
|
Net deferred tax
liabilities
|
|
1,371
|
|
|
|
Other long-term
liabilities
|
|
3,780
|
|
3,864
|
|
Total
liabilities
|
|
448,781
|
|
418,314
|
|
Stockholders
equity
|
|
|
|
|
|
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 June 30, 2008 and
December 31, 2007, respectively, net of 21,548,640 shares held in
treasury as of June 30, 2008 and December 31, 2007
|
|
42
|
|
42
|
|
Preferred stock,
50,000,000 shares authorized, no shares issued or outstanding
|
|
|
|
|
|
Additional
paid-in capital
|
|
284,518
|
|
279,218
|
|
Retained
earnings
|
|
52,222
|
|
64,935
|
|
Accumulated
other comprehensive loss
|
|
(315
|
)
|
(324
|
)
|
Total
stockholders equity
|
|
336,467
|
|
343,871
|
|
Total
liabilities and stockholders equity
|
|
$
|
785,248
|
|
$
|
762,185
|
|
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)
|
|
Six Months Ended June 30,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(12,713
|
)
|
$
|
27,547
|
|
Adjustments to
reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
Loss related to
auction rate securities
|
|
31,601
|
|
|
|
Depreciation and
amortization
|
|
7,124
|
|
6,205
|
|
Minority
interest
|
|
(505
|
)
|
1,243
|
|
Stock-based
compensation expense
|
|
3,881
|
|
3,345
|
|
Deferred income
tax
|
|
2,567
|
|
1,373
|
|
Other
|
|
(352
|
)
|
265
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
Accounts
receivable, net
|
|
(11,100
|
)
|
30,832
|
|
Inventories
|
|
(19,463
|
)
|
(7,872
|
)
|
Accounts payable
and other liabilities
|
|
29,685
|
|
(26,787
|
)
|
Other changes in
operating assets and liabilities
|
|
11,561
|
|
8,851
|
|
Net cash
provided by operating activities
|
|
42,286
|
|
45,002
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
Additions to
property, plant and equipment, net
|
|
(129,555
|
)
|
(78,354
|
)
|
Investment in
short-term securities
|
|
|
|
(242,848
|
)
|
Sale of
short-term securities
|
|
179,899
|
|
|
|
Indemnification
proceeds
|
|
3,039
|
|
|
|
Proceeds from
the sale of property, plant and equipment
|
|
14
|
|
|
|
Net cash
provided by (used for) investing activities
|
|
53,397
|
|
(321,202
|
)
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
Proceeds from
issuance of senior unsecured notes
|
|
|
|
300,000
|
|
Payment of debt
issuance costs
|
|
|
|
(8,221
|
)
|
Proceeds from
stock option exercises
|
|
|
|
200
|
|
Proceeds from
the issuance of common stock
|
|
1,500
|
|
|
|
Distributions to
minority shareholders
|
|
|
|
(1,511
|
)
|
Net cash
provided by financing activities
|
|
1,500
|
|
290,468
|
|
Net increase in
cash and cash equivalents
|
|
97,183
|
|
14,268
|
|
Cash and cash
equivalents at beginning of period
|
|
17,171
|
|
29,791
|
|
Cash and cash
equivalents at end of period
|
|
$
|
114,354
|
|
$
|
44,059
|
|
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 six month periods
ended June 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 June 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 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
4
Table
of Contents
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)
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Finished
products
|
|
$
|
91,782
|
|
$
|
73,530
|
|
Work-in-process
|
|
3,872
|
|
2,035
|
|
Raw materials
|
|
2,928
|
|
2,757
|
|
Supplies
|
|
2,369
|
|
3,166
|
|
Totals
|
|
$
|
100,951
|
|
$
|
81,488
|
|
(4)
Prepaid Expenses and Other
Current Assets
Prepaid
expenses and other current assets are as follows:
(In thousands)
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Prepaid motor
fuel taxes
|
|
$
|
2,099
|
|
$
|
5,061
|
|
Margin deposits
on derivative instruments
|
|
3,373
|
|
4,013
|
|
Prepaid
insurance
|
|
1,440
|
|
1,107
|
|
Prepaid ethanol
|
|
|
|
1,050
|
|
Deferred income
taxes current
|
|
854
|
|
854
|
|
Prepaid
relocation
|
|
527
|
|
|
|
Other prepaid
expenses
|
|
1,381
|
|
731
|
|
Totals
|
|
$
|
9,674
|
|
$
|
12,816
|
|
(5)
Other Assets
Other
assets are as follows:
(In thousands)
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Deferred debt
issuance costs
|
|
$
|
7,135
|
|
$
|
7,533
|
|
Investment in
marketing alliances
|
|
6,000
|
|
6,000
|
|
Funded status of
pension plan
|
|
2,021
|
|
1,184
|
|
Totals
|
|
$
|
15,156
|
|
$
|
14,717
|
|
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.
5
(6)
Debt
The
following table summarizes the Companys long-term debt:
(In thousands)
|
|
June 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
|
|
Senior 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 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 of $1.8 million each quarter beginning with
the quarter ending December 31, 2007.
At June 30, 2008, the amount of property, plant and equipment which
was eligible for inclusion in the calculation of the borrowing base was $44.6
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% fee, 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
investments of principal, interest expense, and dividend and certain other
payments) of 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
6
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.
We had no borrowings outstanding under our secured revolving credit
facility at June 30, 2008, and $21.9 million of standby letters of credit
outstanding, thereby leaving approximately $131.3 million in borrowing
availability under our secured revolving credit facility as of that date.
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 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
(7)
Other Current Liabilities
Other current liabilities are as follows:
(In thousands)
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Income
taxes payable
|
|
$
|
1,460
|
|
$
|
|
|
Deferred
revenue
|
|
1,421
|
|
|
|
Accrued
property taxes
|
|
591
|
|
578
|
|
Unearned
commissions
|
|
424
|
|
424
|
|
Accrued
sales tax
|
|
243
|
|
184
|
|
Deferred
income taxes
|
|
400
|
|
379
|
|
Other
accrued operating expenses
|
|
63
|
|
57
|
|
Totals
|
|
$
|
4,602
|
|
$
|
1,622
|
|
(8)
Other Long-Term Liabilities
Other long-term liabilities are as follows:
(In thousands)
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Accrued
postretirement
|
|
$
|
2,438
|
|
2,310
|
|
Unearned
commissions
|
|
1,342
|
|
1,554
|
|
Totals
|
|
$
|
3,780
|
|
$
|
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 for 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).
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 June 30, 2008:
8
|
|
|
|
Fair Value Measurements at the Reporting Date Using
|
|
|
|
Fair Value
at
June 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
|
|
$
|
114,354
|
|
$
|
114,354
|
|
|
|
|
|
Commodity
futures contracts recorded in prepaid expenses and other
|
|
$
|
(17,619
|
)
|
$
|
(17,619
|
)
|
|
|
|
|
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 six months ended June 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 June 30, 2008
|
|
$
|
|
|
During the
three month period ended June 30, 2008, the Company generated cash of
$97.1 million from the sale of all of its remaining position of auction rate
securities (Level 3 assets). As a
result, the Company recorded in the three month period ended June 30, 2008
an additional loss of $8.5 million, bringing the total losses related to Level
3 assets in 2008 to $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 June 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 losses of $14.1 million and $12.3 million, respectively, for the
three and six month periods ended June 30, 2008 and net gains of $2.1
million and $6.0 million, respectively, for the three and six month periods
ended June 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.
9
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 June 30, 2008 and December 31, 2007. The fair value of these instruments is based
upon the closing market price at period end:
|
|
As of June 30, 2008
|
|
As of December 31, 2007
|
|
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Cost
investments
|
|
6,000
|
|
n/a
|
|
6,000
|
|
n/a
|
|
Long-term
debt
|
|
300,000
|
|
190,500
|
|
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 very 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 are estimated using a
3% forfeiture rate. 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 June 30, 2008 and 2007 was approximately $2.0 million and $1.8
million, respectively. For the three
month period ended June 30, 2008, $1.9 million was charged to SG&A
expense and $0.1 million was charged to cost of goods sold. For the three month period ended June 30,
2007, $1.7 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 $0.03 per basic and fully diluted share for the three
month periods ended June 30, 2008 and 2007, respectively. Pre-tax stock-based compensation expense for
the six month periods ended June 30, 2008 and 2007 was approximately $3.9
million and $3.4 million, respectively.
For the six month period ended June 30, 2008, $3.7 million was
charged to SG&A expense and $0.2 million was charged to cost of goods
sold. For the six month period ended June 30,
2007, $3.3 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 $0.06 per basic and fully diluted share for the six month
period ended June 30, 2008 and by $0.05 per basic and
10
fully
diluted share for the six month period ended June 30, 2007. The Company recognized a tax benefit on its
condensed consolidated statement of income from stock-based compensation
expense in the amount of $0.7 million and $0.5 million for the three month
periods ended June 30, 2008 and 2007, respectively. For the six month period ended June 30,
2008 and 2007, the Company recognized a tax benefit on its condensed
consolidated statement of income from stock-based compensation expense in the
amount of $1.5 million and $1.0 million, respectively. The Company recorded pre-tax stock-based
compensation expense for the three and six month periods ended June 30,
2008 and 2007 as follows:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
(in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense:
|
|
|
|
|
|
|
|
|
|
Non-qualified
stock options
|
|
$
|
1.7
|
|
$
|
1.5
|
|
$
|
3.3
|
|
$
|
3.0
|
|
Restricted
stock
|
|
0.1
|
|
0.1
|
|
0.2
|
|
0.2
|
|
Restricted
stock units
|
|
|
|
0.1
|
|
0.1
|
|
0.1
|
|
Long-term
incentive stock plan
|
|
0.2
|
|
0.1
|
|
0.3
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 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
|
|
$
|
16.6
|
|
2.8
|
|
$
|
19.1
|
|
2.6
|
|
Restricted
stock
|
|
0.9
|
|
3.6
|
|
1.2
|
|
4.4
|
|
Restricted
stock units
|
|
0.1
|
|
0.7
|
|
0.1
|
|
1.4
|
|
Long-term
incentive stock plan
|
|
1.6
|
|
1.8
|
|
1.6
|
|
2.5
|
|
Total
|
|
$
|
19.2
|
|
2.8
|
|
$
|
22.0
|
|
2.7
|
|
The Company did not grant any stock options during the quarter ended June 30,
2008. The Company did grant stock options
during the quarter ended June 30, 2007.
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 June 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. Assumptions for
options granted in the quarter ended June 30, 2007 are as follows:
|
|
2007
|
|
Expected
stock price volatility
|
|
58.0
|
%
|
Expected
life (in years)
|
|
6.5
|
|
Risk-free
interest rate
|
|
4.9
|
%
|
Expected
dividend yield
|
|
0.0
|
%
|
Weighted
average fair value
|
|
$
|
10.57
|
|
|
|
|
|
|
11
The
following table summarizes stock options outstanding and changes during the six
month period ended June 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
|
|
9.9
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Cancelled
or expired
|
|
38
|
|
14.42
|
|
9.5
|
|
|
|
Options
outstanding June 30, 2008
|
|
4,046
|
|
$
|
7.87
|
|
7.2
|
|
$
|
|
|
Options
exercisable June 30, 2008
|
|
1,889
|
|
$
|
4.84
|
|
6.1
|
|
$
|
|
|
The range of exercise prices of the exercisable options and outstanding
options at June 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
|
|
5.0
|
|
$2.36
- $4.80
|
|
584
|
|
1,410
|
|
7.2
|
|
$7.05
|
|
|
|
510
|
|
9.7
|
|
$15.26
- $17.29
|
|
53
|
|
450
|
|
8.8
|
|
$22.15
- $22.50
|
|
244
|
|
630
|
|
7.8
|
|
$43.00
|
|
16
|
|
40
|
|
8.0
|
|
Totals
|
|
1,889
|
|
4,046
|
|
7.2
|
|
Restricted stock award activity for the six months ended June 30,
2008 is summarized below:
|
|
Shares
|
|
Weighted
Average Grant
Date Fair
Value per
Award
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Unvested
restricted stock awards January 1, 2008
|
|
75.9
|
|
$
|
16.29
|
|
Granted
|
|
|
|
|
|
Vested
|
|
16.8
|
|
17.41
|
|
Cancelled
or expired
|
|
|
|
|
|
Unvested
restricted stock awards June 30, 2008
|
|
59.1
|
|
$
|
15.97
|
|
Restricted
stock unit award activity for the six months ended June 30, 2008 is
summarized below:
12
|
|
Shares
|
|
Weighted
Average Grant
Date Fair
Value per
Award
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Unvested
Restricted stock unit awards January 1, 2008
|
|
18.0
|
|
$
|
15.85
|
|
Granted
|
|
9.3
|
|
13.09
|
|
Vested
|
|
7.8
|
|
16.58
|
|
Cancelled
or expired
|
|
|
|
|
|
Unvested
restricted stock unit awards June 30, 2008
|
|
19.5
|
|
$
|
14.22
|
|
(11)
Interest Expense
The following table summarizes interest expense:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
(in thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
7,500
|
|
$
|
7,500
|
|
$
|
15,008
|
|
$
|
7,836
|
|
Amortization
of deferred debt issuance costs
|
|
259
|
|
229
|
|
501
|
|
229
|
|
Capitalized
interest
|
|
(6,634
|
)
|
(708
|
)
|
(11,993
|
)
|
(708
|
)
|
Interest
expense, net
|
|
$
|
1,125
|
|
$
|
7,021
|
|
$
|
3,516
|
|
$
|
7,357
|
|
(12)
Pension Expense
Defined Contribution Plans
We have 401(k) plans covering substantially all of our
employees. We recorded expense with
respect to these plans for the three month periods ended June 30, 2008 and
2007 of $0.3 million, and expense of $0.6 million and $0.7 million for the six
month periods ended June 30, 2008 and 2007, respectively. Contributions made under our defined
contribution plans include a match, at the Companys discretion, of employee
salaries contributed to the plans.
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
June 30,
|
|
Six months ended
June 30,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
67
|
|
$
|
88
|
|
$
|
154
|
|
$
|
176
|
|
Interest
cost
|
|
124
|
|
124
|
|
248
|
|
248
|
|
Expected
return on plan assets
|
|
(179
|
)
|
(180
|
)
|
(359
|
)
|
(360
|
)
|
Amortization
of prior service costs
|
|
11
|
|
11
|
|
22
|
|
22
|
|
Amortization
of net actuarial loss
|
|
(7
|
)
|
6
|
|
|
|
12
|
|
Net
periodic pension cost
|
|
$
|
16
|
|
$
|
49
|
|
$
|
65
|
|
$
|
98
|
|
13
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
June 30,
|
|
Six months ended
June 30,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
38
|
|
$
|
38
|
|
$
|
76
|
|
$
|
76
|
|
Interest
cost
|
|
34
|
|
34
|
|
68
|
|
68
|
|
Net
periodic postretirement cost
|
|
$
|
72
|
|
$
|
72
|
|
$
|
144
|
|
$
|
144
|
|
(13)
Income
Taxes
As of June 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 June 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 return for 2006 and 2007 is 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 securities for the six month
period ended June 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)
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).
14
The
following table sets forth the computation of basic and diluted earnings (loss)
per share:
|
|
Three Months Ended
June 30,
|
|
Six months ended
June 30,
|
|
(In thousands, except per share data)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
(1,918
|
)
|
$
|
12,607
|
|
$
|
(12,713
|
)
|
$
|
27,547
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares and share equivalents outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
shares
|
|
41,971
|
|
41,912
|
|
41,905
|
|
41,861
|
|
Dilutive
non-qualified stock options and RSUs
|
|
28
|
|
737
|
|
27
|
|
693
|
|
Diluted
weighted average shares and share equivalents
|
|
41,999
|
|
42,649
|
|
41,932
|
|
42,554
|
|
|
|
|
|
|
|
|
|
|
|
Income
per common share - basic:
|
|
$
|
(0.05
|
)
|
$
|
0.30
|
|
$
|
(0.30
|
)
|
$
|
0.66
|
|
Income
per common share - diluted:
|
|
$
|
(0.05
|
)
|
$
|
0.30
|
|
$
|
(0.30
|
)
|
$
|
0.65
|
|
We had additional potentially dilutive
securities outstanding representing options on 4.1 million common shares at June 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 biofuels.
(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.
(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 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.
15
Table of Contents
Aventine Renewable Energy Holdings, Inc. and
Subsidiaries
Condensed
Consolidating Statements of Operations
For the Three Months Ended
June 30, 2008
(Unaudited)
(In thousands)
|
|
Parent
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
|
|
$
|
631,083
|
|
$
|
24,003
|
|
$
|
(53,495
|
)
|
$
|
601,591
|
|
Cost of goods sold
|
|
|
|
598,229
|
|
23,776
|
|
(53,274
|
)
|
568,731
|
|
Gross profit
|
|
|
|
32,854
|
|
227
|
|
(221
|
)
|
32,860
|
|
Selling, general and administrative expenses
|
|
66
|
|
9,650
|
|
644
|
|
(221
|
)
|
10,139
|
|
Loss on the sale of securities
|
|
|
|
8,476
|
|
|
|
|
|
8,476
|
|
Other income
|
|
|
|
(1,650
|
)
|
33
|
|
|
|
(1,617
|
)
|
Operating income (loss)
|
|
(66
|
)
|
16,378
|
|
(450
|
)
|
|
|
15,862
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
503
|
|
3
|
|
|
|
506
|
|
Interest expense
|
|
(1,048
|
)
|
(77
|
)
|
|
|
|
|
(1,125
|
)
|
Equity in undistributed earnings of subsidiaries
|
|
2,550
|
|
(133
|
)
|
|
|
(2,417
|
)
|
|
|
Other non-operating income (expense)
|
|
|
|
(14,121
|
)
|
|
|
|
|
(14,121
|
)
|
Minority interest
|
|
|
|
|
|
|
|
314
|
|
314
|
|
Income (loss) before income taxes
|
|
1,436
|
|
2,550
|
|
(447
|
)
|
(2,103
|
)
|
1,436
|
|
Income tax expense
|
|
3,354
|
|
1,015
|
|
|
|
(1,015
|
)
|
3,354
|
|
Net income (loss)
|
|
$
|
(1,918
|
)
|
$
|
1,535
|
|
$
|
(447
|
)
|
$
|
(1,088
|
)
|
$
|
(1,918
|
)
|
Aventine Renewable Energy
Holdings, Inc. and Subsidiaries
Condensed Consolidating
Statements of Operations
For the Three Months Ended
June 30, 2007
(Unaudited)
(In thousands)
|
|
Parent
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
|
|
$
|
392,579
|
|
$
|
26,646
|
|
$
|
(24,311
|
)
|
$
|
394,914
|
|
Cost of goods sold
|
|
|
|
369,835
|
|
21,711
|
|
(24,061
|
)
|
367,485
|
|
Gross profit
|
|
|
|
22,744
|
|
4,935
|
|
(250
|
)
|
27,429
|
|
Selling, general and administrative expenses
|
|
73
|
|
8,248
|
|
708
|
|
(250
|
)
|
8,779
|
|
Other income
|
|
|
|
(510
|
)
|
(4
|
)
|
|
|
(514
|
)
|
Operating income (loss)
|
|
(73
|
)
|
15,006
|
|
4,231
|
|
|
|
19,164
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
4,135
|
|
32
|
|
|
|
4,167
|
|
Interest expense
|
|
(6,972
|
)
|
(49
|
)
|
|
|
|
|
(7,021
|
)
|
Equity in undistributed earnings of subsidiaries
|
|
24,769
|
|
3,415
|
|
|
|
(28,184
|
)
|
|
|
Other non-operating income
|
|
|
|
2,478
|
|
(339
|
)
|
|
|
2,139
|
|
Minority interest
|
|
|
|
|
|
|
|
(725
|
)
|
(725
|
)
|
Income before income taxes
|
|
17,724
|
|
24,985
|
|
3,924
|
|
(28,909
|
)
|
17,724
|
|
Income tax expense
|
|
5,117
|
|
6,346
|
|
|
|
(6,346
|
)
|
5,117
|
|
Net income
|
|
$
|
12,607
|
|
$
|
18,639
|
|
$
|
3,924
|
|
$
|
(22,563
|
)
|
$
|
12,607
|
|
16
Table of Contents
Aventine Renewable Energy
Holdings, Inc. and Subsidiaries
Condensed Consolidating
Statements of Operations
For the Six Months Ended June 30,
2008
(Unaudited)
(In thousands)
|
|
Parent
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
|
|
$
|
1,149,989
|
|
$
|
49,314
|
|
$
|
(87,764
|
)
|
$
|
1,111,539
|
|
Cost of goods sold
|
|
|
|
1,092,845
|
|
49,056
|
|
(87,305
|
)
|
1,054,596
|
|
Gross profit
|
|
|
|
57,144
|
|
258
|
|
(459
|
)
|
56,943
|
|
Selling, general and administrative expenses
|
|
99
|
|
18,025
|
|
1,343
|
|
(459
|
)
|
19,008
|
|
Loss on the sale of securities
|
|
|
|
31,601
|
|
|
|
|
|
31,601
|
|
Other income
|
|
|
|
(2,426
|
)
|
32
|
|
|
|
(2,394
|
)
|
Operating income (loss)
|
|
(99
|
)
|
9,944
|
|
(1,117
|
)
|
|
|
8,728
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
2,730
|
|
15
|
|
|
|
2,745
|
|
Interest expense
|
|
(3,371
|
)
|
(145
|
)
|
|
|
|
|
(3,516
|
)
|
Equity in undistributed earnings of subsidiaries
|
|
(321
|
)
|
(597
|
)
|
|
|
918
|
|
|
|
Other non-operating income (expense)
|
|
|
|
(12,253
|
)
|
|
|
|
|
(12,253
|
)
|
Minority interest
|
|
|
|
|
|
|
|
505
|
|
505
|
|
Income (loss) before income taxes
|
|
(3,791
|
)
|
(321
|
)
|
(1,102
|
)
|
1,423
|
|
(3,791
|
)
|
Income tax expense (benefit)
|
|
8,922
|
|
(104
|
)
|
|
|
104
|
|
8,922
|
|
Net income (loss)
|
|
$
|
(12,713
|
)
|
$
|
(217
|
)
|
$
|
(1,102
|
)
|
$
|
1,319
|
|
$
|
(12,713
|
)
|
Aventine Renewable Energy
Holdings, Inc. and Subsidiaries
Condensed Consolidating
Statements of Operations
For the Six Months Ended June 30,
2007
(Unaudited)
(In thousands)
|
|
Parent
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
|
|
$
|
831,955
|
|
$
|
48,569
|
|
$
|
(48,948
|
)
|
$
|
831,576
|
|
Cost of goods sold
|
|
|
|
783,771
|
|
40,409
|
|
(48,448
|
)
|
775,732
|
|
Gross profit
|
|
|
|
48,184
|
|
8,160
|
|
(500
|
)
|
55,844
|
|
Selling, general and administrative expenses
|
|
236
|
|
17,167
|
|
1,474
|
|
(500
|
)
|
18,377
|
|
Other income
|
|
|
|
(674
|
)
|
(4
|
)
|
|
|
(678
|
)
|
Operating loss
|
|
(236
|
)
|
31,691
|
|
6,690
|
|
|
|
38,145
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
5,477
|
|
58
|
|
|
|
5,535
|
|
Interest expense
|
|
(7,308
|
)
|
(49
|
)
|
|
|
|
|
(7,357
|
)
|
Equity in undistributed earnings of subsidiaries
|
|
48,632
|
|
5,646
|
|
|
|
(54,278
|
)
|
|
|
Other non-operating income (expense)
|
|
|
|
5,867
|
|
141
|
|
|
|
6,008
|
|
Minority interest
|
|
|
|
|
|
|
|
(1,243
|
)
|
(1,243
|
)
|
Income (loss) before income taxes
|
|
41,088
|
|
48,632
|
|
6,889
|
|
(55,521
|
)
|
41,088
|
|
Income tax expense
|
|
13,541
|
|
15,805
|
|
|
|
(15,805
|
)
|
13,541
|
|
Net income (loss)
|
|
$
|
27,547
|
|
$
|
32,827
|
|
$
|
6,889
|
|
$
|
(39,716
|
)
|
$
|
27,547
|
|
17
Table of Contents
Aventine Renewable Energy
Holdings, Inc. and Subsidiaries
Condensed
Consolidating Balance Sheets
June 30, 2008
(Unaudited)
(In thousands)
|
|
Parent
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
$
|
112,993
|
|
$
|
1,361
|
|
$
|
|
|
$
|
114,354
|
|
Accounts receivable, net
|
|
|
|
83,082
|
|
1,076
|
|
|
|
84,158
|
|
Inventories
|
|
|
|
97,913
|
|
3,038
|
|
|
|
100,951
|
|
Intercompany receivable
|
|
311,553
|
|
|
|
85
|
|
(311,638
|
)
|
|
|
Income tax receivable
|
|
|
|
2,509
|
|
|
|
|
|
2,509
|
|
Prepaid expenses and other assets
|
|
6
|
|
9,400
|
|
268
|
|
|
|
9,674
|
|
Total current assets
|
|
311,559
|
|
305,897
|
|
5,828
|
|
(311,638
|
)
|
311,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
87,524
|
|
17,369
|
|
|
|
104,893
|
|
Construction in process
|
|
|
|
352,787
|
|
766
|
|
|
|
353,553
|
|
Investment in subsidiaries
|
|
326,044
|
|
43,750
|
|
|
|
(369,794
|
)
|
|
|
Long-term investments
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
6,364
|
|
8,792
|
|
|
|
|
|
15,156
|
|
Total assets
|
|
$
|
643,967
|
|
$
|
798,750
|
|
$
|
23,963
|
|
$
|
(681,432
|
)
|
$
|
785,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
$
|
113,987
|
|
$
|
4,636
|
|
$
|
|
|
$
|
118,623
|
|
Accrued interest
|
|
7,500
|
|
|
|
|
|
|
|
7,500
|
|
Accrued liabilities
|
|
|
|
3,289
|
|
289
|
|
|
|
3,578
|
|
Other current liabilities
|
|
|
|
4,305
|
|
297
|
|
|
|
4,602
|
|
Intercompany payable
|
|
|
|
311,638
|
|
|
|
(311,638
|
)
|
|
|
Total current liabilities
|
|
7,500
|
|
433,219
|
|
5,222
|
|
(311,638
|
)
|
134,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
300,000
|
|
|
|
|
|
|
|
300,000
|
|
Minority interest
|
|
|
|
|
|
|
|
9,327
|
|
9,327
|
|
Net deferred tax liabilities
|
|
|
|
1,371
|
|
|
|
|
|
1,371
|
|
Other long-term liabilities
|
|
|
|
3,780
|
|
|
|
|
|
3,780
|
|
Total liabilities
|
|
307,500
|
|
438,370
|
|
5,222
|
|
(302,311
|
)
|
448,781
|
|
Stockholders equity
|
|
336,467
|
|
360,380
|
|
18,741
|
|
(379,121
|
)
|
336,467
|
|
Total liabilities and stockholders equity
|
|
$
|
643,967
|
|
$
|
798,750
|
|
$
|
23,963
|
|
$
|
(681,432
|
)
|
$
|
785,248
|
|
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
|
|
Investment 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 Six Months Ended June 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
|
)
|
$
|
44,480
|
|
$
|
(694
|
)
|
$
|
|
|
$
|
42,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
|
(128,065
|
)
|
(1,490
|
)
|
|
|
(129,555
|
)
|
Sale of investment securities
|
|
|
|
179,899
|
|
|
|
|
|
179,899
|
|
Indemnification proceeds
|
|
|
|
3,039
|
|
|
|
|
|
3,039
|
|
Proceeds from the sale of fixed asset
|
|
|
|
|
|
14
|
|
|
|
14
|
|
Net cash provided by (used for) investing activities
|
|
|
|
54,873
|
|
(1,476
|
)
|
|
|
53,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
99,353
|
|
(2,170
|
)
|
|
|
97,183
|
|
Cash and cash equivalents at beginning of period
|
|
|
|
13,640
|
|
3,531
|
|
|
|
17,171
|
|
Cash and cash equivalents at end of period
|
|
$
|
|
|
$
|
112,993
|
|
$
|
1,361
|
|
$
|
|
|
$
|
114,354
|
|
Aventine Renewable Energy
Holdings, Inc. and Subsidiaries
Condensed Consolidating
Statement of Cash Flows
For the Six Months Ended June 30,
2007
(Unaudited)
(In thousands)
|
|
Parent
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities
|
|
$
|
(291,979
|
)
|
$
|
328,319
|
|
$
|
8,662
|
|
$
|
|
|
$
|
45,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
|
(77,674
|
)
|
(680
|
)
|
|
|
(78,354
|
)
|
Investment in short-term securities
|
|
|
|
(242,848
|
)
|
|
|
|
|
(242,848
|
)
|
Net cash used for investing activities
|
|
|
|
(320,522
|
)
|
(680
|
)
|
|
|
(321,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of senior unsecured notes
|
|
300,000
|
|
|
|
|
|
|
|
300,000
|
|
Payment of debt issuance costs
|
|
(8,221
|
)
|
|
|
|
|
|
|
(8,221
|
)
|
Proceeds from stock option exercises
|
|
200
|
|
|
|
|
|
|
|
200
|
|
Distribution to minority stockholders
|
|
|
|
5,489
|
|
(7,000
|
)
|
|
|
(1,511
|
)
|
Net cash provided by (used for) financing activities
|
|
291,979
|
|
5,489
|
|
(7,000
|
)
|
|
|
290,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
|
13,286
|
|
982
|
|
|
|
14,268
|
|
Cash and cash equivalents at beginning of period
|
|
|
|
26,413
|
|
3,378
|
|
|
|
29,791
|
|
Cash and cash equivalents at end of period
|
|
$
|
|
|
$
|
39,699
|
|
$
|
4,360
|
|
$
|
|
|
$
|
44,059
|
|
20
Table of Contents
(18)
Subsequent Event
On July 31, 2008, the Company entered into a
purchase agreement with Nebraska Energy Cooperative, its minority partner in
Nebraska Energy, LLC, to purchase the 21.6% of Nebraska Energy, LLC it does not
already own. The Company has agreed to
issue 1 million shares of common stock to acquire the remaining interest. It is expected that this transaction will
close as soon as possible after receiving the necessary approvals from the
existing unit holders of the Nebraska Energy Cooperative.
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. 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. Aventine is also a marketer and distributor
of biodiesel. 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 six month periods ended June 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:
·
Ethanol which we manufacture at our plants;
·
Ethanol which we purchase from our marketing
alliance partners; and
·
Ethanol that we purchase from other producers
and marketers.
22
Table
of Contents
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. In addition to ethanol, we
also purchase and market biodiesel.
Executive Summary
We
incurred a net loss of $1.9 million, or $0.05 per diluted share, in the second
quarter of 2008, as compared to net income of $12.6 million, or $0.30 per
diluted share, in the second quarter of 2007.
The net loss in the second quarter of 2008 includes $8.5 million in
losses related to the sale of auction rate securities. Excluding this loss, net income and diluted
earnings per share would have been $6.6 million and $0.16, respectively. Net income in this quarter was also significantly
affected by realized and unrealized losses on hedges, significantly higher corn
costs, higher utility costs and higher legal and other professional fees,
offset somewhat by higher ethanol pricing and higher volumes of ethanol
sold. Revenue in the second quarter of
2008 was a record at $601.6 million, an increase of $206.7 million, or 52.3%,
from second quarter 2007 revenue of $394.9 million. Commodity spread, defined as gross ethanol
selling price per gallon less net corn cost per gallon, was basically flat in
the second quarter of 2008 as compared to 2007, at $1.29 per gallon, as
compared to $1.28 per gallon in the second quarter of 2007. The average sales price per gallon of ethanol
increased in Q208 to $2.50 per gallon from the $2.29 average received in Q207. However, corn costs during the second quarter
of 2008 averaged $5.38 per bushel, significantly higher than our second quarter
2007 cost of $3.99 per bushel.
Gallons of ethanol sold in
the second quarter of 2008 increased 38.8%, to 220.3 million gallons from 158.7
million gallons in the second quarter of 2007.
Higher purchase/resale gallons and higher volumes purchased from
marketing alliance partners were offset by declines in equity production. Ethanol production in the quarter totaled
45.6 million gallons, down from 50.7 million gallons in the second quarter of
2007.
Gross
profit was $32.9 million in the second quarter of 2008, an increase of $5.4
million from the second quarter of 2007.
While gross profit increased, the gross profit percentage decreased in
the second quarter of 2008 to 5.5%, from 6.9% in the second quarter of
2007. The decrease in the gross profit
percentage is mainly due to a shift in the mix of gallons available for sale,
with less higher margin production gallons being replaced with an increase in the
number of gallons of lower margin marketing alliance and purchase/resale
volumes. The economic impact of selling
gallons held in inventory at the end of Q108 with a $1.95 per gallon value as
prices increased during Q208 was a positive impact to cost of goods sold of
approximately $13.7 million. The average
inventory cost of $2.28 per gallon at the end of the second quarter of 2008
versus $1.95 at the end of the first quarter of 2008 reflects the increase in
ethanol prices during the quarter using our weighted average FIFO approach to
calculating inventory. Similarly, rising prices throughout Q207 had a
positive economic impact on cost of goods sold of $2.1 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.
23
Table of Contents
Other
non-operating expense for the second quarter of 2008 includes $14.1 million of
realized and unrealized net losses on derivative contracts, including the
effect of marking to market derivative contracts, versus net gains in the
second quarter of 2007 of $2.1 million.
Derivative gains and losses for Q208 are composed of net realized gains
on CBOT corn positions of $4.4 million, net realized losses on short gasoline
future positions of $3.9 million, net unrealized losses on CBOT corn positions
of $7.0 million and net unrealized losses on short gasoline positions of $7.6
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.
For the
Three Months Ended June 30, 2008 Compared to the Three Months Ended June 30,
2007
Total
gallons of ethanol sold in the second quarter of 2008 increased to 220.3
million gallons, versus 158.7 million gallons sold in the second quarter of
2007. Gallons of ethanol were sourced as
follows:
|
|
For the Three Months Ended June 30,
|
|
Increase/
|
|
% Increase/
|
|
(In thousands, except for percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
(Decrease)
|
|
Equity
production
|
|
45,590
|
|
50,679
|
|
(5,089
|
)
|
(10.0
|
)%
|
Marketing
alliance purchases
|
|
120,225
|
|
75,105
|
|
45,120
|
|
60.1
|
%
|
Purchase/resale
|
|
49,144
|
|
22,085
|
|
27,059
|
|
122.5
|
%
|
Decrease
(increase) in inventory
|
|
5,305
|
|
10,862
|
|
(5,557
|
)
|
N.M.
|
*
|
Total
|
|
220,264
|
|
158,731
|
|
61,533
|
|
38.8
|
%
|
* Not meaningful
Net
sales in the second quarter of 2008 increased 52.3% from the second quarter of
2007. Net sales were $601.6 million in
the second quarter of 2008 versus $394.9 million in the second 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 $2.50 per gallon in the second quarter of 2008
versus $2.29 in the second quarter of 2007.
Co-product
revenues for the second quarter of 2008 totaled $37.0 million, an increase of
$13.8 million or 59.5%, from the second quarter 2007 total of $23.2
million. Co-product revenues increased
during the second 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 second quarter of 2008,
we sold 272.8 thousand tons, versus 297.1 thousand tons in the second quarter
of 2007. Co-product revenues, as a
percentage of corn costs, were 40.2% during the second quarter of 2008, versus
31.1% in the second quarter of 2007.
Co-product revenues, as a percentage of corn costs, increased in the
second quarter of 2008 as compared to 2007 as the result of increases in our
co-product pricing rising at a faster rate in 2008 versus 2007 as compared to
the price we paid for corn. For the
second quarter 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 quarter ended June 30, 2008 was $568.7 million,
compared to $367.5 million for the quarter ended June 30, 2007, an
increase of $201.2 million or 54.7%. As
a percentage of net sales, cost of good sold increased from 93.1% to
94.5%. 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
and biodiesel from other producers and marketers, freight and logistics costs
to ship ethanol, biodiesel and co-products, and the cost of motor fuel taxes
which have been billed
24
Table
of Contents
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 biofuels.
Purchased
ethanol in the second quarter of 2008 totaled $393.6 million, versus $207.9
million in the second quarter 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
second quarter of 2008, we purchased 169.4 million gallons of ethanol at an
average cost of $2.32 per gallon as compared to 97.2 million gallons of ethanol
at an average cost of $2.14 in the second 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
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 second quarter of 2008
totaled $92.1 million or $5.38 per bushel, versus $74.7 million, or $3.99 per
bushel in the second quarter of 2007.
The increase in corn costs is due to higher corn prices as a result of
increased demand for grains on a global basis, lower expected corn production
as a result of severe flooding in the Midwest portion of the U.S., along with
expected new ethanol production facilities being built.
Conversion
costs for the second quarter of 2008 increased to $33.1 million from $30.9
million for the second quarter of 2007.
The total dollars spent on conversion costs increased year over year as
a result of higher natural gas costs, higher denaturant costs, and higher
outside service costs. The conversion
cost per gallon increased year over year to $0.73 per gallon in the second
quarter of 2008 versus $0.61 per gallon in the second quarter of 2007. Conversion costs per gallon in the second
quarter of 2008 were also negatively affected by the lower number of gallons
produced.
Depreciation
in the second quarter of 2008 totaled $3.3 million, versus $3.0 million in the
second quarter of 2007. Motor fuel taxes
were $4.5 million in the second quarter of 2008 versus $4.3 million in the
second quarter of 2007. The cost of
motor fuel taxes are recovered through billings to customers.
Freight/logistics
costs in the second quarter of 2008 increased to $44.3 million, or
approximately $0.20 per gallon, from $28.0 million, or $0.18 per gallon in the
second quarter 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 increasing fuel surcharges resulting from record high oil prices, which
continue to negatively impact general freight rates, and from general freight increases associated with moving product along longer
supply lines to emerging new markets in the Southeast. These additional
expenses have been made to support higher prices on the increased volumes.
The average inventory cost
of $2.28 per gallon at the end of the second quarter of 2008 versus $1.95 at
the end of the first quarter of 2008 reflects the increase in ethanol prices
during the quarter 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 the first quarter of 2008 during a period of
rising prices was $13.7 million.
Similarly, rising prices throughout Q207 had a positive economic impact
on cost of goods sold of $2.1 million.
Selling,
general and administrative (SG&A) expenses were $10.1 million in the
second quarter of 2008, compared to $8.8 million in the second quarter of
2007. The year over year increase
primarily reflects higher expenditures for legal and other professional fees,
along with increased personnel costs.
25
Table
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In the second quarter of
2008, the Company incurred additional losses totaling $8.5 million on the
liquidation of its portfolio of auction rate securities. The Company holds no auction rate securities
as of June 30, 2008.
Interest
income in the second quarter of 2008 was $0.5 million, versus $4.2 million in
the second quarter 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 which reset to zero for most of Q208.
Interest
expense in the second quarter of 2008 was $1.1 million, as compared to $7.0
million in the second quarter of 2007.
Interest expense in the second 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 second quarter of 2008. Interest expense in the second quarter of
2008 includes $7.5 million in interest on $300 million aggregate principal
amount of our 10.0% senior unsecured notes issued March 27, 2007 and $0.2
million of amortization of deferred financing fees, reduced by capitalized
interest of $6.6 million.
Other
non-operating expense for the second quarter of 2008 includes $14.1 million of
realized and unrealized net losses on derivative contracts, including the
effect of marking to market derivative contracts, versus net gains in the
second quarter of 2007 of $2.1 million.
Derivative gains and losses for the second quarter of 2008 are comprised
of net realized gains on CBOT corn positions of $4.4 million, net realized
losses on short gasoline future positions of $3.9 million, net unrealized
losses on CBOT corn positions of $7.0 million and net unrealized losses on
short gasoline positions of $7.6 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 greater. 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 quarter ended June 30, 2008 was a reduction of
expense of $0.3 million, compared to a charge to income of $0.7 million for the
quarter ended June 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 second quarter of 2008 totaled $3.4 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 Q208 was 33.8% of
pre-tax income, versus an income tax rate of 28.9% in the second quarter of
2007. In 2007, our effective income tax
rate was lower due to the amount of tax free interest received on our
investment portfolio.
For the
Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30,
2007
Total
gallons of ethanol sold in the first six months of 2008 increased to 431.5
million gallons, versus 351.9 million gallons sold in the first six months of
2007. Gallons of ethanol were sourced as
follows:
|
|
For the Six Months Ended June 30,
|
|
Increase/
|
|
% Increase/
|
|
(In thousands, except for percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
(Decrease)
|
|
Equity
production
|
|
93,325
|
|
99,586
|
|
(6,261
|
)
|
(6.3
|
)%
|
Marketing
alliance purchases
|
|
250,114
|
|
209,814
|
|
40,300
|
|
19.2
|
%
|
Purchase/resale
|
|
88,108
|
|
43,613
|
|
44.495
|
|
102.0
|
%
|
Decrease
(increase) in inventory
|
|
(41
|
)
|
(1,094
|
)
|
1,053
|
|
N.M.
|
*
|
Total
|
|
431,506
|
|
351,919
|
|
79,587
|
|
22.6
|
%
|
* Not meaningful
26
Table
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Net
sales in the first six months of 2008 increased 33.7% from the same period in
2007. Net sales were $1,111.5 million in
the first half of 2008 versus $831.6 million in the first half 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 $2.36 per gallon in the first half of 2008
versus $2.18 in the first half of 2007.
Co-product
revenues for the first six months of 2008 totaled $70.3 million, an increase of
$24.0 million or 51.8%, from the first six months of 2007 total of $46.3
million. Co-product revenues increased
during the first half 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 first six months of
2008, we sold 545.2 thousand tons, versus 564.1 thousand tons in the first six
months of 2007. Co-product revenues, as
a percentage of corn costs, were 40.7% during the first six months of 2008,
versus 33.2% in the first six months of 2007.
Co-product revenues, as a percentage of corn costs, increased in the
first half of 2008 as compared to 2007 as the result of increases in co-product
pricing rising at a faster rate in 2008 versus 2007 as compared to corn. For the first half 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 six months of 2008 was $1,054.6 million, compared
to $775.7 million for the first six months of 2007, an increase of $278.9 million
or 36.0%. As a percentage of net sales,
cost of goods sold increased from 93.3% to 94.9%. 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 and biodiesel
from other producers and marketers, freight and logistics costs to ship
ethanol, biodiesel 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 biofuels.
Purchased
ethanol in the first half of 2008 totaled $735.5 million, versus $508.7 millon
in the first half 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 half of 2008, we
purchased 338.2 million gallons of ethanol at an average cost of $2.17 per
gallon as compared to 253.4 million gallons of ethanol at an average cost of
$2.01 in the first half 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 six months of 2008
totaled $172.9 million or $4.93 per bushel, versus $139.4 million, or $3.79 per
bushel in the first six months of 2007.
The increase in corn costs is due to higher corn prices as a result of
increased demand for grains on a global basis, lower expected corn production
as a result of severe flooding in the Midwest portion of the U.S. along with
expected new ethanol production facilities being built.
27
Table
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Conversion
costs for the first half of 2008 increased to $62.9 million from $57.9 million
for the first half of 2007. The total
dollars spent on conversion costs increased year over year as a result of
higher natural gas costs, higher denaturant costs, and higher outside service
costs. The conversion cost per gallon
increased year over year to $0.67 per gallon in the first six months of 2008
versus $0.58 per gallon in the first six months of 2007. Conversion costs per gallon in the first half
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 half of 2008 totaled $6.6 million, versus $6.0 million in the
first half of 2007. Depreciation expense
increased in the first half of 2008 as a result of the Pekin dry mill ramping
up production during the first quarter of 2007.
Motor fuel taxes were $7.9 million in the first half of 2008 versus
$10.5 million in the first half of 2007.
The cost of motor fuel taxes are recovered through billings to
customers.
Freight/logistics
costs in the first half of 2008 increased to $86.5 million, or approximately
$0.20 per gallon, from $58.2 million, or $0.17 per gallon in the first half 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 increasing fuel surcharges resulting
from record high oil prices, which continue to negatively impact general
freight rates, and from general freight
increases associated with moving product along longer supply lines to emerging
new markets in the Southeast. These additional expenses have been made to
support higher prices on the increased volumes.
The average inventory cost
of $2.28 per gallon at the end of the first half of 2008 versus $1.80 at the
end of 2007 reflects the increase in ethanol prices during the quarter 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 rising prices was $17.5 million. Similarly, rising prices throughout the first
half of 2007 had a positive economic impact on cost of goods sold of $2.1
million.
Selling,
general and administrative (SG&A) expenses were $19.0 million in the
first six months of 2008, compared to $18.4 million in the first six months of
2007. The year over year increase
primarily reflects higher expenditures for legal and other professional fees,
along with increased personnel costs.
In the first six months of
2008, the Company incurred losses totaling $31.6 million related to the
valuation and ultimate sale of its portfolio of auction rate securities. The Company holds no auction rate securities
as of June 30, 2008.
Interest
income in the first half of 2008 was $2.7 million, versus $5.5 million in the
first half 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 which reset to zero for most of 2008.
Interest
expense in the first six months of 2008 was $3.5 million, as compared to $7.4
million in the first six months of 2007.
Interest expense in the first half 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 half of 2008 includes $15.0 million in interest on $300
million aggregate principal amount of our 10.0% senior unsecured notes issued March 27,
2007 and $0.5 million of amortization of deferred financing fees, reduced by
capitalized interest of $12.0 million.
28
Table
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Other
non-operating expense for the first half of 2008 includes $12.3 million of
realized and unrealized net losses on derivative contracts, including the
effect of marking to market derivative contracts, versus net gains in the first
half of 2007 of $6.0 million. Derivative
gains and losses for the first half of 2008 are composed of net realized gains
on CBOT corn positions of $7.6 million, net realized losses on short gasoline
future positions of $4.5 million, net unrealized losses on CBOT corn positions
of $8.4 million and net unrealized losses on short gasoline positions of $7.0
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 half of 2008 was a reduction of expense of $0.5
million, compared to a charge to income of $1.2 million for the first half 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 half of 2008 totaled $8.9 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 half of 2008 was 32.1% of pre-tax income, versus an income tax rate
of 33.0% in the first half of 2007.
Trends
and Factors that May Affect Future Operating Results
Ethanol Pricing
Ethanol prices increased throughout the first half
of 2008. The effect of higher ethanol
prices benefited our gross profit during 2008 by offsetting increasing costs to
produce. Both corn and gasoline prices
have risen in 2008. The rise in price of
these commodities favorably impacts ethanol price since corn is the principal
feedstock in ethanol production and ethanol replaces gasoline. The rise in ethanol prices could also be
attributable to a combination of a new renewable fuel mandate passed by
Congress in December 2007 which requires 9 billion gallons of renewable
biofuel consumption in 2009 and favorable economics of blending ethanol due to the
current price of ethanol being substantially lower than the price of
gasoline. During the first six months of
2008, ethanol has been sold at a significant discount to wholesale gasoline. This, combined with the $0.51 per gallon tax
credit available to blenders, provided significant arbitrage opportunities to
blenders to increase the amount of ethanol they are blending. However, we are unable to predict whether
ethanol prices will remain strong, or whether new supply projected to come
online will cause ethanol prices to fall.
As
of June 30, 2008, we had contracts for delivery of ethanol totaling 184.5
million gallons through December 2008.
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
30.3 million gallons at an average fixed price of $2.32 per gallon, 35.8
million gallons at an average spread to wholesale gasoline of a negative 36
cents per gallon (based upon the NYMEX, Chicago and NY harbor indices), and
118.4 million gallons at spot prices (using various Platt, OPIS and AXXIS
indices).
For
the third quarter of 2008, we have contracts for delivery of ethanol totaling
108.1 million gallons. These commitments
are for 16.3 million gallons at an average fixed price of $2.37, 22.8 million
29
Table
of Contents
gallons
at an average spread to wholesale gasoline of a negative 34 cents (based upon
the NYMEX, Chicago and NY harbor indices), and 69.0 million gallons at spot
prices (using various Platt, OPIS and AXXIS indices).
At
the end of the second quarter of 2008, we also had short gasoline positions
outstanding using swap agreements where we sold 8.1 million gallons of gasoline
at an average fixed price of $2.15 per gallon for delivery through December 2008. We did this to hedge some of our gasoline
indexed contracts from potentially falling gasoline prices. The fair value of these positions at June 30,
2008 was a loss of approximately $10.3 million.
Corn
Corn prices have risen significantly since 2006 and
reached record levels during the second quarter of 2008. We 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 also typically short 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 June 30, 2008, we had fixed the price of
18.9 million bushels of corn through December 2008 at an average of $5.83
per bushel, representing approximately 50% percent of our corn requirements for
the remainder of 2008.
Marketing Alliance
Our marketing alliance annualized volume at the end
of the second quarter of 2008 was 538 million gallons. With our own equity
production, our marketing alliance partner volumes, and purchase/resale
volumes, we distributed approximately 881 million gallons of ethanol on an
annualized basis in the second quarter of 2008.
Our expectation for 2008 is that another 316 million gallons of marketing
alliance partner production will come online, bringing our total ethanol
marketing capacity to approximately 1.2 billion gallons annually by the end of
this year. Going forward, we may see
changes to our marketing alliance volumes as a result of economic pressures
which may affect marketing alliance volumes available for distribution.
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 13.4 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.
30
Table of Contents
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, where
we expect to begin ramping up ethanol production in the first 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 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).
We recently amended our lease with the Indiana Port Commission to
provide additional flexibility as to the timing of the phase II expansion at
Mt. Vernon. This lease, as amended,
requires substantial completion of phase I (an initial 110 million gallons of
capacity) by March 1, 2009 and substantial completion of phase II (an
additional 110 million gallons of capacity) by January 1, 2011, subject in
the case of the phase II to specified extension rights. If we do not achieve these milestones, the
State 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 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 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.
31
Table of Contents
Biodiesel
During
the first half of 2008, we sold 2.1 million gallons of biodiesel.
Liquidity and Capital
Resources
Overview and Outlook
The
following table sets forth selected information concerning our financial
condition:
(In thousands)
|
|
June 30,
2008
(Unaudited)
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
114,354
|
|
$
|
17,171
|
|
Short-term investments
|
|
|
|
211,500
|
|
Working capital
|
|
177,343
|
|
303,377
|
|
Total debt
|
|
300,000
|
|
300,000
|
|
Current ratio
|
|
2.32
|
|
3.90
|
|
|
|
|
|
|
|
|
|
During the second quarter, the Company
generated cash of $97.1 million from the sale of its remaining position of
auction rate securities. As a result,
the Company recorded an additional loss of $8.5 million in the second quarter,
bringing the total losses on auction rate securities to $31.6 million. The Company holds no auction rate securities
as of June 30, 2008.
The Company has made commitments for the
construction of new ethanol facilities.
The initial phase I expansions in Mt. Vernon, Indiana and Aurora,
Nebraska began construction in 2007. It
is expected that each phase I project will cost approximately $250
million. Through June 30, 2008,
approximately $313 million has been spent on these two projects. We expect to spend an additional $190 million
to complete these projects, excluding capitalized interest. Total liquidity available to us at the end of
the second quarter of 2008 was $245.7 million, comprised of $114.4 million in
cash and cash equivalents and $131.3 million available under our existing
secured revolving credit facility.
In addition to funding capital expenditures, our
principal use of liquidity is funding our working capital needs. Our working capital needs are primarily
driven by inventory, accounts receivable and accounts payable levels. 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.
The
Company continues to evaluate options to increase the amount of liquidity
available to it, including discussions with banks on a new or amended liquidity
facility or raising additional capital.
However, we currently expect the existing liquidity available to us,
including our current cash balances, amounts available under our existing
secured revolving credit facility and anticipated cash flow from operations, will
be sufficient to satisfy existing anticipated working capital needs, debt
service obligations, capital expenditures and other anticipated cash
requirements for 2008.
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
32
Table of Contents
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 second 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 expansion, as well as cash provided by operations.
Sources of Liquidity
Our
principal sources of liquidity are cash, cash equivalents, cash provided by
operations, and cash available under our secured revolving credit facility.
Cash
and cash equivalents.
For
the first six months of 2008, cash and cash equivalents increased by $97.2
million. Cash and cash equivalents as of
June 30, 2008 and December 31, 2007 were $114.4 million and $17.2
million, respectively. The increase in
cash and cash equivalents is principally the result of the liquidation of our
auction rate security portfolio, along with cash provided by operations, offset
by expenditures related to our plant expansions.
C
ash provided by operations.
Net cash provided by operating activities in the first six months of
2008 was $42.3
million, as compared to cash
provided by operating activities of $45.0 million for the first six months of
2007. Cash provided by operations in
2008 was affected by a regularly scheduled $15 million semi-annual interest
payment made in the second quarter of 2008 on our 10% senior unsecured bonds. We issued these bonds in March 2007. For 2007, no interest payment on these bonds
was scheduled to be made 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 June 30,
2008, and $21.9 million of standby letters of credit outstanding, thereby
leaving approximately $131.3 million in borrowing availability under our
secured revolving credit facility as of that date.
Uses of Liquidity
Our principal uses of liquidity are capital
expenditures, payments related to our outstanding debt and liquidity facility,
working capital and the repurchase of shares of our common stock.
Capital
expenditures.
During the
first half of 2008, we spent approximately $117.6 million, exclusive of
capitalized interest of $12.0 million, on capital projects. Of this amount, $5.7 million was spent on
maintenance and environmental projects, while $111.9 million was spent on
capacity expansion projects. The amount
we expect to spend to complete our two new ethanol production facilities
through the first quarter of 2009 is approximately $190 million, exclusive of
capitalized interest. Expected capital
expenditures on non-expansion related maintenance and environmental items
should be approximately $5 million for the remainder of 2008.
33
Table of Contents
Payments
related to our outstanding debt and liquidity facility.
In the first half of 2008, we made a
regularly scheduled $15 million semi-annual payment on our 10% senior unsecured
bonds. 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 to $177.3 million from December 31,
2007 to June 30, 2008 as we used current assets to fund our capital
expenditures.
Repurchase
of shares of common stock.
In the first half of 2008, we did not
repurchase any shares of our common stock on the open market. The share repurchase program allows the
repurchase of up to $50 million of our outstanding common stock, although there
are no minimum share purchase requirements.
There is approximately $45.9 million available to be repurchased under
this program.
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 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 of $1.8 million each quarter beginning with the quarter ended
December 31, 2007. At June 30,
2008, the amount of property, plant and equipment which was eligible for
inclusion in the calculation of the borrowing base was $44.6 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% fee, 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 investments of
principal, interest expense, and dividend and certain other payments) of 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
34
Table
of Contents
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.
We
had no borrowings outstanding under our secured revolving credit facility at June 30,
2008, and $21.9 million of standby letters of credit outstanding, thereby
leaving approximately $131.3 million in borrowing availability under our
secured revolving credit facility as of that date.
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 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 contamination or such third party
claims. We have not accrued any amounts
for environmental matters as of June 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.
35
Table of Contents
Our
air emissions are subject to the federal Clean Air Act, the federal Clean Air
Act Amendments of 1990 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 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 recently 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.
36
Table of Contents
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 global demand and
supply. Our weighted average gross corn
costs for the three months ended June 30, 2008 and 2007 was $5.38 and
$3.99 per bushel, respectively. For the
six months ended June 30, 2008 and 2007, our weighted average corn costs
were $4.93 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 June 30, 2008,
we had commitments to purchase approximately 24.3 million bushels of corn
through December 2009 at an average price of $5.92 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)
|
|
June 30,
2008
|
|
|
|
|
|
Realized and unrealized loss included in earnings in
2008
|
|
$
|
11.2
|
|
|
|
|
|
|
(In millions)
|
|
June 30, 2008
|
|
|
|
|
|
Net bushels sold
|
|
5.5
|
|
Aggregate notional value of derivatives outstanding
|
|
$
|
32.3
|
|
Period through which derivative positions currently
exist
|
|
December 2009
|
|
Unrealized loss on the fair value of outstanding
derivative positions
|
|
$
|
(9.6
|
)
|
The change in fair value due to the effect of a 10%
adverse change in commodity prices to current fair value
|
|
$
|
(4.2
|
)
|
37
Table of Contents
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:
|
|
June 30,
|
|
(In millions)
|
|
2008
|
|
|
|
|
|
Realized and unrealized net gain included in
earnings in 2008
|
|
$
|
10.4
|
|
|
|
|
|
|
|
|
June 30,
|
|
(In millions)
|
|
2008
|
|
|
|
|
|
Net bushels bought
|
|
1.4
|
|
Aggregate notional value of derivatives outstanding
|
|
$
|
8.1
|
|
Period through which derivative positions currently
exist
|
|
December 2008
|
|
Unrealized gain on fair value of derivatives
|
|
$
|
2.3
|
|
The change in fair value due to the effect of a 10%
adverse change in commodity prices to current fair value
|
|
$
|
(1.0
|
)
|
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 June 30, 2008, we had fixed contracts to sell approximately 30.3
million gallons of ethanol at an average fixed price of $2.32 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 June 30, 2008, we had sold forward
approximately 35.8 million gallons of ethanol using wholesale gasoline as an
index plus a fixed spread that averaged a negative $0.36 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:
38
Table of Contents
(In millions)
|
|
June 30,
2008
|
|
|
|
|
|
Realized and unrealized loss included in earnings
|
|
$
|
11.5
|
|
|
|
|
|
Gallons sold
|
|
8.1
|
|
Aggregate notional value of derivatives outstanding
|
|
$
|
17.3
|
|
Period through which derivative positions currently
exist
|
|
December 2008
|
|
Unrealized loss on the fair value of outstanding
derivative positions
|
|
$
|
(10.3
|
)
|
The change in fair value due to the effect of a 10%
adverse change in commodity prices to current fair value
|
|
$
|
(2.8
|
)
|
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.
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
July 31, 2008, the Company entered into a purchase agreement with Nebraska
Energy Cooperative, its minority partner in Nebraska Energy, LLC, to purchase
the 21.6% of Nebraska Energy, LLC it does not already own. The Company has agreed to issue 1 million
shares of common stock to acquire the remaining interest. It is expected that this transaction will
close as soon as possible after receiving the necessary approvals from the
existing unit holders of the Nebraska Energy Cooperative.
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.
39
Table of Contents
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.
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.
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, efforts have been
underway by various parties to repeal or reduce the RFS through new
legislation and/or requested waivers of the current legislation. In April 2008,
Texas Governor Rick Perry formally filed a request with the EPA to reduce the
2008 mandated usage of renewable biofuels to 4.5 billion gallons,
from the current 9 billion gallon mandate. In addition, 24
Republican Senators sent a letter to the EPA in support of Governor Perrys
request. The EPA requested comment letters and received over
15,000 responses addressing Governor Perrys waiver request.
The EPA was initially required to rule on the waiver request by July 23,
2008, but has extended the time period in order to fully examine and consider
all of the issues brought forth by these comment letters. There is
also a current public relations campaign underway by the Retail
Grocers Association which purports to directly associate a rise in corn prices
with the increased mandates required under the new RFS. The attempt is to
blame ethanol for the rise in food prices in order to get the RFS requirements
reduced or repealed. Concurrent with these attempts at eliminating or
reducing the mandated use of ethanol, legislation has been introduced in
Congress to repeal the RFS. 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.
40
Table of Contents
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 June 30, 2008 is approximately 9.7 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 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
|
On
May 2, 2007, the Company held its Annual Meeting of Stockholders. The matters voted on at the meeting and the
results of those votes were as follows:
(1) Election of Class III
Directors:
|
|
Vote for
|
|
Votes against
|
|
Votes withheld and
non-votes
|
|
|
|
|
|
|
|
|
|
Leigh J. Abramson
|
|
34,024,693
|
|
531,967
|
|
7,414,670
|
|
Wayne D. Kuhn
|
|
34,027,645
|
|
529,443
|
|
7,414,242
|
|
Ronald H. Miller
|
|
33,993,447
|
|
568,444
|
|
7,409,439
|
|
O
ther directors whose term of
office continued after the meeting were Messrs. Bobby L. Latham and Farokh
S. Hakimi as Class I directors; and Messrs. Richard A. Derbes,
Michael C. Hoffman and Arnold M. Nemirow as class II directors.
(2) Ratification of
the appointment of Ernst and Young LLP as the Companys independent registered
public accounting firm for the fiscal year ending December 31, 2008:
Vote for
|
|
Votes against
|
|
Votes withheld
and non-votes
|
|
|
|
|
|
|
|
34,337,646
|
|
269,328
|
|
7,364,356
|
|
41
Table of Contents
Item 5.
|
|
Other
Information
|
|
|
|
|
|
None
|
|
|
|
Item 6.
|
|
Exhibits
|
(a)
|
Exhibits
|
|
|
|
10.1
|
Fourth Amendment to Lease
Agreement and Reaffirmation of Guaranty, dated as of June 19, 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.
|
|
|
|
|
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.
|
|
|
|
|
|
Dated:
August 7, 2008
|
By:
|
/s/ William J. Brennan
|
|
Name:
|
William J. Brennan
|
|
Title:
|
Chief Accounting and Compliance
Officer (duly authorized officer and
principal accounting officer)
|
|
|
|
|
42
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