Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. Renewable Energy Group, Inc. (1463258) 10-Q published on May 04, 2018 at 5:15 pm
Reporting Period: Mar 30, 2018
In the first quarter of 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). Under the ASU, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company applied the five-step method outlined in the ASU to all contracts with customers and elected the modified retrospective implementation method. The Company has generally a single performance obligation in its arrangements with customers. The Company believes for most of its contracts with customers, control is transferred at a point in time, typically upon delivery to the customers. When the Company performs shipping and handling activities after the transfer of control to the customers (e.g., when control transfers prior to delivery), they are considered as fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues. The Company generally expenses sales commissions when incurred because the amortization period would have been less than one year. The Company records these costs within selling, general and administrative expenses. The implementation of the new standard did not have any material impact on the measurement or recognition of revenue of prior periods, however additional disclosures have been added in accordance with the ASU.
The following is a description of principal activities from which we generate revenue. Revenues from contracts with customers are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.
The Company receives payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. Contract liabilities include payments received in advance of performance under the contract, and are realized with the associated revenue recognized under the contract. While in general the Company has not historically offered sales incentives to customers, the uncertainty around the reinstatement of the federal biodiesel tax credit led to the Company and other market participants acting as if the federal biodiesel tax credit would be reinstated throughout the year and entering into agreements with both customers and vendors throughout the year to capture the credit when or if reinstated. The impacts of the agreements with customers are recorded as contract liabilities in accounts payable and as adjustments to Biomass-based diesel sales, whereas agreements with vendors are recorded net as adjustments to Biomass-based diesel costs of goods sold on the Condensed Consolidated Statements of Operations. Significant changes to the contract liabilities during the quarter are as follows:
At the beginning of the first quarter of 2018, the value of RINs, as reported by OPIS, to the average B100 spot price of a gallon of biodiesel was $1.22 per gallon. The value of RINs to the average B100 spot price of gallon of biodiesel was $1.06 per gallon at the end of March 2018. It reached a high of $1.36 per gallon of biodiesel in February 2018 and a low of $1.02 per gallon in March 2018. The RIN market was largely operating as expected as lower feedstock prices increased the spread between feedstocks and fuels, RINs correspondingly came down in value. The decrease in RIN Value towards the end of the first quarter of 2018 was mainly attributable to market uncertainty related to a possible ethanol RIN cap or other Administration intervention and most recently, the EPA's approval of record levels of Smaller Refiner Exemptions from RIN compliance requirements for 2016 and 2017. The decrease in the value of RINs acquired from third parties and held in inventory resulted in a $3.5 million write-down to lower of cost or net realizable value for the first three months of 2018. We enter into forward contracts to sell RINs and we use risk management position limits to manage RIN exposure.
In the first three months of 2018, we used $28.6 million of cash from operations, compared to $22.0 million of cash generated in the first quarter of 2017. During the first three months of 2017, we received approximately $79.1 million related to the 2016 reinstatement of the BTC, of which $0.9 million was paid to our vendors and customers. We did not receive any payments of the 2017 BTC credits in the first quarter of 2018. In addition, during the first three quarters of 2018, approximately $35.9 million of operating cash was used to build up our inventories. Our net cash flows used in investing activity was impacted by a receipt of $4.0 million of insurance proceeds to cover the property losses related to the June 2017 fire at our Madison facility and payments of $16.8 million for our continued investments in our plant and office facilities. Financing activities were impacted primarily by net borrowings on revolving lines of credit of $40.5 million for the three months ended March 31, 2018, compared to net repayments of $31.9 million for the three months ended March 31, 2017. These incremental borrowings were offset by cash paid of $7.8 million to buy back shares of our common stock and $6.7 million used to buy back $6.3 million principal amount of the 2019 Convertible Senior Notes for the three months ended March 31, 2018.
The RFS has a small refinery waiver provision that allows certain small refiners to apply for an exemption of their RVO in select years. In prior years, under prior Administrations, there were few requests and even fewer exemptions granted. Under this Administration, the number of requests has significantly increased and the corresponding granting of waivers has also increased. Unfortunately, nearly all aspects of this process have been claim as Confidential Business Information (CBI) and very little is known about the number of applicants, the volume of renewable fuel being waived, or the number of waivers granted. Several members of the press have researched publicly available data and received details from unnamed EPA staff that indicate at least 30 applications have been submitted for the 2017 compliance year (with approximately 25 being granted). Since 2016, approximately 40 waivers have been granted in total. Net RIN demand impact of Small Refinery Exemptions is unknown, but is estimated to be 5-8% of 2017 volumes, effectively reducing the required RINs by that amount which would harm our business and profitability. Additional waivers granted for the 2018 compliance year would further reduce demand for RINs.