USBE US Bioenergy Corp (MM)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

 

Commission File Number: 001-33203

 

 

 

Registrant’s telephone number, including area code:

(651) 554-5000

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o      Accelerated filer  o      Non-accelerated filer  þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o      No  þ

 

The number of shares of the registrant’s common stock, $0.01 par value per share, outstanding on October 31, 2007, was 79,622,690.

 

US BioEnergy Corporation

 

TABLE OF CONTENTS

 

 

PART I. FINANCIAL INFORMATION

 

 

 

See notes to condensed consolidated financial statements

 

 

See notes to condensed consolidated financial statements

US BioEnergy Corporation

 

 

US BioEnergy Corporation

 

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

 

(SFAS No. 159) which included an amendment of FASB Statement 115. This statement provides companies with an option to report selected financial assets and liabilities at fair value. This statement is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. The Company is in the process of evaluating the effect, if any, that the adoption of SFAS No. 159 will have on its consolidated results of operations and financial condition.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157) to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value in generally accepted accounting principles, and expanding disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement and is effective for the fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the effect, if any, that the adoption of SFAS No. 157 will have on its consolidated results of operations and financial condition.

 

 

The Company adopted the provisions of FASB Interpretation (FIN) No. 48 — “Accounting for Uncertainty in Income Taxes” — an interpretation of SFAS No. 109 (FIN 48), on January 1, 2007. FIN 48 prescribes how a company should recognize, measure, present and disclose uncertain tax positions that the Company has taken or expects to take in its income tax returns. FIN 48 requires that only income tax benefits that meet the “more likely than not” recognition threshold be recognized or continue to be recognized on its effective date.

 

As a result of the implementation of FIN 48, the Company recognized a $0.2 million decrease in the liability for unrecognized tax benefits. This decrease was accounted for as an adjustment to the January 1, 2007, balance of retained earnings.

 

The total gross amount of unrecognized tax benefits at January 1, 2007, was approximately $1.3 million, of which $0.7 million is reflected as long-term income taxes payable and $0.6 million reduced the Company’s deferred tax asset related to net operating loss carryforwards. As of January 1, 2007, if the total amount of unrecognized tax benefits were recognized, the impact would not affect the effective tax rate.

 

The Company recognizes interest and penalties accrued on unrecognized tax benefits as well as interest received from favorable tax settlements within income tax expense. The Company did not accrue interest or penalties upon adoption of FIN 48.

 

The Company files income tax returns in the U.S. federal and several state jurisdictions. The Company is currently under examination by the Internal Revenue Service for its 2005 and 2006 tax years. The Company has not recorded any material adjustment in the liability for unrecognized income tax benefits related to this audit. Additionally, the years 2004 through 2006 remain open for examination by federal and state authorities.

 

Gross unrecognized tax benefits increased in the third quarter of 2007 by $3.4 million. Of this amount, $0.2 million, if recognized, would have an impact on the effective tax rate. Given that the Company is currently under audit by the IRS, it is reasonably possible that significant changes in the gross balance of unrecognized tax benefits may occur within the next 12 months. An estimate of the range of such gross changes cannot be made at this time. However, the Company does not expect the audit to result in amounts that would cause significant change within the next twelve months to its effective tax rate or expected cash payments for income taxes.

 

 

 

 

On February 1, 2007, the Company and Big River Resources, LLC (Big River) entered into an agreement (Operating Agreement) related to Grinnell. The Operating Agreement contained terms and conditions related to the operation and governance of Grinnell, an Iowa limited liability company formed for the purpose of developing, constructing, owning, and operating an ethanol plant near Grinnell, Iowa. The Company and Big River each own 50% of Grinnell. In exchange for its 50% interest in Grinnell, the Company contributed $4.0 million in cash and a build slot under the master design-build agreement between the Company and Fagen, Inc., dated August 10, 2006. Additional capital contributions in connection with the construction of the plant will be made as determined from time to time by the board of Grinnell. The Company and Big River each have the right to designate three managers to the board of managers of Grinnell.

 

Site work at the Grinnell plant commenced on December 1, 2006; however, due to lawsuits brought against Big River, and certain other defendants, including the county zoning board, related to zoning issues at the plant, no date has been set to mobilize Fagen, Inc., the design-builder for the project, to start the next phase of construction for the Grinnell plant. A majority of the contested issues were favorably decided for Big River on summary judgment, with Big River prevailing on the remaining issues at trial in September 2007. However, the plaintiff has requested a reconsideration of the decision, and if the plaintiff is unsuccessful, the

 

US BioEnergy Corporation

 

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

 

Company believes that an appeal is likely. The Company has not provided significant additional funding for the Grinnell plant, since its original investment in February 2007.

 

The Company accounts for its investment in Grinnell on a consolidated basis, because it is a variable interest entity and the Company is its primary beneficiary.

 

In March 2006, the Company sold 50% of its membership interest in its wholly-owned subsidiary, Provista, to CHS, Inc. (CHS), a shareholder of the Company, for $2.4 million, plus the assignment by CHS of a fuel delivery contract. UBE also assigned certain of its fuel delivery contracts to Provista and agreed to indemnify Provista for certain claims relating to Provista’s business prior to CHS becoming a member. The Company refers to this arrangement as a joint venture with CHS. A gain on the sale of $1.8 million was deferred until December 2006.

 

The Company consolidated Provista’s financial position and results of operations through August 31, 2006, because Provista was a variable interest entity and the Company was the primary beneficiary. On August 31, 2006, the Company’s guarantee of Provista’s debt was terminated and Provista paid all outstanding indebtedness to the Company, except for trade receivables related to ongoing business transactions. Beginning September 1, 2006, the Company has accounted for its investment in Provista as an unconsolidated subsidiary under the equity method of accounting. Total net revenues for Provista which represent the period beginning January 1, 2006 and ending August 31, 2006, as reflected in the statements of operations were $3.8 million.

 

 

On February 7, 2007, the Company entered into five senior secured credit facilities with AgStar Financial Services, PCA, (AgStar) as administrative agent and as a lender, and a group of other lenders. The senior secured credit facilities include $337.0 million structured as construction loans for Hankinson, Janesville, Dyersville and Ord and $90.0 million for Platte Valley to refinance its existing credit facility. The construction loan includes up to $5.0 million per project to be available for letters of credit. The Hankinson, Janesville and Dyersville construction loans will provide funds necessary to finance up to 60% of construction costs. The Company must provide the necessary funds for 40% of the construction costs before funds are available under each credit facility. In addition, a $10.0 million seasonal revolving credit facility is available under the senior secured credit facility for the Platte Valley and Ord plants and a $10.0 million seasonal revolving credit facility will be available to each of Hankinson, Janesville and Dyersville upon the conversion of each construction loan to a term loan. On February 7, 2007, the Company used funds from the new credit facilities to prepay all the outstanding debt with First National Bank of Omaha in aggregate of $36.8 million. In connection with the refinancing the Company incurred and expensed a prepayment penalty of $0.7 million and $0.7 million of debt financing costs.

 

As of September 30, 2007, the Company held the following positions:

 

Albert City had outstanding borrowings of $64.6 million and $12.6 million under its senior secured credit facility and revolving term loan, respectively, and outstanding letters of credit of $2.7 million. There were no outstanding borrowings under its seasonal revolving loan.

 

Ord had outstanding borrowings of $34.9 million and $11.6 million under its senior secured credit facility and revolving term loan, respectively. There were no outstanding borrowings under its seasonal revolving loan. Ord’s construction loan converted to term loans on September 1, 2007.

 

Platte Valley had outstanding borrowings of $65.9 million and $22.5 million under its senior secured credit facility and revolving term loan, respectively, and outstanding letters of credit of $0.5 million. There were no outstanding borrowings under its seasonal revolving loan.

 

Woodbury had outstanding borrowings of $27.0 million and $8.0 million under its senior secured credit facility and revolving term loan, respectively, and outstanding letters of credit of $0.9 million.

 

US BioEnergy Corporation

 

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

 

Dyersville had outstanding borrowings under its construction loan of $8.9 million and no outstanding letters of credit.

 

Hankinson had outstanding borrowings under its construction loan of $34.7 million and outstanding letters of credit of $4.3 million.

 

Janesville had no outstanding borrowings under its construction loan and no outstanding letters of credit.

 

Marion had outstanding borrowings under its construction loan of $51.9 million, no amounts outstanding on its revolving credit facility and outstanding letters of credit of $1.1 million. On August 29, 2007, the Company acquired Millennium, a development stage company, which it subsequently named US Bio Marion, LLC (Marion). Marion is constructing an ethanol plant near Marion, South Dakota (see Note 9 for more detail). The senior construction loan, with Dougherty Funding LLC (Dougherty), has a total commitment of $90.0 million, which bears interest at 4.5% above the one-month LIBOR and a revolving loan of up to $7.0 million, which bears interest at 4% above the one-month LIBOR. During the construction phase, interest on the senior construction loan is due monthly. The term of the senior construction loan commitment allows advances to be made through May 31, 2008. After conversion of the senior construction loan to a term loan, payments will be based on monthly amortized payments of principal and interest sufficient to amortize the remaining unpaid principal balance to a maturity date of March 31, 2013. The senior construction loan is secured by substantially all of the assets of Marion. The revolving line of credit is secured by Marion’s inventory and accounts receivable and expires on May 28, 2009. Marion also has availability of $7.3 million under a letters of credit agreement with First Bank & Trust, a South Dakota state bank, to be issued on behalf of Marion to satisfy the requirements of certain utility service providers to secure Marion’s contractual obligation to them under certain agreements with these service utility providers.

 

 

On December 8, 2006, the Company’s shareholders approved a 1-for-4 reverse stock split of the Company’s common stock, which became effective on December 12, 2006. The par value of common shares remained $0.01 per share. The reverse stock split has been retroactively reflected in these condensed consolidated financial statements for all periods presented.

 

 

 

Options outstanding of 480,375 and 1,971,250 in 2007 and 2006, respectively, were not included in the computation of diluted EPS because their effect would have been antidilutive. All restricted stock has been included in the computation of diluted EPS. There was no restricted stock outstanding for the three and nine months ended September 30, 2006.

 

 

Effective January 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), “Share-Based Payment,” (SFAS 123(R)), which requires the measurement and recognition of compensation cost at fair value for all

 

US BioEnergy Corporation

 

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

 

share-based payments made to employees and directors, including stock options and employee stock purchases related to the Employee Stock Purchase Plan (ESP Plan).

 

The Company adopted SFAS 123(R) using the prospective transition method, which requires the application of the accounting standard as of January 1, 2006. The condensed consolidated financial statements for the three and nine months ended September 30, 2006, reflect the impact of SFAS 123(R).

 

For the three months ended September 30, 2007, total compensation recognized in the statement of operations for all stock based compensation arrangements was $0.7 million, with a recognized deferred income tax benefit of $0.2 million. For the same three months ended September 30, 2006, total compensation expense recognized in the statement of operations for all stock based compensation arrangements was $0.2 million, with a deferred income tax expense of $49,000 related thereto.

 

For the nine months ended September 30, 2007 and 2006, respectively, the Company recognized expenses of $2.1 million and $0.2 million in the statement of operations for all stock-based compensation arrangements, and recognized related deferred income tax benefits of $0.6 million and $50,000, respectively.

 

Stock Incentive Plans :   The US BioEnergy Corporation 2005 Stock Incentive Plan (2005 Plan) was administered by the Board of Directors or, at its discretion, by a committee consisting of at least three members of the Board of Directors. The 2005 Plan permitted the grant of awards in the form of options, which could have been incentive stock options or non-qualified stock options, stock appreciation rights, restricted stock, or deferred stock. The Board of Directors could award unrestricted awards to recipients in its discretion or upon the attainment of specified performance goals. A total of 426,750 shares were awarded under the 2005 incentive plan. As of September 30, 2007, 241,250 shares were still outstanding under this Plan. The 2005 stock incentive plan was superseded by the 2006 stock incentive plan.

 

On December 8, 2006 the Company’s shareholders approved the US BioEnergy Corporation 2006 Stock Incentive Plan (2006 Plan). The 2006 Plan is administered by the Board of Directors or, at its discretion, by a committee consisting of at least two members of the Board of Directors. The 2006 Plan permits the grant of awards in the form of options, which may be incentive stock options or non-qualified stock options, stock appreciation rights, restricted stock, or deferred stock. The Board of Directors may award unrestricted awards to recipients at its discretion or upon the attainment of specified performance goals.

 

The maximum number of shares reserved under the Plan is 6,560,943 shares of Class A common stock (Award Shares). Award Shares covered by expired or terminated stock options and forfeited shares of restricted stock or deferred stock may be used for subsequent awards under the Plan. The Company has the ability to settle equity awards through the issuance of authorized but unissued common stock. As of September 30, 2007, there were 5,957,045 shares available to be awarded under the 2006 Plan. No awards shall be granted under the 2006 Plan more than ten years after the date of adoption of the 2006 Plan.

 

Restricted stock :   In December 2006, the Company awarded 223,952 shares of restricted stock to certain employees and 19,250 shares of restricted stock to certain members of the Company’s Board of Directors under the 2006 Plan. The restricted stock granted to employees generally vests ratably over three to five years, based on the grant, as long as the employees are employed by the Company. The restricted stock granted to the members of the Company’s Board of Directors in December 2006 vested on May 30, 2007, the date immediately prior to the Company’s 2007 annual shareholders’ meeting. In April 2007, the Company awarded 24,240 shares of restricted stock to certain members of the Company’s local advisory boards and 21,612 shares of restricted stock to the Company’s Board of Directors under the 2006 Plan. On August 21, 2007, the Company awarded 338,707 shares of restricted stock to all employees under the 2006 Plan. The Company had historically applied an average annual forfeiture rate of 2% when calculating the number of shares expected to vest, based upon comparable information for similar businesses. During the second quarter of 2007, the Company did a re-evaluation of the forfeiture rate and will be applying a new rate of 15% on future grants, except grants to board members, which do not have a forfeiture rate. Unrecognized compensation expense

 

 

Stock options :   Stock options under the 2005 and 2006 Plans (Plans) are subject to a vesting period of up to five years from the date of grant. Compensation expense is recognized on a straight-line basis over the vesting period. The term of an incentive stock option may not exceed ten years (or five years if issued to an optionee who owns or is deemed to own more than 10% of the combined voting power of all classes of the Company’s stock, a subsidiary, or any affiliate). The exercise price of a stock option may not be less than the fair market value of the stock on the date the option is granted or, in the event the optionee owns more than 10% of the combined voting power of all classes of capital stock of the Company and an incentive stock option is granted to such optionee, the option exercise price shall not be less than 110% of the fair market value of the stock on the date the option is granted.

 

In addition to the options granted under the Plans, the Company has 1,625,000 options outstanding which were granted outside of the Company’s 2005 Plan.

 

 

As of September 30, 2007, there was $3.3 million of unrecognized compensation expense related to nonvested stock options. This amount is expected to be recognized as compensation expense over a weighted average period of 4.1 years.

 

There were no options granted during the three months ended September 30, 2006, and as a result, there was no calculation of a weighted average grant fair date for that period. During the three months ended September 30, 2007, 5,750 options, which had an intrinsic value of $39,000, were exercised for cash proceeds of $23,000. The exercise of the stock options resulted in a tax benefit of $4,000 for the Company. The Company issued new shares to satisfy these exercises. No options were exercised during the three months ended September 30, 2006. The Company expects to satisfy exercises of options in the future through the issuance of authorized but unissued common stock.

 

US BioEnergy Corporation

 

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

 

The weighted average grant date fair value of stock options granted during the nine months ended September 30, 2006 was $7.92. During the nine months ended September 30, 2007, 16,500 options, which had an intrinsic value of $141,000, were exercised for cash proceeds of $71,000. The exercise of the stock options resulted in a tax benefit of $28,000 for the Company. The Company issued new shares to satisfy these exercises. No options were exercised during the nine months ended September 30, 2006. The Company expects to satisfy exercises of options in the future through the issuance of authorized but unissued common stock.

 

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option awards. The Company had historically applied an annual forfeiture rate of 2% when calculating the amount of options to vest. This rate was based on comparable information for similar businesses. During the second quarter of 2007, the Company did a re-evaluation of the forfeiture rate, and will be applying a new rate of 15% on future grants except grants to board members, which do not have a forfeiture rate. The expected term assumption used in the option pricing model was based on the “safe harbor” approach under SEC Staff Accounting Bulletin (SAB) No. 107, (SAB 107), where the “expected term = ((vesting term + original contractual term) / 2).” The expected stock price volatility assumption was based on the average volatility of a similar public company for the period prior to the Company’s initial public offering. The risk free interest rate assumption was based on the implied yield currently available on U.S. Treasury zero coupon issues with remaining term equal to the expected term. A projected dividend yield of 0% was used as the company has never issued dividends.

 

Employee Stock Purchase Plan:   On December 8, 2006, the Company’s shareholders approved the 2006 ESP Plan. The ESP Plan provides eligible employees an opportunity to purchase shares of the Company’s common stock through payroll deductions of up to 10 percent of eligible compensation. The plan provides for two six-month purchase periods per year, beginning December 1 and June 1, which are the grant dates. On May 31 and November 30, the exercise dates, participant account balances are used to purchase shares of stock at 90 percent of the closing price of the shares on the lesser of the grant date or the exercise date. The ESP Plan expires September 20, 2016. A maximum of 3,280,472 shares are available for purchase under the ESP Plan. Stock sales under the ESP Plan result in the recognition of compensation expense, which equals the discount to the closing price on the date of purchase. There have been no purchases under the plan as of September 30, 2007. The first purchase date will be December 1, 2007.

 

Amendments to Stock Option Agreements:   On June 23, 2006 the Company modified two option grants. The grants were to two individuals who were members of the Board of Directors as of the original grant date. Under the terms of the original grant, if the individuals no longer served on the Board of Directors, the options were to terminate. On June 23, 2006, these individuals ceased to be members of the Board, however, the Company agreed to allow the options to continue in effect in exchange for the individuals providing consulting services to the Company over the remaining vesting period. A total of 30,000 options were affected by this modification. Additional compensation expense of approximately $0.1 million was recognized related to this modification. Additional unrecognized compensation expense of approximately $0.1 million is expected to be recognized over the next 13 months as a result of the modifications.

 

On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards” (FSP No. FAS 123(R)-3). FSP No. 123(R)-3 provides an alternative method of calculating the excess tax benefits available to absorb tax deficiencies recognized after the adoption of SFAS 123(R). The calculation of excess tax benefits recorded as an operating cash outflow and a financing inflow in the condensed consolidated Statements of Cash Flows required by FSP No. FAS 123(R)-3 differs from that required by SFAS 123(R). The Company has until December 2007 to make a one-time election to adopt the transition method described in FSP No. FAS 123(R)-3. The Company is currently evaluating FSP No. FAS 123(R)-3; however, the one-time election will not affect operating income or net income. During the interim period, the Company used the

 

US BioEnergy Corporation

 

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

 

alternative method of calculating the excess tax benefits available to absorb tax deficiencies recognized after the adoption of SFAS 123(R).

 

 

On March 31, 2006, the Company acquired all the outstanding common shares of Hankinson, a development stage company. The operations of Hankinson were included in the Company’s condensed consolidated financial statements beginning April 1, 2006. Hankinson was formed in 2005 to develop, construct, own and operate an ethanol plant near Hankinson, North Dakota. The Company commenced construction at Hankinson in the third quarter of 2006.

 

On April 30, 2006, the Company acquired all of the outstanding common shares of Platte Valley and Ord. The results of their operations have been included in the condensed consolidated financial statements beginning May 1, 2006. At the time of acquisition, Platte Valley was operating as a 50 mmgy ethanol plant near Central City, Nebraska. In November 2006, the Company completed an expansion project at its Platte Valley plant, which resulted in total production capacity of 100 mmgy. At the time of acquisition Ord was a development stage company, formed in 2005 to develop, construct, own and operate an ethanol plant near Ord, Nebraska. Ord began production in May of 2007.

 

Marion Acquisition:

 

On May 31, 2007, the Company, and Millennium Ethanol, LLC, a South Dakota limited liability company, entered into an Agreement and Plan of Merger, which provided for the acquisition of Millennium by the Company. On August 29, 2007, the Company completed the acquisition of Millennium for total aggregate net consideration of $130.9 million, which was comprised of 11,292,168 shares of US BioEnergy Common Stock, and $11.6 million of cash. The Company also incurred transaction costs of $1.7 million. The total purchase price, including transaction costs, was $132.6 million.

 

Millennium was a development stage company that was in the process of constructing an ethanol plant near Marion, South Dakota. The Company changed the name to US Bio Marion, LLC (Marion) upon completion of the acquisition. The Company believes that this acquisition will increase its total production capacity once construction is completed and commercial operations begin. The operations of Marion were included in the condensed consolidated financial statements beginning on August 29, 2007.

 

The total purchase price was comprised of (in thousands):

 

 

Intangible assets consist of debt financing costs related to the construction term loan. Property and equipment acquired consisted primarily of the values assigned to the construction that was in progress at the time of acquisition and the value assigned to the contract to build the ethanol plant, which will be depreciated over the estimated useful lives, which range from 3 to 40 years, of the related assets once operations commence.

 

The purchase price was allocated to the assets acquired based upon their estimated relative fair values. The Company has estimated the fair values of the acquired assets based on a number of factors, including third-party valuations and its own assumptions, which are subject to change once the Company has completed

 

 

Unaudited pro forma consolidated results of operations for the three and nine months ended September 30, 2007 and 2006, as though Hankinson, Platte Valley, Ord and Marion had been acquired as of the beginning of 2006 are as follows (in thousands, except per share data):

 

 

 

The Company’s Production segment includes those production plants that are currently producing ethanol or are being constructed for that purpose. The Production segment includes the activities of Albert City, Ord, Platte Valley, Woodbury, Hankinson, Dyersville, Janesville, Marion and Grinnell. The All Other category in the following tables is primarily the marketing and management operations of UBE Services, UBE Ingredients and Provista, cash to be used towards the construction of ethanol plants, intersegment receivables and corporate operations. Beginning September 1, 2006, the activities of Provista have been accounted for under the equity method of accounting and, as such, the assets in the All Other segment category no longer include the assets of Provista, except for the Company’s equity method investment in Provista. All Other includes the

 

 

Revenue is recognized when the title transfers to the customer. Ethanol is generally shipped FOB shipping point. For the period beginning January 1, 2006 and ending August 31, 2006, the Company recorded the activities of Provista on a consolidated basis. During this time period the Company’s customers were the customers of Provista; principally refining and marketing companies who blend ethanol with gasoline. On August 31, 2006, the Company discontinued consolidating Provista, because the Company was no longer the primary beneficiary, and began accounting for its investment in Provista under the equity method of accounting. At that time the Company’s customer became Provista, its marketing joint venture. Since August 31, 2006, 100% of the Company’s ethanol sales have been to Provista, which, in turn, resells the ethanol to the refining and marketing companies.

 

For the three and nine months ended September 30, 2007, the Company recorded net sales of $129.0 million and $371.4 million, respectively, to Provista, which represented over 10% of total revenues for this period. The sales to Provista represent 100% of the Company’s ethanol sales, and were recorded within the Production segment.

 

For the period beginning January 1, 2006, to the period ending August 31, 2006, the Company recorded net sales of $7.9 million to Valero, and $6.2 million to Elbow River. For the period beginning September 1, 2006 and ended September 30, 2006, the Company recorded net sales of $10.2 million to Provista. These three customers represented over 10% of the total revenues for the nine months ended September 30, 2006.

 

US BioEnergy Corporation

 

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

 

 

As of September 30, 2007, the Company had commitments to Fagen Inc., an entity controlled by Roland (Ron) Fagen, one of the Company’s largest shareholders, of approximately $176.0 million. These commitments are in connection with the Company’s ethanol construction projects currently underway at Hankinson, North Dakota, Dyersville, Iowa, Janesville, Minnesota and Marion, South Dakota.

 

 

Goodwill and intangible assets are reviewed for impairment annually in the fourth quarter or more frequently if certain impairment conditions arise. In September 2007, the Company determined that based on discounted estimated future cash flows, the carrying amount of the goodwill and intangible assets, which were assigned to UBE, its marketing and services business in the All Other segment category, exceeded its fair value in aggregate by $2.5 million. The aggregate amount of $2.5 million consisted of a goodwill impairment of $1.8 million and intangible assets, which consisted of customer lists and contracts, of $0.7 million. Accordingly, an impairment loss of $2.5 million was recognized and is reported as a loss on impairment of assets in the consolidated statements of operations.

 

 

 

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed or referred to below under “Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995”.

 

GENERAL

 

We are one of the largest producers of ethanol in the United States. We own and operate four ethanol plants with total ethanol production capacity of 310 million gallons per year (mmgy) and are constructing four additional ethanol plants with expected total ethanol production capacity of 440 mmgy. We are also implementing US Bio Process Technology ^tm , our proprietary process improvement initiatives, which are designed to achieve increased production levels at our plants. We believe these improvements will position us to achieve total ethanol production capacity of 800 mmgy once fully implemented at each of our plants.

 

Our primary products are ethanol and distillers grains, which we derive from corn. We sell our ethanol to Provista Renewable Fuels Marketing LLC (Provista), our ethanol marketing joint venture with CHS, Inc., which in turn resells to refining and marketing companies, such as BP North America, Inc., Chevron Texaco Products Company and Marathon Petroleum Company, LLC. We believe that Provista’s customers blend ethanol with gasoline in order to capture attractive economics relative to refining costs, to achieve higher octane levels for their products, to facilitate compliance with clean air regulations and to extend their processing capacities. We sell our distillers grains to livestock operators and marketing companies in the U.S. and internationally primarily to be used as an animal feed. We also market distillers grains for, and provide facilities management and other services to other ethanol producers.

 

Previously, we have referred to “nameplate” capacity of our operational plants as well as those under construction. As we continue to develop operational experience and implement US Bio Process Technology ^tm , we have determined that it is more meaningful to refer to our plants by their expected capacity. Accordingly, instead of referring to “nameplate capacity” of our plants, we will now refer to Ord and Woodbury as 50 mmgy plants, we will refer to our expanded Platte Valley plant as a 100 mmgy plant, and we will refer to Albert City, Marion, Hankinson, Dyersville and Janesville as 110 mmgy plants. We believe that this better reflects our expectations and is in accord with industry practice.

 

The following table sets forth a summary of our ethanol plants that are currently in operations or under construction as of September 30, 2007:

 

 

 

 

 

We also have a 50% interest in a joint venture organized to construct, own and operate an ethanol plant that is located near Grinnell, Iowa, with the other 50% interest being held by Big River Resources, LLC (Big River). Site work at the Grinnell plant commenced on December 1, 2006; however, due to pending lawsuits brought against Big River, and certain other defendants, including the county zoning board, related to zoning issues at the plant, no date has been set to mobilize Fagen, Inc., the design builder for the project, to start the next phase of construction for the Grinnell plant. A majority of the contested issues were favorably decided for Big River on summary judgment, with Big River prevailing on the remaining issues at trial in September 2007. However, the plaintiff has requested a reconsideration of the decision, and if the plaintiff is unsuccessful, the Company believes that an appeal is likely. We have not provided significant additional funding for the Grinnell plant since our initial investment in February 2007.

 

All of our plants that are either operating or under construction are designed, engineered and constructed by Fagen, Inc., using ICM, Inc. processing technology. We have entered into master design-build agreements with Fagen, Inc., that provide us with a number of build slots for additional ethanol plants through 2010. We are continuing to evaluate potential future opportunities for development.

 

We have one reportable segment, our Production segment, with other activities recorded in the All Other category. Our Production segment includes our plants that are either currently manufacturing ethanol or are being constructed for that purpose. The activities of our marketing and services entities and corporate functions are combined in the All Other category for segment reporting purposes.

 

EXECUTIVE OVERVIEW

 

We recorded net income of $11.1 million, or $0.15 per basic share, for the three months ended September 30, 2007, compared to net income of $2.5 million, or $0.04 per basic share, for the three months ended September 30, 2006. Our gross profits increased $19.2 million to $28.8 million for the three months ended September 30, 2007, compared to $9.6 million for the three months ended September 30, 2006. Our net revenues increased $116.7 million to $150.0 million for the three months ended September 30, 2007, compared to $33.3 million for the three months ended September 30, 2006.

 

For the nine months ended September 30, 2007, we recorded net income of $24.6 million, or $0.35 per basic share, compared to a net loss of $0.5 million, or $0.01 per basic share, for the nine months ended September 30, 2006. Our gross profits increased by $49.5 million to $66.1 million in the nine months ended September 30, 2007, compared to $16.6 million for the nine months ended September 30, 2006. For the nine months ended September 30, 2007, our net revenues increased $376.3 million to $436.7 million, compared to total net revenues of $60.4 million for the nine months ended September 30, 2006.

 

The following significant items affected the comparability of our recorded results for the three and nine months ended September 30, 2007 and 2006, and our financial position as of September 30, 2007:

 

In May 2006, the sale of ethanol and distillers grains became the primary source of our revenues when we acquired Platte Valley, our first ethanol production plant. In September 2006, our Woodbury plant began operations, in November 2006, we completed the expansion of our Platte Valley plant and in December 2006, our Albert City plant began operations. In May 2007, we commenced operation at our Ord plant. Prior to May 1, 2006, we derived our revenues primarily from UBE, our marketing and

services businesses. As a result of the growth of our ethanol and distillers grains production business, our results of operations and financial condition for the three and nine months ended September 30, 2007, are not comparable to our results of operations and financial condition for the corresponding periods in 2006.

 

In December 2006, we completed our initial public offering (IPO), in which we sold 11,500,000 shares of our common stock at a price to the public of $14.00 per share. Net proceeds of the IPO, after deducting the underwriters discount and commissions, were $149.7 million. Our common stock is currently traded on the NASDAQ Global Market under the symbol “USBE”.

 

In 2006, we began construction on two ethanol plants near Hankinson, North Dakota and Dyersville, Iowa.

 

In January 2007, we began construction on an ethanol plant near Janesville, Minnesota.

 

In February 2007, we entered into five senior secured credit facilities with AgStar Financial Services, PCA, (AgStar) as administrative agent and as a lender, and a group of other lenders to provide financing for our Hankinson, Janesville, Dyersville and Ord construction projects and to refinance our Platte Valley credit facilities.

 

In February 2007, we formed Grinnell, a joint venture company, with Big River to develop, construct, own and operate an ethanol plant near Grinnell, Iowa. We account for this investment on a consolidated basis because it is a variable interest entity and we are its primary beneficiary.

 

In May 2007, we commenced operations at our ethanol plant located in Ord, Nebraska.

 

In August 2007, we completed the acquisition of Millennium Ethanol, LLC (Millennium) for total aggregate consideration of $130.9 million, which was comprised of 11,292,168 shares of our common stock and $11.6 million of cash. We changed the name to US Bio Marion, LLC (Marion) upon completion of the acquisition. Marion is currently constructing an ethanol plant near Marion, South Dakota.

CONSOLIDATED RESULTS

 

The operating results for the three and nine months ended September 30, 2007, are not comparable to the results of the three and nine months ended September 30, 2006, due to the growth of our ethanol and distillers grains production business. Our 2007 operating results include a full nine months of operations at our Albert City and Woodbury plants and our expanded Platte Valley plant and approximately five months of operations at our Ord plant. The acquisition of Platte Valley on April 30, 2006, initiated the operations of our Production segment; therefore, the 2006 results for our Production segment do not constitute a complete year of production activity for any of our plants currently in operation. The following table presents the consolidated income as well as the percentage relationship to total revenues of specified items in our consolidated statements of operations:

 

 

 

 

 

 

Three Months Ended September 30, 2007 compared to Three Months Ended September 30, 2006

 

Total Revenues.   Total revenues increased by $116.7 million to $150.0 million for the three months ended September 30, 2007, compared to $33.3 million for the three months ended September 30, 2006, primarily as a result of the continued growth of our ethanol production business. The revenues for the three months ended September 30, 2007, represent a full quarter of production activity at our Albert City, Woodbury, Platte Valley and Ord plants compared to one full quarter of production activity at the Platte Valley plant and approximately one month of operations at our Woodbury plant in our results for the three months ended September 30, 2006.

 

Net sales of ethanol increased by $102.0 million to $129.0 million for the three months ended September 30, 2007, from $27.0 million for the three months ended September 30, 2006. During the third quarter of 2007, our Production segment sold 73.2 million gallons of ethanol at an average selling price of $1.76 per gallon, compared to the third quarter of 2006, when we sold 14.3 million gallons of ethanol at an average selling price of $1.90 per gallon. Sales for the three months ended September 30, 2007, are net of transportation costs of $10.6 million, or $0.14 per gallon, and commissions of $2.0 million, or $0.03 per gallon. As of September 2006, we discontinued consolidating the operations of Provista and, as such, the sales from that time forward are recorded on a net basis.

 

Net sales of co-products increased $15.9 million to $19.0 million for the three months ended September 30, 2007, compared to $3.1 million for the three months ended September 30, 2006, due to a 269,000 ton increase in volume sold and an increase in the average net selling prices. During the third quarter of fiscal 2007, our Production segment sold 61,100 tons of dried distillers grains at an average selling price of $97.10 per ton, 276,800 tons of modified wet distillers grains at an average selling price of $39.39 per ton and 7,800 tons of wet distillers grains at an average selling price of $26.94 per ton. In the third quarter of 2006, our Production segment sold 5,300 tons of dried distillers grains at an average selling price of $75.39 per ton and 71,400 tons of modified wet distillers grains at an average selling price of $36.82 per ton. Sales of co-products represented $0.25 per gallon of ethanol sold for the three months ended September 30, 2007, compared to $0.21 per gallon of ethanol sold for the three months ended September 30, 2006.

 

Sales of other products decreased $0.2 million, or 39%, to $0.3 million for the three months ended September 30, 2007, from $0.5 million for the three months ended September 30, 2006, primarily as the result of decreased sales of non-fixed margin commodities in our marketing and services business.

 

Services and commissions revenues increased $0.4 million, or 30%, to $1.5 million for the three months ended September 30, 2007, from $1.1 million for the three months ended September 30, 2006.

Other revenue decreased $1.3 million, or 85%, to $0.2 million for the three months ended September 30, 2007, compared to $1.5 million for the three months ended September 30, 2006, due to the timing of incentive credits earned under the State of Nebraska’s ethanol incentive program. In 2007, we earned our incentive credits sooner than in 2006 due to the expansion of our Platte Valley plant. Our Platte Valley plant generates alcohol fuel tax incentive credits at a rate of $0.18 per gallon on the first 15,625,000 gallons of ethanol produced on a yearly basis beginning on May 1st of each year. This state incentive program is set to expire in 2012.

 

Cost of Goods Sold.   Cost of goods sold increased by $97.6 million to $121.3 million for the three months ended September 30, 2007, from $23.7 million for the three months ended September 30, 2006, primarily as the result of the growth in our ethanol and distillers grains production business and lower natural gas prices, which were partially offset by higher corn prices. Cost of goods sold in our Production segment represented $1.62 per gallon of ethanol sold for the three months ended September 30, 2007, compared to $1.54 per gallon of ethanol sold for the three months ended September 30, 2006. Ethanol cost of goods sold, which represents cost of goods sold less distillers grains revenues, was $1.37 per gallon for the three months ended September 30, 2007, compared to $1.33 per gallon for the three months ended September 30, 2006.

 

 

Corn costs were $80.5 million for the three months ended September 30, 2007, and represented 67% of our cost of goods sold, compared to $10.9 million and 49% of our cost of goods sold for the three months ended September 30, 2006. This increase in costs was primarily due to increased volumes of corn processed and an average price, net of hedging gains, that was $1.16 per bushel higher than the corresponding period in 2006.

 

Natural gas costs were $9.5 million for the three months ended September 30, 2007, and represented 8% of our cost of goods sold, compared to $3.4 million and 16% of our cost of goods sold for the three months ended September 30, 2006. The increased utilization of natural gas is due to the increase in production as a result of the growth of our business, which was partially offset by a decrease of $4.23 MMBTU in the average price, net of hedging losses, compared to the corresponding period in 2006.

 

Transportation costs were $1.7 million for the three months ended September 30, 2007, and represented 1% of our cost of goods sold, compared to $2.3 million and 10% of cost of goods sold for the three months ended September 30, 2006. All of the transportation costs of $1.7 million for the three months ended September 30, 2007, are related to shipments of distillers grains, which compared to $54,000 for the three months ended September 30, 2006. Shipments of distillers grains increased as a result of the growth in our volume sold. For the three months ended September 30, 2007, we recorded our ethanol sales net of related transportation costs as Provista incurred those costs. For the three months ended September 30, 2006, we recorded $2.2 million of ethanol related transportation costs in cost of goods sold, due to the consolidation of Provista.

 

Labor and manufacturing overhead was $26.1 million for the three months ended September 30, 2007, and represented 23% of our cost of goods sold, compared to $5.4 million and 25% of cost of goods sold for the three months ended September 30, 2006. Labor and manufacturing overhead represented $0.35 per gallon

for the three months ended September 30, 2007, compared to $0.45 per gallon for the three months ended September 30, 2006. Construction related labor costs incurred during the construction phase of our ethanol plants are considered to be part of the direct cost of construction and, as such, are capitalized.

 

Hedging losses on exchange-traded energy futures contracts were $1.5 million, or $0.02 per gallon, for the three months ended September 30, 2007, and represented 1% of our cost of goods sold. We did not enter into any exchange-traded energy futures contracts in 2006.

 

The aggregate net gain from derivatives included in cost of goods sold was $9.3 million for the three months ended September 30, 2007, compared to a $0.1 million loss for the three months ended September 30, 2006. We mark all exchange-traded corn, natural gas and energy futures contracts to market through cost of goods sold. For the three months ended September 30, 2007, net gains on hedging activities were $0.13 per gallon, compared to a $0.01 per gallon net loss on hedging activities for the three months ended September 30, 2006.

 

Cost of products sales related to the commodities that we sell under non-fixed margin contracts increased $0.6 million to $1.1 million for the three months ended September 30, 2007, from $0.5 million for three months ended September 30, 2006.

 

Cost of services and commissions decreased by $0.5 million, or 40%, to $0.8 million for the three months ended September 30, 2007, from $1.3 million for the three months ended September 30, 2006, primarily due to the deconsolidation of Provista.

 

Gross Profit.   Gross profit increased by $19.2 million to $28.8 million for the three months ended September 30, 2007, from $9.6 million for the three months ended September 30, 2006, driven primarily by the expansion of our Platte Valley plant and the commencement of operations at our Albert City, Ord and Woodbury plants, hedging gains and a decrease in natural gas prices, which were partially offset by higher corn prices. For the three months ended September 30, 2007, our Production segment generated gross profit of $28.1 million, or $0.39 per gallon, compared to $9.6 million, or $0.61 per gallon, for the three months ended September 30, 2006. Gross profit for the three months ended September 30, 2007, decreased $0.22 per gallon compared to the three months ended September 30, 2006, primarily due to higher corn costs, which was partially offset by lower natural gas costs.

 

Selling, General and Administrative Expenses.   Our selling, general and administrative expenses increased $3.6 million, or 50%, to $10.8 million for the three months ended September 30, 2007, from $7.2 million for the three months ended September 30, 2006. Expenses in the All Other segment category increased by $4.0 million, primarily due to the growth of our businesses, which was partially offset by decreased expenses of $0.4 million in our Production segment.

 

Loss on Impairment of Assets.   In September 2007, we determined that based on future cash flows, the carrying amount of the goodwill and intangible assets which were assigned to UBE, our marketing and services business, exceed the fair value by $2.5 million. At that time we recorded an expense of $2.5 million in the All Other segment category to impair $1.8 million of goodwill and $0.7 million of intangible assets (Refer to Footnote 12 for more detail).

 

Interest Expense.   Interest expense increased by $0.5 million, or 54%, to $1.4 million for the three months ended September 30, 2007, from $0.9 million for the three months ended September 30, 2006, primarily due to additional borrowings on our senior secured credit facilities. Interest expense for the three months ended September 30, 2006, represented interest on borrowings under credit facilities primarily related to Provista, which have since been repaid and terminated in connection with the transfer of our 50% ownership interest to CHS. Interest costs of $4.2 million and $1.0 million incurred on borrowings related to construction activities were capitalized for the three months ended September 30, 2007 and 2006, respectively, and, as such, are not included in interest expense. Total interest costs for the three months ended September 30, 2007 were $5.6 million, compared to $1.9 million for the three months ended September 30, 2006.

Interest Income.   Interest income increased by $0.6 million, or 81%, to $1.3 million for the three months ended September 30, 2007, from $0.7 million for the three months ended September 30, 2006, primarily as the result of increased short-term investments from excess cash flows generated by our Production segment.

 

Equity in Net Income (Loss) of Subsidiary.   Our equity in net income of unconsolidated subsidiary of $1.1 million for the three months ended September 30, 2007, represented our 50% share of Provista’s results. Beginning September 1, 2006, we accounted for our investment in Provista under the equity method of accounting. The net loss for this period was $76,000.

 

Income Before Income Taxes and Minority Interest.   Pretax income increased by $14.3 million to $16.4 million for the three months ended September 30, 2007, from $2.1 million for the three months ended September 30, 2006, which is primarily due to the increase in production volumes as our ethanol plants began operations.

 

Income Taxes.   Income tax expense of $5.3 million for the three months ended September 30, 2007, represented an effective tax rate of 32.5%, and included a $1.0 million benefit (net of federal tax effect) due to a reversal of a deferred tax asset valuation allowance related to state tax credits. We recorded income tax expense of $1.0 million for the three months ended September 30, 2006, which was offset by a $1.0 million valuation allowance.

 

Minority Interest in Net Loss of Subsidiary.   Minority interest in net loss of subsidiary was $7,000 for the three months ended September 30, 2007, and represented the minority owner’s 50% share of losses of Grinnell. In February 2007, we formed a joint venture with Big River and began to consolidate the operations of the joint venture. Minority interest in net loss of subsidiary was $0.5 million for the three months ended September 30, 2006, and represented the minority owner’s 50% share of Provista’s net losses. On March 31, 2006, we sold 50% of our membership interest in Provista to CHS. For the period beginning April 1, 2006, and ending August 31, 2006, we consolidated the operations of Provista because it was a variable interest entity and we were the primary beneficiary of a significant receivable owed to us by Provista and we guaranteed Provista’s debt. On August 31, 2006, our guarantee of Provista’s debt was terminated and Provista repaid all outstanding debts to us, and we deconsolidated Provista. From September 1, 2006, forward we are accounting for our investment in Provista under the equity method of accounting.

 

Nine Months Ended September 30, 2007 compared to Nine Months Ended September 30, 2006

 

Total Revenues.   Total revenues increased by $376.3 million to $436.7 million for the nine months ended September 30, 2007, compared to $60.4 million from the nine months ended September 30, 2006, primarily as the result of increased production as our new plants became operational. Revenues for the nine months ended September 30, 2007, represents nine months of production activity at Albert City, Platte Valley and Woodbury, and almost two full quarters of production at our Ord plant, compared to 2006 results which reflected five months of production activity at Platte Valley before the expansion, and one month of operations at Woodbury.

 

Net sales of ethanol increased by $327.8 million to $371.4 million for the nine months ended September 30, 2007, from $43.6 million for the nine months ended September 30, 2006. For the three quarters of 2007, our Production segment sold 200.0 million gallons of ethanol at an average selling price of $1.86 per gallon compared to 2006, when we sold 21.5 million gallons of ethanol at an average selling price of $1.90 per gallon. Sales for the nine months ended September 30, 2007, are net of transportation costs of $28.1 million, or $0.14 per gallon, and commissions of $5.6 million, or $0.03 per gallon. As of September 2006, we discontinued consolidating the operations of Provista and, as such, the sales from that time forward are recorded on a net basis.

 

Net sales of co-products increased $48.0 million to $53.1 million for the nine months ended September 30, 2007, from $5.1 million for the nine months ended September 30, 2006 due to an increase in volume sold of 793,500 tons and an increase in the average net selling prices. During the nine months ended September 30, 2007, our Production segment sold 201,800 tons of dried distillers grains at an average selling price of $99.87 per ton, 692,600 tons of modified wet distillers grains at an average selling price of $42.58 per ton and 20,000 tons of wet distillers grains at an average selling price of $34.15 per ton. In the period beginning May 1, 2006

through September 30, 2006, our Production segment sold 5,300 tons of dried distillers grains at an average selling price of $75.39 per ton and 115,600 tons of modified wet distillers grains at an average selling price of $37.22 per ton. Sales of co-products represented $0.25 per gallon of ethanol sold for the nine months ended September 30, 2007, compared to $0.22 per gallon of ethanol sold for the nine months ended September 30, 2006.

 

Sales of other products decreased by $0.2 million, or 7%, to $3.0 million for the nine months ended September 30, 2007, from $3.2 million for the nine months ended September 30, 2006. For the nine months ended September 30, 2007, we recorded revenues of $1.7 million from the sale of yellow corn. This increase was offset by decreased sales of non-fixed margin commodities of $1.9 million in our marketing and services business.

 

Services and commissions revenues increased $0.6 million, or 12%, to $6.3 million for the nine months ended September 30, 2007, from $5.7 million for the nine months ended September 30, 2006. In the second quarter of 2007, we recorded $0.2 million of revenue related to the termination of a management agreement with a third-party plant customer.

 

Other revenue remained consistent at $2.8 million for the nine months ended September 30, 2007 and 2006. Our Platte Valley plant generates alcohol fuel tax incentive credits under the State of Nebraska’s ethanol incentive program at a rate of $0.18 per gallon on the first 15,625,000 gallons of ethanol produced on a yearly basis beginning on May 1st of each year. This state incentive program is set to expire in 2012.

 

Cost of Goods Sold.   Cost of goods sold increased by $326.7 million to $370.5 million for the nine months ended September 30, 2007, from $43.8 million for the nine months ended September 30, 2006, as a result of the growth in our ethanol and distillers grains production business, as well as lower natural gas prices, which were partially offset by increased corn prices. Cost of goods sold in our Production segment represented $1.83 per gallon of ethanol sold for the nine months ended September 30, 2007, compared to $1.60 per gallon of ethanol sold for the nine months ended September 30, 2006. This per gallon increase was primarily driven by higher corn prices, which were partially offset by decreased natural gas prices. Ethanol cost of goods sold, which represents cost of goods sold less distillers grains revenues, was $1.58 per gallon for the nine months ended September 30, 2007, compared to $1.38 per gallon for the nine months ended September 30, 2006.