Item 1. Business
References to “we”,
“us”, “our”, “REX” or “the Company” refer to REX American Resources Corporation
and its majority owned subsidiaries.
Fiscal Year
All references in this report to a particular
fiscal year are to REX’s fiscal year ended January 31. For example, “fiscal year 2019” means the period February
1, 2019 to January 31, 2020. We refer to our fiscal year by reference to the year immediately preceding the January 31 fiscal year
end date.
Overview
REX was incorporated in Delaware in
1984 as a holding company. Our principal offices are located at 7720 Paragon Road, Dayton, Ohio 45459. Our telephone number is
(937) 276-3931. We have been an investor in ethanol production facilities beginning in 2006. We are currently invested in three
ethanol production entities; we have a majority ownership interest in two of these entities – One Earth Energy, LLC (“One
Earth”) and NuGen Energy, LLC (“NuGen”). We also own a majority interest in an entity that owns and operates
a refined coal facility. We may make additional investments in the energy or other industries in the future. In the third quarter
of fiscal year 2017, we began reporting the results of our refined coal operation as a new segment as a result of the August 10,
2017 acquisition of an entity that operates a refined coal facility (see Note 3 to the Consolidated Financial Statements). Prior
to the acquisition, we had one reportable segment, ethanol. Beginning with the third quarter of fiscal year 2017, we have two reportable
segments: i) ethanol and by-products and ii) refined coal.
Our ethanol operations are highly dependent
on commodity prices, especially prices for corn, ethanol, distillers grains, non-food grade corn oil and natural gas. As a result
of price volatility for these commodities, our operating results can fluctuate substantially. The price and availability of corn
is subject to significant fluctuations depending upon several factors that affect commodity prices in general, including crop conditions,
weather, federal policy and foreign trade. Because the market prices of ethanol and distillers grains are not always directly related
to corn prices, at times ethanol and/or distillers grains prices may lag movements in corn prices. In an environment of higher
corn prices or lower ethanol/distillers grains prices, the overall margin structure at the plants could be reduced. As a result,
at times, we may operate our plants at negative or minimally positive operating margins.
We expect our ethanol plants to produce
approximately 2.8 gallons of denatured ethanol for each bushel of grain processed in the production cycle. We refer to the actual
gallons of denatured ethanol produced per bushel of grain processed as the realized yield. We refer to the difference between the
price per gallon of ethanol and the price per bushel of grain (divided by the realized yield) as the “crush spread.”
Should the crush spread decline, it is possible that our ethanol plants will generate operating results that do not provide adequate
cash flows for sustained periods of time. In such cases, production at the ethanol plants may be reduced or stopped altogether
in order to minimize variable costs at individual plants.
We attempt to manage the risk related
to the volatility of commodity prices by utilizing forward grain purchase, forward ethanol, distillers grains and non-food grade
corn oil sale contracts, and commodity futures agreements, as management deems appropriate. We attempt to match quantities of these
sales contracts with an appropriate quantity of grain purchase contracts over a given period of time when we can obtain an adequate
gross margin resulting from the crush spread inherent in the contracts we have executed. However, the market for future ethanol
sales contracts generally lags the spot market with respect to ethanol price. Consequently, we generally execute fixed price contracts
for no more than four months into the future at any given time and we may lock in our corn or ethanol price without having a corresponding
locked in ethanol or corn price for short durations of time. As a result of the relatively short period of time our fixed price
contracts cover, we generally cannot predict the future movements in our realized crush spread for more than four months; thus,
we are unable to predict the likelihood or amounts of future income or loss from the operations of our ethanol facilities. We utilize
derivative financial instruments, primarily exchange traded commodity future contracts, in conjunction with certain of our grain
procurement activities and commodity marketing activities.
Commodity prices in fiscal year 2019
were subject to significant volatility. For fiscal year 2019, the average Chicago Board of Trade (“CBOT”) near-month
corn price ranged from a low of approximately $3.47 per bushel in April 2019 to a high of approximately $4.55 per bushel in June
2019. Corn prices were impacted by wet spring weather conditions, which led to lower acres planted in certain regions, including
near the NuGen facility. This resulted in higher local basis amounts for corn than we have historically experienced. Corn basis
is the difference between the local cash price and the futures price of the corn contract with the closest delivery month. Ethanol
prices had significant fluctuations ranging from a low of approximately $1.26 per gallon in August 2019 to a high of approximately
$1.61 per gallon in June 2019. Ethanol prices were influenced by many factors throughout the year including domestic demand, exports
and U.S. ethanol supply. Ethanol prices in 2019 and 2018 were negatively impacted, in part, by increased small refiner waivers
(“SRWs”) granted by the Environmental Protection Agency (“EPA”) and the resulting reductions to the Renewable
Fuel Standard (“RFS”) obligations and ethanol demand.
On August 10, 2017, we purchased, through
a 95.35% owned subsidiary, for approximately $12.0 million, the entire ownership interest of an entity that owns a refined coal
facility. We began operating the refined coal facility immediately after the acquisition. We expect that the refined coal operating
results will be subsidized by federal production tax credits through November 2021, subject to meeting qualified emissions reductions
as governed by Section 45 of the Internal Revenue Code (“IRC”). In order to maintain compliance with Section 45 of
the Internal Revenue Code, we are required to test every six months, through an independent laboratory,
the effectiveness of our
process with respect to emissions reductions. Annually, the IRS publishes the amount of federal income tax credit earned per ton
of refined coal produced and sold for a given calendar year, which for 2019 is $7.173 per ton.
Net income attributable to REX
common shareholders was approximately $7.4 million in fiscal year 2019 compared to approximately $31.6 million in fiscal year
2018. Both fiscal years 2019 and 2018 benefitted from reductions in our effective tax rate resulting from the impact of
federal production tax credits associated with our refined coal operations and from the impact of research and
experimentation credits associated with our ethanol and by-products operations. Gross profit in fiscal year 2019 was
significantly lower compared to fiscal year 2018, primarily a result of lower ethanol crush spreads. During fiscal year 2019,
operating results in our ethanol and by-products segment were adversely affected by a weak margin environment highlighted by
higher costs for corn, lower availability of local corn, higher local basis prices for corn and resulting reductions in plant
production volumes at our NuGen facility. Due to the inherent volatility of commodity prices within the ethanol industry, the
uncertainty regarding future refined coal production and associated financial results, we cannot predict the likelihood of
future operating results being similar to the results of historical periods. Due to the economic impact of the spread of a
new strain of the coronavirus (“COVID-19”), and recent crush spreads, we have idled our NuGen and One Earth
ethanol plants. The impacts of COVID-19 on our business operations, including the duration and impact on ethanol demand cannot be
reasonably estimated at this time, although a prolonged production stoppage at our plants would have a material adverse
impact on our results of operations, financial condition and cash flows in fiscal year 2020.
During fiscal year 2013, we entered
into a joint venture with Hytken HPGP LLC (“Hytken”) to file and defend patents for eSteam technology relating to heavy
oil and oil sands production methods, and to attempt to commercially exploit the technology to generate license fees, royalty income
and development opportunities. The patented technology is an enhanced method of heavy oil recovery involving zero emissions downhole
steam generation. To date, we have paid and expensed approximately $2.4 million to purchase our ownership interest and fund patent
and other expenses. We have not successfully demonstrated that the technology is commercially feasible. We own 60% and Hytken owns
40% of the entity named Future Energy, LLC (“Future Energy”), an Ohio limited liability company. Future Energy is managed
by a board of three managers, two appointed by us and one by Hytken.
We plan to seek and evaluate various
investment opportunities including energy related, carbon dioxide related, agricultural or other ventures we believe fit our investment
criteria. We can make no assurances that we will be successful in our efforts to find such opportunities.
Ethanol and By-products Overview
We began investing in the ethanol industry
during fiscal year 2006. The form and structure of our investments is tailored to the specific needs and goals of each project
and the local farmer group or investor with whom we are partnering. We generally participate in the management of our projects
through our membership on the board of managers of the limited liability companies that own the plants.
We have equity investments in three entities
engaged in the production of ethanol as of January 31, 2020. The following table is a summary of our ethanol investments at January
31, 2020 (gallons in millions):
|
Entity
|
Trailing
12 Months Ethanol Gallons Shipped
|
REX's
Current Ownership Interest
|
Current Effective Ownership of Trailing 12 Months Ethanol Gallons Shipped
|
|
One Earth Energy, LLC
|
140.5
|
75.2%
|
105.7
|
|
NuGen Energy, LLC
|
94.8
|
99.5%
|
94.3
|
|
Big River Resources, LLC:
Big River Resources W Burlington, LLC
Big River Resources Galva, LLC
Big River United Energy, LLC
Big River Resources Boyceville, LLC
|
111.6
121.2
131.8
60.1
|
10.3%
10.3%
5.7%
10.3%
|
11.5
12.5
7.5
6.2
|
|
Total
|
660.0
|
|
237.7
|
Ethanol Industry
Ethanol is a renewable fuel source produced
by processing corn and other biomass through a fermentation process that creates combustible alcohol that can be used as a fuel
additive to reduce vehicle emissions from gasoline, as an octane enhancer to improve the octane rating of gasoline with which it
is blended and, to a lesser extent, as a gasoline substitute. The majority of ethanol produced in the United States is made from
corn because of its wide availability and ease of convertibility from large amounts of carbohydrates into glucose, the key ingredient
in producing alcohol that is used in the fermentation process. Ethanol production can also use feedstocks such as grain sorghum,
switchgrass, wheat, barley, potatoes and sugarcane as carbohydrate sources. Most ethanol plants have been located near large corn
production areas, such as Illinois, Indiana, Iowa, Minnesota, Nebraska, Ohio and South Dakota. Railway access and interstate access
are vital for ethanol facilities due to the large amount of raw materials and finished goods required to be shipped to and from
the ethanol plant facilities.
According to the Renewable Fuels Association
(“RFA”), the United States ethanol industry produced an estimated 15.8 billion gallons of ethanol in 2019. Approximately
1.5 billion gallons were exported in 2019. According to the RFA, the United States ethanol industry consists of 205 plants (190
operating) in 26 states with an annual capacity of approximately 16.9 billion gallons (approximately 16.0 billion gallons at operating
plants) of ethanol production. The RFA estimates approximately 183 million gallons per year of additional production capacity is
under construction or expansion.
On December 19, 2007, the Energy Independence
and Security Act of 2007 (the “Energy Act of 2007”) was enacted. The Energy Act of 2007 established new levels of renewable
fuel mandates, including two different categories of renewable fuels: conventional biofuels and advanced biofuels. Corn-based ethanol
is considered a conventional biofuel which is subject to a renewable fuel standard (“RFS”) of 15.0 billion gallons
annually through 2022. After 2022, RFS volumes will be determined by the Environmental Protection Agency (“EPA”) in
coordination with the Secretaries of Energy and Agriculture.
The federal government mandates the use of
renewable fuels under Renewable Fuel Standard II (“RFS II”), established in October 2010. The EPA has the authority
to waive the mandates in whole or in part if one of two conditions is met: 1) there is inadequate domestic renewable fuel supply,
or 2) implementation of the mandate requirement severely harms the economy or environment of a state, region or the United States.
In 2014, 2015 and 2016, the EPA took action to reduce the volumes for both conventional biofuels and advanced biofuels.
The U.S. Federal District Court for the D.C.
Circuit ruled on July 28, 2017, in favor of the Americans for Clean Energy and its petitioners against the EPA related to its decision
to lower the 2016 volume requirements. The Court concluded the EPA erred in how it interpreted the “inadequate domestic supply”
waiver provision of RFS II, which authorizes the EPA to consider supply-side factors affecting the volume of renewable fuel available
to refiners, blenders, and importers to meet the statutory volume requirements. The waiver provision does not allow the EPA to
consider the volume of renewable fuel available to consumers or the demand-side constraints that affect the consumption of renewable
fuel by consumers. As a result, the Court vacated the EPA’s decision to reduce the total renewable fuel volume requirements
by 500 million gallons for 2016 through its waiver authority. To date, the EPA has not reinstated these gallons.
Pursuant to RFS II, if mandatory renewable
fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes
through 2022. While conventional ethanol was maintained at 15.0 billion gallons, 2019 was the second consecutive year the total
proposed renewable volume obligations (“RVOs”) was more than 20% below statutory volumes levels. The EPA Administrator
directed his staff to initiate the reset rulemaking process. However, the EPA announced it will not move forward with reset rulemaking
in 2020.
Obligated parties use renewable identification
numbers (“RINs”) to show compliance with RFS-mandated volumes. RINs are attached to renewable fuels by producers and
detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached
RINs affects the price of ethanol in certain markets and influences the purchasing decisions by obligated parties. Certain obligated
parties petitioned the EPA to move the point of obligation from refiners and importers of fuel to fuel blenders. In November 2017,
the EPA denied this petition to change the point of obligation under RFS II to the parties that own the gasoline before it is sold.
On January 26, 2018, in separate court actions,
both Valero Energy and American Fuel and Petrochemical and Manufacturers (“AFPM”) challenged the EPA regarding the
EPA’s management of the U.S. biofuel mandate. Amongst their challenges are the EPA’s November 2017 decision to reject
proposed changes to the structure of the RFS, including the point of obligation. The plaintiffs also are seeking a review of the
annual Renewable Volume Obligations rule set by the EPA for 2018. In addition, an action brought by Valero sought review of the
EPA’s December 2017 assertion that the agency has fulfilled its duty to periodically review the RFS as directed by statute.
The D.C. Circuit Court denied all of the petitions on various grounds issued in 2019. In December 2019, Valero and the AFPM filed
a petition seeking U.S. Supreme Court review of the D.C. Circuit decisions on the first two actions.
At the same time the EPA took action (in 2019)
to allow the Reid Vapor Pressure (“RVP”) waiver to E-15 for the summer months, it also took RIN market reform action.
The reform action requires public disclosure when RIN holdings exceed specified thresholds by an entity and also requires the reporting
of additional price and affiliate data to the EPA.
Under RFS II, a small refiner that processes
less than 75,000 barrels per day can petition the EPA for a waiver of their requirement to submit RINs. The EPA, through consultation
with the Department of Energy and the Department of Agriculture, can grant the refiner a full or partial waiver, or deny the waiver.
The EPA issued 85 refinery exemptions for 2016-2018 compliance years, undercutting the statutory renewable fuel volumes by a total
of 4.0 billion gallons. In its final rule establishing the 2020 renewable fuel volume obligations, the EPA stated it will reallocate
gallons lost to exemptions, based on a rolling three year average of what the Department of Energy has recommended, and extend
this to the 2019 compliance year. On average, these recommendations have represented only about half of the waivers the EPA has
granted. The U.S. Court of
Appeals for the 10th Circuit recently vacated decisions by the EPA to extend exemptions to
renewable fuel obligations to three small refineries. The Court ruled the extensions should not have been granted because the three
refineries were not already in possession of exemptions. In addition, the Court ruled the economic hardship should be determined
by whether complying with RFS II created the hardship solely, not compliance with RFS II amongst other factors. The oil refiners appealed this ruling.
Ethanol Production
The
plants we have invested in are designed to use the dry milling method of producing ethanol. In the dry milling process, the entire
corn kernel is first ground into flour, which is referred to as “meal,” and processed without separating out the various
component parts of the grain. The meal is processed with enzymes, chemicals and water, and then placed in a high-temperature cooker.
It is then transferred to fermenters where yeast is added and the conversion of sugar to ethanol begins. After fermentation, the
resulting liquid is transferred to distillation columns where the ethanol is separated from the remaining “stillage”
for fuel uses. The anhydrous ethanol is then blended with a denaturant, such as natural gasoline, to render it undrinkable and
thus not subject to beverage alcohol tax. With the starch elements of the corn consumed in the above described process, the principal
by-product produced by the dry milling process is dry distillers grains with solubles, or DDGS. DDGS is sold as a protein used
in animal feed, which recovers a portion of the corn value not absorbed in ethanol production. Depending on market and operating
conditions, we may also sell modified distillers grains or wet distillers grains by removing less liquid content compared to DDGS.
We also generate revenues from the sale of non-food grade corn oil produced at our facilities. Non-food grade corn oil is sold
to the animal feed market, as well as biodiesel and other chemical markets.
The Primary Uses
of Ethanol
Blend component. Today,
much of the ethanol blending in the U.S. is done to meet the RFS. Most regular gasoline is produced using blendstock with an octane
rating of 84, which is then increased to 87 (the minimum octane rating required in most states) by adding 10% ethanol according
to the RFA. The industry is attempting to expand ethanol blending above the current 10% for most vehicles in use. The EPA has approved
the use of 15% ethanol (“E-15”), which has an octane rating of 88, in gasoline for cars, SUV’s and light duty
trucks made in 2001 and later. Previously, the EPA had not granted E-15 the same RVP as E-10 so it could only be sold from September
16 through May 31 for those vehicles in most markets. In May 2019, the EPA finalized regulatory changes to allow the same RVP waiver
for E-15 for the summer months that it allows for E-10. This may remove a significant barrier to wider sales of E-15, although
E-15 sales are still limited by the lack of infrastructure at retail locations to dispense E-15.
Clean air additive. Ethanol
is employed by the refining industry as a fuel oxygenate, which when blended with gasoline, allows engines to combust fuel more
completely and reduce emissions from motor vehicles, than gasoline that has not been oxygenated. Ethanol contains 35% oxygen, which
results in more complete combustion of the fuel in the engine cylinder. Oxygenated gasoline is used to help meet certain federal
and air emission standards.
Octane enhancer. Ethanol
increases the octane rating of gasoline with which it is blended. Octane is a measure of fuel performance. Ethanol is used by gasoline
suppliers as an octane enhancer both for producing regular grade gasoline from lower octane blending stocks and for upgrading regular
gasoline to premium grades.
Legislation
The United States ethanol industry is highly
dependent upon federal and state legislation. See Item 1A. Risk Factors for a discussion of legislation affecting the U.S. ethanol
industry.
Refined Coal Overview
On August 10, 2017, we
purchased, through a 95.35% owned subsidiary, the entire ownership interest of an entity that owns a refined coal facility. We
began operating the refined coal facility immediately after the acquisition. Using licensed technology, our plant applies two separate
chemicals to convert feedstock coal into refined coal, which is sold to the end user of the refined coal. We expect that the refined
coal operating results will be subsidized by federal production tax credits through November 2021, subject to meeting qualified
emissions reductions as governed by Section 45 of the Internal Revenue Code (“IRC”). In order to maintain compliance
with Section 45 of the IRC, we are required to test every six months, through an independent laboratory, the effectiveness of our
process with respect to emissions reductions. Annually, the IRS publishes the amount of federal income tax credit earned per ton
of refined coal produced and sold for a given calendar year, which for 2019 is $7.173 per ton.
Section 45 of the IRC was created
by Congress to encourage the development and use of environmentally sound solutions to control harmful emissions during energy
production and to facilitate and move the United States towards better compliance with global environmental energy standards. The
American Jobs Creation Act of 2004 amended Section 45 of the IRC by adding provisions to incentivize the production of emission
reducing refined coal. To qualify for tax credits under Section 45 of the IRC, a process must reduce coal emissions of nitrogen
oxide by 20% and either sulfur dioxide or mercury by 40%. The tax credits can be earned for refined coal produced and sold by our
facility through November 2021.
Facilities
As of our fiscal year end, our consolidated
ethanol entities owned a combined 477 acres of land and two facilities that shipped a combined quantity of approximately 235 million
gallons of ethanol in fiscal year 2019. We also own our corporate headquarters office building, consisting of approximately 7,500
square feet, located in Dayton, Ohio. We own a refined coal plant that is located on leased property on the site of an electrical
generating station.
Employees
At
January 31, 2020, we had 128 employees at our two consolidated ethanol plants and at our corporate headquarters. None of our employees
are represented by a labor union. We expect this employment level to remain relatively stable. We consider our relationship with
our employees to be good.
Service Marks
We have registered the service marks
“REX”, and “Farmer’s Energy”, with the United States Patent and Trademark Office. We are not aware
of any adverse claims concerning our service marks.
Item 1A. Risk Factors
We encourage you to carefully consider the
risks described below and other information contained in this report when considering an investment decision in REX common stock.
Any of the events discussed in the risk factors below may occur. If one or more of these events do occur, our results of operations,
financial condition or cash flows could be materially adversely affected. In this instance, the trading price of REX stock could
decline, and investors might lose all or part of their investment.
Risks Related to our Ethanol and By-Products
Business
During the early months of 2020,
a new strain of COVID-19 spread into the United States and other countries.
In an effort to contain the
spread of this virus, there have been various government mandated restrictions, in addition to voluntary privately
implemented restrictions, including limiting public gatherings, retail store closures, restrictions on employees working and
the quarantining of people who may have been exposed to the virus. The duration of the resulting downturn in economic
activity is unknown both on a macro and a micro level. However, it has led to historically low ethanol pricing. This could
lead to prolonged production stoppages at our ethanol plants and could result in an adverse material impact on the results of
operations and on our financial position. We have idled our NuGen and One Earth ethanol plants.
The ethanol industry is changing
rapidly which could result in unexpected developments that could negatively impact our operations.
According to the RFA, the ethanol
industry has grown from approximately 1.5 billion gallons of domestic annual ethanol production in 1999 to approximately 16.1 billion
gallons in 2018. In 2019, the industry produced approximately 15.8 billion gallons, with the reduction reflecting industry conditions.
Thus, there have been significant changes in the supply and demand of ethanol over a relatively short period of time which could
lead to difficulty in maintaining profitable operations at our ethanol plants.
The financial returns on our ethanol
investments are highly dependent on commodity prices, which are subject to significant volatility, uncertainty and regional supply
shortages, so our results could fluctuate substantially.
The financial returns
on our ethanol investments are highly dependent on commodity prices, especially prices for corn, natural gas, ethanol, dried distillers
grains, non-food grade corn oil and unleaded gasoline. As a result of the volatility of the prices for these items, our returns
may fluctuate substantially and our investments could experience periods of declining prices for their products and increasing
costs for their raw materials, which could result in operating losses at our ethanol plants.
Our returns
on ethanol investments are highly sensitive to grain prices.
Corn is the principal
raw material our ethanol plants use to produce ethanol and by-products. As a result, changes in the price of corn can significantly
affect our businesses. Rising corn prices result in higher production costs of ethanol and by-products. Because ethanol competes
with non-corn-based fuels, our ethanol plants may not be able to pass along increased grain costs to our customers. At certain
levels, grain prices may make ethanol uneconomical to produce.
The price of corn
is influenced by weather conditions and other factors affecting crop yields, transportation costs, farmer planting decisions, exports,
the value of the U.S. dollar and general economic, market and regulatory factors. These factors include government policies and
subsidies with respect to agriculture and international trade and global and local demand and supply. The significance and relative
effect of these factors on the price of corn is difficult to predict. Any event that tends to negatively affect the production
and/or supply of corn, such as adverse weather or crop disease, could increase corn prices and potentially harm the business of
our ethanol plants, to include intermittent production slowdowns or stoppages. Increasing
domestic ethanol capacity could boost
the demand for corn and result in increased corn prices. Much of the Midwestern United States experienced adverse weather conditions,
primarily during the early months of 2019 which led to a smaller harvest of corn and increased corn prices. Our ethanol plants
may also have difficulty, from time to time, in physically sourcing corn on economic terms due to regional supply shortages, transportation
issues, or unfavorable local pricing. Such a shortage or price impact could require our ethanol plants to suspend operations which
would have a material adverse effect on our consolidated results of operations.
The spread
between ethanol and corn prices can vary significantly.
The gross margin
at our ethanol plants depends principally on the spread between ethanol and corn prices. Fluctuations in the spread are likely
to continue to occur. A sustained narrow or negative spread, whether as a result of sustained high or increased corn prices or
sustained low or decreased ethanol prices, would adversely affect the results of operations at our ethanol plants.
Our risk management
strategies may be ineffective and may expose us to decreased profitability and liquidity.
In an attempt to
partially offset the impact of volatility of commodity prices, we enter into forward contracts to sell a portion of our ethanol
and distillers grains production and to purchase a portion of our corn and natural gas requirements. The financial impact of these
risk management activities is dependent upon, among other items, the prices involved and our ability to receive or deliver the
commodities involved. Risk management activities can result in financial loss when positions are purchased in a declining market
or when positions are sold in an increasing market. In addition, we may not be able to match the appropriate quantity of corn contracts
with quantities of ethanol, distillers grains and non-food grade corn oil contracts. We vary the amount of risk management techniques
we utilize, and we may choose not to engage in any risk management activities. Should we fail to properly manage the inherent volatility
of commodities prices, our results of operations and financial condition may be adversely affected.
The market
for natural gas is subject to market conditions that create uncertainty in the price and availability of the natural gas that our
ethanol plants use in their manufacturing process.
Our ethanol plants
rely upon third parties for their supply of natural gas, which is consumed as fuel in the production process. The prices for and
availability of natural gas are subject to volatile market conditions. These market conditions often are affected by factors beyond
the ethanol plants’ control, such as weather conditions, overall economic conditions and foreign and domestic governmental
regulation and relations. Significant disruptions in the supply of natural gas could impair or completely prevent the ethanol plants’
ability to economically manufacture ethanol for their customers. Furthermore, increases in natural gas prices may adversely affect
results of operations and financial position at our ethanol plants.
Fluctuations in the selling price
of commodities may reduce profit margins at our ethanol plants.
Ethanol is marketed as a fuel additive
to reduce vehicle emissions from gasoline, as an octane enhancer to improve the octane rating of gasoline with which it is blended
and, to a lesser extent, as a gasoline substitute. As a result, ethanol prices are influenced by the supply and demand for gasoline
and our ethanol plants’ results of operations and financial position may be materially adversely affected if gasoline demand
decreases or the price of gasoline declines making ethanol less economical.
Distillers grains compete with other
protein based animal feed products. The price of distillers grains may decrease when the prices of competing feed products decrease.
The prices of competing animal feed products are based in part on the prices of the commodities from which these products are made.
Historically, sales prices for distillers grains have tracked along with the price of corn. However, there have been instances
when the price increase for distillers grains has lagged price increases in corn prices.
The production of distillers grains
has increased as a result of increases in dry mill ethanol production in the United States. This could lead to price declines in
what we can sell our distillers grains for in the future. Such declines could have an adverse material effect on our results of
operations.
Increased ethanol
production or decreases in demand for ethanol may result in excess production capacity in the ethanol industry, which may cause
the price of ethanol, distillers grains and non-food grade corn oil to decrease.
According to the
RFA, domestic ethanol production capacity is approximately 16.9 billion gallons per year. The RFA estimates that approximately
183 million gallons per year of additional production capacity is under construction or expansion. The EPA set the RFS requirement
to be satisfied by corn-derived ethanol at 15.0 billion gallons for 2019 and 2020. However, the RFS requirements have been reduced
through SRWs issued by the EPA. These SRWs were in the amount of approximately 4.0 billion gallons for 85 refinery exemptions of
ethanol for 2016 through 2018. There have been no rulings on waiver requests for subsequent years. As of February 21, 2020, there
were 23 SRW requests pending for compliance year 2019. Excess capacity in the ethanol industry could have an adverse effect on
the results of our operations. In a manufacturing industry with excess capacity, producers have an incentive to manufacture additional
products for so long as the price exceeds the marginal cost of production (i.e., the cost of producing only the next unit, without
regard for interest, overhead or fixed costs). This incentive could result in the reduction of the market price of ethanol to a
level that is inadequate to generate sufficient cash flow to cover costs.
Excess capacity
may also result from decreases in the demand for ethanol, which could result from a number of factors, including, but not limited
to, regulatory developments and reduced U.S. gasoline consumption. Reduced gasoline consumption could occur as a result of increased
prices for gasoline or crude oil, which could cause businesses and consumers to reduce driving or acquire vehicles with more favorable
gasoline mileage or acquire non-gasoline powered vehicles. In addition, decreased overall economic activity could also lead to
reduced gasoline consumption.
In addition, because
ethanol production produces distillers grains and non-food grade corn oil as by-products, increased ethanol production will also
lead to increased supplies of distillers grains and non-food grade corn oil. An increase in the supply of distillers grains and
non-food grade corn oil, without corresponding increases in demand, could lead to lower prices or an inability to sell our ethanol
plants’ distillers grains and non-food grade corn oil production. A decline in the price of distillers grains or non-food
grade corn oil could have a material adverse effect on the results of our ethanol operations.
The price of ethanol and distillers
grains may decline as a result of trade restrictions or duties on ethanol and distillers grains exports from the United States
or from unfavorable foreign currency exchange rates.
The United States exported approximately
1.5 billion gallons of ethanol in 2019, down from approximately 1.7 billion gallons in 2018. If producers and exporters of ethanol
are subject to trade restrictions, or additional duties are imposed on exports, it may make it uneconomical to export ethanol.
Brazil, China and the European Union all have trade barriers or tariffs against fuel ethanol. In 2013, the European Union imposed
a five year tariff of $83.33 per metric ton on U.S. fuel ethanol to discourage competition. Effective January 1, 2017, China indicated
its intention to raise its 5% tariff on U.S. and Brazil fuel ethanol to 30%. On April 1, 2018, China raised their tariff rate to
45%, and later raised it to 70% in the U.S. and China trade war. On September
1, 2017, Brazil imposed a 20% tariff on U.S. fuel
ethanol imports in excess of 150 million liters, or 39.6 million gallons per quarter. The tariff on U.S. fuel ethanol was valid
for two years. In a resolution published August 31, 2019, Brazil raised its annual import quota to 198 million gallons per year,
which awaits final approval by the Brazilian government. Furthermore, unfavorable changes in foreign currency exchange rates could
reduce the demand for United States ethanol exports. This could result in an oversupply of ethanol in the United States, which
could have a material adverse effect on the results of our ethanol operations.
Exports of distillers grains produced
in the United States have been increasing in recent years. In 2019, approximately 10.9 million metric tons (“mmt”)
of distillers grains were exported of the approximately 36.0 mmt produced in the U.S. However, the export market may be jeopardized
if foreign governments impose trade barriers or other measures to protect the foreign local markets. The Chinese export market
was approximately 2% of global shipments in 2019 versus approximately 51% in 2015, due to punitive tariffs established beginning
January 2017 in effect for 5 years per the RFA. If producers and exporters of distillers grains are subjected to trade barriers
when selling distillers grains to foreign customers, there may be a reduction in the price of distillers grains in the United States.
In addition, foreign currency exchange rate fluctuations could reduce the demand for United States exports of distillers grains.
Declines in the price we receive for our distillers grains could lead to decreased revenues and may result in our inability to
operate our ethanol plants profitably.
Future demand for ethanol is uncertain
and changes in overall consumer demand for transportation fuel could affect demand.
There are limited markets for ethanol
other than what is federally mandated. Increased consumer acceptance of E15 and E85 fuel is likely necessary in order for ethanol
to achieve significant market share growth beyond federal mandate levels.
We depend on our partners to operate
certain of our ethanol investments.
Our investments currently represent
both majority and minority equity positions. Day-to-day operating control of minority owned plants generally remains with the local
investor group. We do not have the ability to directly modify the operations of these plants in response to changes in the business
environment or in response to any deficiencies in local operations of the plants. In addition, local plant operators, who also
represent the primary suppliers of corn and other crops to the plants, may have interests, such as the price and sourcing of corn
and other crops, that may differ from our interest, which is based solely on the operating profit of the plant. The limitations
on our ability to control day-to-day plant operations could adversely affect plant results of operations.
We may not successfully acquire or
develop additional ethanol investments.
The growth of our
ethanol business depends on our ability to identify and develop new ethanol investments. Our ethanol development strategy depends
on referrals, and introductions, to new investment opportunities from industry participants, such as ethanol plant builders, financial
institutions, marketing agents and others. We must continue to maintain favorable relationships with these industry participants,
and a material disruption in these sources of referrals would adversely affect our ability to expand our ethanol investments.
Any expansion strategy
will depend on prevailing market conditions for the price of ethanol and the cost of corn and natural gas and the expectations
of future market conditions. If suitable sites or opportunities are identified, we may not be able to secure the services and products
from contractors, engineering firms, construction firms and equipment suppliers necessary to build or expand ethanol plants on
a timely basis or on acceptable economic terms. Construction costs may increase to levels that would make a new plant too expensive
to complete or unprofitable to operate. Additional financing may also be necessary to implement
any expansion strategy, which may
not be accessible or available on acceptable terms. New and more stringent environmental regulations could increase the operating
costs and risks of new plants, which, in turn could discourage us from further expansion. In addition, failure to adequately manage
the risks associated with additional ethanol investments could have a material adverse effect on our business.
Our ethanol plants
may be adversely affected by technological advances and efforts to anticipate and employ such technological advances may prove
unsuccessful.
The development and implementation
of new technologies may result in a significant reduction in the costs of ethanol production. For instance, any technological advances
in the efficiency or cost to produce ethanol from inexpensive cellulosic sources such as corn stalk, wheat, oat or barley straw
could have an adverse effect on our ethanol plants, because our plants are designed to produce ethanol from corn, which is, by
comparison, a raw material with other high value uses. We cannot predict when new technologies may become available, the rate of
acceptance of new technologies by competitors or the costs associated with new technologies. In addition, advances in the development
of alternatives to ethanol could significantly reduce demand for or eliminate the need for ethanol.
Any advances in technology
which require significant unanticipated capital expenditures to remain competitive or which reduce demand or prices for ethanol
would have a material adverse effect on the results of our ethanol operations.
In addition, alternative
fuels, additives and oxygenates are continually under development. Alternative fuel additives that can replace ethanol may be developed,
which may decrease the demand for ethanol. It is also possible that technological advances in engine and exhaust system design
and performance could reduce the use of oxygenates, which would lower the demand for ethanol, and the results of our ethanol operations
may be materially adversely affected.
The U.S. ethanol industry is highly
dependent upon a myriad of federal and state legislation and regulation and any changes in legislation or regulation could materially
and adversely affect our results of operations and financial position.
The Energy Independence and Security
Act of 2007 (EISA) established RFS II, which modified the renewable fuel standard from prior legislation. EISA increased the amount
of renewable fuel required to be blended into gasoline and required a minimum usage of corn-derived renewable fuels of 12.0 billion
gallons in 2010, increasing annually by 600 million gallons to 15.0 billion gallons in 2015 through 2022, with no specified volume
subsequent to 2022. The EPA has the authority to assign the mandated amounts of renewable fuels to be blended into transportation
fuel to individual fuel blenders. RFS II has been a primary factor in the growth of ethanol usage. Over the past several years
various pieces of legislation have been introduced to the U.S. Congress that were intended to reduce or eliminate ethanol blending
requirements. To date, none of the bills have been successful but they are an indication of the continued effort to undermine the
EISA.
Under EISA, the EPA has the authority
to waive or modify the mandated RFS II requirements in whole or in part. In order to grant a waiver, the EPA administrator must
determine in consultation with the Secretaries of Agriculture and Energy, that one of the following two conditions has been met:
i) there is inadequate domestic renewable fuel supply or ii) implementation of the requirement would severely harm the economy
or environment of a state, region or the country. In certain past years the EPA has taken action to reduce the mandated gallons
called for under EISA for both conventional and advanced renewable fuels.
Pursuant to RFS II, if mandatory renewable
fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes
through 2022. While conventional ethanol was maintained at 15 billion gallons, 2019 was the second consecutive year the total proposed
RVOs was more than 20% below statutory volumes levels. The EPA Administrator directed his staff to initiate the reset rulemaking
process. However, the EPA has announced it will not move forward with a reset rulemaking in 2020.
Obligated parties use renewable identification
numbers (“RINs”) to show compliance with RFS-mandated volumes. RINs are attached to renewable fuels by producers and
detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached
RINs affects the price of ethanol in certain markets and influences the purchasing decisions by obligated parties. As a result
of fluctuations in RINs pricing, certain obligated parties have petitioned the EPA and filed court actions to change the point
of obligation or to seek relief from their obligation. The EPA has granted 85 total SRWs for 2016 through 2018 totaling approximately
4.0 billion gallons. This action has led to reduced values for RINs and further action could decrease RIN values and ethanol pricing.
As of February 21, 2020, there were 23 SRWs pending for compliance year 2019. In a decision that could impact the granting of SRW’s,
the U.S. Court of Appeals for the 10th Circuit recently vacated decisions by the EPA to extend exemptions to renewable
fuel obligations to three small refineries. The refineries appealed this ruling.
At the same time the EPA took action
(in 2019) to allow the RVP waiver for E-15 for the summer months, it also took RIN market reform action. The reform action requires
public disclosure when RIN holdings exceed specified thresholds by an entity and requires the reporting of additional price and
affiliate data to the EPA.
If the United States were to withdraw
from or materially modify certain international trade agreements, our business, financial condition and results of operations could
be materially adversely affected. Ethanol and other products that we produce are sold into various other countries with trade agreements
with the United States. If tariffs were raised on the foreign-sourced goods that lead to retaliatory actions, it could have material
adverse effect on our business, financial condition and results of operations.
The inability to generate or obtain
RINs could adversely affect our operating results. Virtually all of our ethanol is sold with RINs that are used by customers
to comply with RFS II. If our production does not meet EPA requirements for RIN generation in the future, we would have to purchase
RINs in the open market or sell our ethanol at substantially lower prices to adjust for the absence of RINs. The price of RINs
varies based on many factors and cannot be predicted. Failure to obtain sufficient RINS or reliance on invalid RINs could subject
us to fines and penalties imposed by the EPA.
Changes in corporate average fuel
economy standards could adversely impact ethanol prices. Flexible fuel vehicles receive preferential treatment in meeting
federally mandated corporate average fuel economy (“CAFE”) standards for automobiles manufactured by car makers. High
blend ethanol fuels such as E-85 result in lower fuel efficiencies. Absent the CAFE preferences, car makers would not likely build
flexible-fuel vehicles. Any change in CAFE preferences could reduce the growth of E-85 markets and result in lower ethanol prices.
Various studies have
criticized the efficiency of ethanol, in general, and corn-based ethanol in particular, which could lead to the reduction or repeal
of incentives and tariffs that promote the use and domestic production of ethanol or otherwise negatively impact public perception
and acceptance of ethanol as an alternative fuel.
Although many trade groups, academics
and governmental agencies have supported ethanol as a fuel additive that promotes a cleaner environment, others have criticized
ethanol production as consuming considerably more energy and emitting more greenhouse gases than other biofuels and as potentially
depleting water resources. Other studies have suggested that corn-based ethanol is less efficient than ethanol produced from switchgrass
or wheat grain and that it negatively impacts consumers by causing prices for dairy, meat and other foodstuffs from livestock that
consume corn to increase.
If these views gain acceptance, support
for existing measures promoting use and domestic production of corn-based ethanol could decline, leading to reduction or repeal
of these measures. These views could also negatively impact public perception of the ethanol industry and acceptance of ethanol
as an alternative fuel.
Federal support of cellulosic ethanol
may result in reduced incentives to corn-derived ethanol producers.
The American Recovery
and Reinvestment Act of 2009 and EISA provide funding opportunities in support of cellulosic ethanol obtained from biomass sources
such as switchgrass and poplar trees. The amended RFS mandates an increasing level of production of non-corn-derived biofuels.
These federal policies may suggest a long-term political preference for cellulosic processes using alternative feedstocks such
as switchgrass, silage or wood chips. Cellulosic ethanol has a smaller carbon footprint than corn-derived ethanol and is unlikely
to divert foodstuff from the market. Several cellulosic ethanol plants are under development and there is a risk that cellulosic
ethanol could displace corn ethanol. Our plants are designed as single-feedstock facilities, located in corn production areas with
limited alternative feedstock nearby, and would require significant additional investment to convert to the production of cellulosic
ethanol. The adoption of cellulosic ethanol as the preferred form of ethanol could have a significant adverse effect on our ethanol
business.
Our ethanol business is affected by environmental and other regulations
which could impede or prohibit our ability to successfully operate our plants.
Our ethanol production
facilities are subject to extensive air, water and other environmental regulations. We have had to obtain numerous permits to construct
and operate our plants. Regulatory agencies could impose conditions or other restrictions in the permits that are detrimental,
or which increase our costs. More stringent federal or state environmental regulations could be adopted which could significantly
increase our operating costs or require us to expend considerable resources.
Our ethanol plants emit
various airborne pollutants as by-products of the ethanol production process, including carbon dioxide (a greenhouse gas). In 2007,
the U.S. Supreme Court classified carbon dioxide as an air pollutant under the Clean Air Act in a case seeking to require the EPA
to regulate carbon dioxide in vehicle emissions. In February 2010, the EPA released its final regulations on the Renewable Fuel
Standard program. We believe our plants are grandfathered up to certain operating capacity, but recent plant expansion requires
us to meet a 20% threshold reduction in greenhouse gas (GHG) emissions from a 2005 baseline measurement to produce ethanol eligible
for the RFS II mandate. To further expand our plant capacity, we may be required to obtain additional permits, install advanced
technology equipment, or reduce drying of certain amounts of distillers grains. We may also be required to install carbon dioxide
mitigation equipment or take other steps in order to comply with future laws or regulations. Compliance with future laws or regulations
of carbon dioxide, or if we choose to expand capacity at certain of our plants, compliance with then-current regulations of carbon
dioxide, could be costly and may prevent us from operating our plants as profitably, which may have a negative impact on our financial
performance. We also face the risk of ethanol production above our grandfathered capacity not qualifying for RINS if the plants
do not meet certain emission requirements.
The California Air Resources
Board ("CARB") has adopted a Low Carbon Fuel Standard ("LCFS") requiring a 10% reduction in GHG emissions from
transportation fuels by 2020. An Indirect Land Use Charge is included in this lifecycle GHG emission calculation. After a series
of rulings that temporarily prevented CARB from enforcing these regulations, the State of California Office of Administrative Law
approved the LCFS on November 26, 2012 and revised LCFS regulations took effect in January 2013. This standard could have an adverse
impact on the market for corn-based ethanol in California if corn-based ethanol fails to achieve lifecycle GHG emission reductions.
This could have a negative impact on our financial performance.
Our ethanol business may become subject to various environmental
and health and safety and property damage claims and liabilities.
Operation of our ethanol
business exposes the business to the risk of environmental and health and safety claims and property damage claims, such as failure
to comply with environmental regulations. These types of claims could also be made against our ethanol business based upon the
acts or omissions of other persons. Serious claims could have a material negative impact on our results of operations, financial
position and future cash flows.
Our business is not
diversified.
Our financial results
depend heavily on our ability to operate our ethanol plants profitably. Our lack of diversification could have a material negative
impact on our results of operations, financial position and future cash flows should our ethanol plants operate unprofitably.
We may have commitments
to produce and sell ethanol.
We may, at times, sell
our products with forward contracts. If we are unable to produce the products due to economic conditions, business interruption,
or other factors, we may incur additional costs or have to obtain commodities at unfavorable prices to meet our contractual commitments.
This could have a material adverse effect on our results of operations.
We may have commitments
to purchase commodities.
We may, at times, purchase
certain commodities with forward contracts without a corresponding quantity of ethanol sold via forward contracts at known prices.
Should ethanol and by-product prices decline to levels that would lead to significant unprofitable results of operations, we may
incur additional costs and/or losses to meet our contractual commitments. This could have a material adverse effect on our results
of operations.
Our revenue from the
sale of distillers grains depends upon its continued market acceptance as an animal feed.
Distillers grains is
a by-product from the fermentation of corn to produce ethanol. Antibiotics may be used during the fermentation process to control
bacterial contamination; therefore, antibiotics may be present in small quantities in distillers grains marketed as animal feed.
The U. S. Food and Drug Administration’s Center for Veterinary Medicine has expressed concern about potential animal and
human health hazards from the use of distillers grains as an animal feed due to the possibility of antibiotic residues. If the
public became concerned about the impact of distillers grains in the food supply or as an acceptable animal feed, the market for
distillers grains could be negatively impacted, which would have a negative impact on our results of operations. We may not be
able to obtain a suitable replacement for antibiotics, should this be required, which would also negatively impact the market for
distillers grains.
An estimated 30% of distillers
grains produced in the United States were exported in 2019. The price of distillers grains has benefitted from the exports of the
product. In recent years, certain countries have refused to import U.S. distillers grains for a variety of reasons. If export shipments
are rejected or delayed, the market price for distillers grains would be negatively impacted, which would have a negative impact
on our ethanol results of operations.
We extract non-food grade
corn oil immediately prior to the production of distillers grains. Several studies are attempting to determine whether non-food
grade corn oil extraction may impact the nutritional value of the resulting distillers grains. If it is determined that non-food
grade corn oil extraction adversely impacts the nutritional energy content of distillers grains, the value of the distillers grains
we sell may be negatively impacted, which would have a negative impact on our results of operations.
We face significant
competition in the ethanol industry.
We face significant
competition for new ethanol investment opportunities. There are varied enterprises seeking to participate in the ethanol industry.
Some enterprises provide financial and management support similar to our business model. Other enterprises seek to acquire or develop
plants which they will directly own and operate. Many of our competitors are larger and have greater financial resources and name
recognition than we do. We must compete for investment opportunities based on our strategy of supporting and enhancing local development
of ethanol plant opportunities. We may not be successful in competing for investment opportunities based on our strategy.
The ethanol industry
is primarily comprised of entities that engage exclusively in ethanol production and large integrated grain companies that produce
ethanol along with their base grain business. Several large oil companies have entered the ethanol production market. If these
companies increase their ethanol plant ownership or if other oil companies seek to engage in direct ethanol production, there would
be less of a need to purchase ethanol from independent producers such as our ethanol plants. No assurance can be given that our
ethanol plants will be able to compete successfully or that competition from larger companies with greater financial resources
will not have a materially adverse impact on the results of our ethanol operations.
We may face competition
from foreign producers.
There is a risk
of foreign competition in the ethanol industry. Brazil is presently the second largest producer of ethanol in the world. Brazil's
ethanol production is sugarcane based, and, depending on feedstock prices, may be cheaper to produce than corn-derived ethanol.
Under the RFS, certain parties were obligated to meet an advanced biofuel standard. In recent years, sugarcane based ethanol imported
from Brazil has been one of the most economical means for obligated parties to comply with this standard.
If significant additional
foreign ethanol production capacity is created, such facilities could create excess supplies of ethanol, which may result in lower
prices of ethanol. In addition, foreign ethanol producers may be able to produce ethanol at costs lower than ours. These risks
could have significant adverse effects on our financial performance.
We are exposed
to credit risk from our sales of ethanol and distillers grains to customers.
The inability of
a customer to make payments to us for our accounts receivable may cause us to experience losses and may adversely impact our liquidity
and our ability to make our payments when due.
We may not be
able to hire and retain qualified personnel to operate our ethanol plants.
Our ability to attract
and retain competent personnel has a significant impact on operating efficiencies and plant profitability. Competition for key
plant employees in the ethanol industry can be intense, and we may not be able to attract and retain qualified employees. Failure
to do so could have a negative impact on our financial results at individual plants.
Our plants depend on an uninterrupted supply of energy and water
to operate. Unforeseen plant shutdowns could harm our business.
Our plants require a significant and uninterrupted
supply of natural gas, electricity and water to operate. We generally rely on third parties to provide these resources. If there
is an interruption in the supply of energy or water for any reason, such as supply, delivery or mechanical problems and we are
unable to secure an adequate alternative supply to sustain plant operations, we may be required to stop production. A production
halt for an extended period of time could result in material losses.
Potential business disruption from factors
outside our control, including natural disasters, severe weather conditions, accidents, strikes, unexpected equipment failures
and unforeseen plant shutdowns, could adversely affect our cash flow and operating results.
The debt agreements for certain of the ethanol
plants limit, or otherwise restrict the amount of dividends and other payments the ethanol subsidiaries can transfer to their members.
We are dependent on dividends from our ethanol
subsidiaries to generate cash flow. Presently our unconsolidated ethanol subsidiary has debt agreements that limit payments to
members. Therefore, this company cannot distribute all of the cash it generates to its members. Furthermore, we may not be able
to use the excess cash flow from one subsidiary to fund corporate needs or needs of another operating ethanol subsidiary.
We rely on information technology in our
operations and financial reporting and any material failure, inadequacy, interruption or security breach of that technology could
harm our ability to efficiently operate our business and report our financial results accurately and timely.
We rely heavily on information technology systems
across our operations, including for management of inventory, purchase orders, production, invoices, shipping, accounting and various
other processes and transactions. Our ability to effectively manage our business, coordinate the production, distribution and sale
of our products and ensure the timely and accurate recording and disclosure of financial information depends significantly on the
reliability and capacity of these systems. The failure of these systems to operate effectively, problems with transitioning to
upgraded or replacement systems, or a breach in security of these systems through a cyber-attack or otherwise could cause delays
and/or interruptions in plant operations, product sales, reduced efficiency of our operations and delays in reporting our financial
results. Significant capital investments could be required to remediate any such problem. Security breaches of employee information
or other confidential or proprietary data could also adversely impact our reputation and could result in litigation against us
or the imposition of penalties.
We are exposed to potential business
disruption from factors outside our control, including natural disasters, severe weather conditions, accidents, pandemic diseases
and unforeseen operational failures any of which could negatively affect our transportation operations and could adversely affect
our cash flows and operating results.
Potential
business disruption in available transportation due to natural disasters, severe weather conditions, the outbreak of a pandemic
disease, significant track damage resulting from a train derailment, strikes or other interruptions by our transportation providers
could result in delays in procuring and supplying raw materials to our ethanol facilities, or transporting ethanol and distillers
grains to our customers. Such business disruptions may result in our inability to meet customer demand or contract delivery requirements,
as well as the potential loss of customers.
Rail cars used to transport ethanol may
need to be modified or replaced to meet proposed rail safety regulations.
The leased rail cars we use to transport ethanol
to market will need to be retrofitted or replaced as the Enhanced Tank Car Standards and Operation Controls for High-Hazard Flammable
Trains adopted by the U.S. Department of Transportation (“DOT”) imposes an enhanced tank car standard known as the
DOT specification 117 and establishes a schedule to retrofit or replace older tank cars that carry crude oil and ethanol. The rule
also establishes braking standards intended to reduce the severity of accidents and new operational protocols. This could lead
to increased rail car lease costs and delays in transportation of ethanol if rail cars are out of service for extended periods
of time.
We operate in a capital intensive
industry. Limitations on external financing could adversely affect our financial performance.
We may need to incur additional financing to
fund growth of our business or in times of increasing liquidity requirements (such as increases in raw material costs). Bankruptcy
filings by several ethanol companies in past years and capital market volatility has reduced available capital for the ethanol
industry. Any delays in obtaining additional financing, or our inability to do so, could have a material adverse impact on our
financial results.
Risks Related to our Refined Coal Operations
During the early months of 2020,
a new strain of COVID-19 spread into the United States and other countries.
In an effort to contain the spread
of this virus, there have been various government mandated restrictions, in addition to voluntary privately implemented restrictions,
including limiting public gatherings, retail store closures, restrictions on employees working and the quarantining of people who
may have been exposed to the virus. The duration of the resulting downturn in economic activity is unknown both on a macro and
a micro level. This could lead to prolonged production stoppages or interruptions at our refined coal plant and could result in
an adverse material impact on the results of operations and on our financial position.
Our refined coal investment is subject to various risks and uncertainties.
We purchased a company that produces refined coal that we believe qualifies to earn tax credits under IRC Section 45 through
November 2021. Our ability to generate returns and avoid write-offs in connection with this investment is subject to various risks
and uncertainties. These include, but are not limited to, the risks and uncertainties as set forth below.
Availability of the tax credits under IRC Section 45.
Our ability to claim tax credits under IRC
Section 45 depends upon the operation which we have purchased satisfying certain ongoing conditions set forth in IRC Section 45.
Furthermore, the tax credits under IRC Section 45 could be reduced or eliminated as a result of changes in income tax laws and/or
regulations.
The IRS could ultimately determine that the
refined coal facility we purchased and/or its operations have not satisfied, or have not continued to satisfy, the conditions set
forth in IRC Section 45. As our refined coal operation is expected to generate pre-tax losses, the unavailability of the tax credits
for any reason could have a material impact on our results of operations.
IRC Section 45 phase out provisions.
IRC Section 45 contains phase out provisions
based upon the market price of coal such that, if the price of coal rises to specified levels, we could lose some or all of the
tax credits we expect to receive from this operation.
The refined coal operation depends on one customer.
The refined coal operation receives tax credits
by selling its refined coal to an unrelated party. The unrelated party is not obligated to continue purchasing refined coal from
us. Our user of refined coal could convert its fuel source to natural gas, oil or some other source instead of coal depending on
the price of natural gas, oil or other sources relative to that of coal. If the unrelated party ceases to purchase refined coal
from us, we would attempt to move our refined coal plant to a different location, which could require us to invest additional capital,
or to find a different user to purchase our refined coal. In addition, we may not be able to find a suitable location to move our
refined coal plant to or find a different user to purchase our refined coal in a timely manner, given that we only intend to operate
the refined coal plant until November 2021. Market demand for coal may also decline as a result of an economic slowdown. Sustained
low natural gas prices may also cause users of coal to phase out or close existing coal using operations. If users of coal burn
less coal or eliminate the use of coal, there would be less need for our product. A reduction or cessation of refined coal sales
could have a material impact on our results of operations.
Environmental concerns regarding coal could lead to reduced or suspended refined coal operations.
Environmental concerns about greenhouse gases,
toxic wastewater discharges and the potentially hazardous nature of coal combustion waste could lead to regulations that discourage
the burning of coal. Such regulations could mandate that electric power generating companies purchase a minimum amount of power
from renewable energy sources such as wind, hydroelectric, solar and geothermal. This could result in utilities burning less coal,
which could have a material impact on our results of operations.
The refined coal operation in which we have invested and the
by-products from such operations may result in environmental and product liability claims and environmental compliance costs.
The construction and operation of refined coal
operations are subject to Federal, state and local laws, regulations and potential liabilities arising under or relating to the
protection or preservation of the environment, natural resources and human health and safety. Such laws and regulations generally
require the operations and/or the utilities at which the operations are located to obtain and comply with various environmental
registrations, licenses, permits, inspections and other approvals. Such laws and regulations also impose liability, without regard
to fault or the legality of a party’s conduct, on certain entities that are considered to have contributed to, or are otherwise
involved in, the release or threatened release of hazardous substances into the environment. Such hazardous substances could be
released as a result of burning refined coal in a number of ways, including air emissions, wastewater, and by-products such as
fly ash. One party may, under certain circumstances, be required to bear more than its share or the entire share of investigation
and cleanup costs at a site if payments or participation cannot be obtained from other responsible parties. We may be exposed to
the risk of becoming liable for environmental damage we may have had little, if any, involvement in creating. Such risk remains
even after production ceases at an operation to the extent the environmental damage can be traced to the types of chemicals or
compounds used or operations conducted in connection with the use of refined coal.
No assurances can be given that contractual
arrangements and precautions taken to ensure assumption of these risks by facility owners or operators will result in that facility
owner or operator accepting full responsibility for any environmental damage. It is also not uncommon for private claims by third
parties alleging contamination to also include claims for personal injury, property damage, diminution of property or similar claims.
Furthermore, many environmental, health and safety laws authorize citizen suits,
permitting third parties to make claims for violations of laws or permits and force compliance. Our insurance
may not cover all
environmental risk and costs or may not provide sufficient coverage in the event of an environmental claim. If significant uninsured
losses arise from environmental damage or product liability claims, or if the costs of environmental compliance increase for any
reason, our results of operations and financial condition could be adversely affected.
We rely on a third party to operate the refined coal facility.
We rely on an unrelated third party to operate
the refined coal plant. Should the third party fail to perform or underperform in the operation, management or regulatory compliance
of the facility, our results of operations and financial condition could be adversely affected as we are not experienced in operating
a refined coal facility.
We will have to generate taxable income
to utilize the Section 45 federal production tax credits.
If we do not generate sufficient taxable income
to utilize the tax credits earned by our refined coal operation, we could incur write-offs of the related tax attributes which
could adversely affect our results of operations and financial condition. In addition, this could adversely reduce our liquidity
reserves as we expect to incur operating losses sustained by the refined coal operation.
Risks Related to our eSteam investment
eSteam may not be a commercially viable
technology.
During fiscal year 2013, we invested in eSteam,
a new technology utilizing steam to extract deep heavy oil. Cumulatively, we have paid and expensed approximately $2.4 million
on this patented but unproven technology. To date, we have not tested or proven the viability of the technology. In addition, low
energy and crude oil prices may make eSteam technology less attractive to potential users. If we cannot demonstrate that the technology
is commercially feasible, we may incur additional losses.
eSteam testing methods and results are not
known.
We do not have specific testing methodologies
or specifications developed for testing the viability of the eSteam technology. The actual eSteam testing process could result
in injury to others, and property and other damages that could expose us to claims for damages from unrelated parties.
Our eSteam technology may be subject to
patent challenges.
If our patents of the eSteam technology are
challenged, we could be required to spend considerable time and resources defending our patents.
Operations utilizing our eSteam technology
may be subject to stringent environmental regulations.
Use of the eSteam technology will require significant
amounts of water and energy. If we or third parties are unable to obtain the proper permits and sources of water and energy, then
we may not be able to commercialize the new technology, and thus, generate any revenue from our investment.
Operations utilizing our eSteam technology
may cause environmental damage.
When testing and operating the eSteam technology,
we may cause environmental damage, as we would be injecting water and other fluids into the ground to generate underground steam
in order to extract oil. We could be subject to significant penalties and fines if we were to cause environmental damage.
Risks Related to REX and non-industry specific
matters
Given the amount of our cash and
short-term investments, recent actions by the Federal Reserve, related to the COVID-19 outbreak, which have reduced interest rates
and could significantly reduce our interest income in future periods.
Depending on the length of time interest
rates remain at these levels, this could result in an adverse material impact on the results of operations and on our financial
position.
We have concentrations of cash deposits
at financial institutions that exceed federal insurance limits.
We generally have cash deposits that exceed
federal insurance limits. Should the financial institutions we deposit our cash in experience insolvency or other financial difficulty,
our access to cash deposits could be limited. In extreme cases, we could lose our cash deposits entirely. This would negatively
impact our liquidity and results of operations.
We may fail to realize the anticipated benefits
of mergers, acquisitions, or other investments.
We intend to continue seeking growth opportunities.
Acquisitions and similar transactions involve many risks that could harm our business, which include:
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The anticipated benefits of these transactions may not be fully realized, or take longer to realize
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Future acquisitions could result in operating losses or loss of investment, and
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Future acquisitions may involve incurring debt to complete these transactions, which could have
a material adverse effect on our financial condition.
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Federal, state and local jurisdictions may
challenge our tax return positions.
We use significant judgments, estimates and
interpretation and application of complex tax laws in preparing the tax returns we file, and the positions contained therein. We
believe that our tax return positions are fully supportable. However, certain positions may be successfully challenged by federal,
state and local jurisdictions. This could result in material additional income tax payments we would have to make and higher income
tax expense in future periods.