GENERAL
This Management's Discussion and Analysis section discusses the Company's results of operations for the years endingSeptember 30, 2019 , 2018 and 2017, together with its balance sheets as ofSeptember 30, 2019 , and 2018. This discussion should be read in conjunction with the consolidated financial statements included herewith and the notes to the consolidated financial statements thereto and the risk factors contained herein, as well as Part I, Item 1. "Business - Company Overview and Recent Events."
OVERVIEW
Advanced BioEnergy, LLC ("Company," "we," "our," "Advanced BioEnergy" or "ABE") was formed in 2005 as aDelaware limited liability company. Until theDecember 19, 2019 closing the Asset Sale as described above, our business consisted of producing ethanol and co-products, including wet, modified and dried distillers' grains, and corn oil through the two ethanol production facilities inAberdeen andHuron, South Dakota owned and operated by our subsidiary,ABE South Dakota, LLC ("ABE South Dakota"). The table below provides a summary of our dry mill ethanol plants in operation as ofSeptember 30, 2019 : Estimated Annual Estimated Estimated Distillers' Annual Estimated Annual Ethanol Grains Corn Oil Annual Corn Primary Location Opened Production(1) Production(2) Production Processed Energy Source (Million gallons) (000s Tons) (000s lbs) (Million bushels) Aberdeen, SD January 2008 48 134 11,561 15.7 Natural Gas Huron, SD September 1999 32 97 5,717 11.4 Natural Gas Consolidated 80 231 17,278 27.1
(1) Actual permitted gallons are 65.7 million for
(2) Our plants produce and sell wet, modified, and dried distillers' grains. The
stated quantities are on a fully dried basis operating at full production
capacity. RESULTS OF OPERATIONS
Year Ended
The following table reflects quantities of our products sold at average net
prices as well as bushels of corn ground and therms of natural gas burned at
average costs for fiscal 2019 and fiscal 2018 for our
Year Ended Year EndedSeptember 30, 2019 September 30, 2018
Product Sales Information Quantity Average Price Quantity Average Price (In thousands) (In thousands) Ethanol (gallons) 82,902 $ 1.18 83,869 $ 1.23 Distillers grains (tons) 203$ 126.49 209$ 128.06 Corn Oil (pounds) 20,446 $ 0.22 20,273 $ 0.20 Product Cost Information Quantity Average Cost Quantity Average Cost Corn (bushels) 28,803 $ 3.59 29,357 $ 3.25 Natural Gas (therms) 2,050 $ 3.31 2,106 $ 3.92 Net Sales Net sales for fiscal 2019 were$128.0 million , compared to$133.8 million for fiscal 2018, a decrease of$5.8 million or 4%. The decrease was a result of lower ethanol and distillers' prices combined with a decrease in ethanol gallons and distillers' tons sold, partially offset by an increase in corn oil price and corn oil pounds sold. The decrease in ethanol and distillers prices is the result of various factors, including but not limited to, market demand for our products, the spread between ethanol/distillers, corn prices and overall gasoline demand. Ethanol gallons sold decreased 1.0 million gallons or 2% in fiscal 2019, compared to fiscal 2018. Corn oil pounds sold increased 0.2 million pounds or 1% in fiscal 2019, compared to fiscal 2018. The increase in corn oil pounds sold is the result of increased production efficiency at both plants. 16
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Cost of Goods Sold
Cost of goods sold for fiscal 2019 was$138.3 million , compared to$133.6 million for fiscal 2018, an increase of$4.7 million . An increase in corn costs offset by a decrease in natural gas costed represented a portion of the increase in cost of goods sold in fiscal 2019. Corn costs represented 74.7% and 71.4% of cost of sales for the fiscal years 2019 and 2018, respectively. Corn prices increased approximately 10% in fiscal 2019 from fiscal 2018; however, we used 2% fewer corn bushels in fiscal 2019 than in fiscal 2018, due to lower ethanol production in fiscal 2019. Natural gas costs represented 4.9% and 6.2% of cost of sales for fiscal years 2019 and 2018, respectively. The cost of natural gas per mmbtu decreased 18% in fiscal 2019, compared to fiscal 2018. The cost of natural gas in fiscal 2018 was higher than fiscal 2019 due to lower stocks coming out of the withdrawal season, which is the colder season from November through March, in 2017. These lower stock levels drove prices higher during fiscal 2018.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses consist primarily of recurring administrative personnel compensation, legal, technology, consulting, insurance and accounting fees.
Overall selling, general and administrative costs increased by approximately$0.7 million to$3.4 million in fiscal 2019, compared to fiscal 2018. The increase was primarily a result of higher costs in fiscal 2019 related to the Asset Sale and related transactions. As a percentage of net sales, fiscal 2019 selling, general and administrative expenses increased to 2.7%, compared to 2.0% for fiscal 2018. Interest Expense Interest expense for fiscal 2019 was$1.0 million compared to$0.7 million in fiscal 2018. Fiscal 2019 interest expense included$0.7 million of variable rate interest and$0.6 million of fixed rate interest related to our outstanding debt and$0.1 million of amortization of deferred financing costs offset by$0.4 million of capitalized interest. Fiscal 2018 interest expense included$0.6 million of variable rate interest related to our outstanding debt and$0.1 million of amortization of deferred financing costs.
Year Ended
The following table reflects quantities of our products sold at average net
prices as well as bushels of corn ground and therms of natural gas burned at
average costs for fiscal 2018 and fiscal 2017 for our
Year Ended Year EndedSeptember 30, 2018 September 30, 2017
Product Sales Information Quantity Average Cost Quantity Average Cost (In thousands) (In thousands) Ethanol (gallons) 83,869 $ 1.23 84,742 $ 1.39 Distillers grains (tons) 209$ 128.06 210$ 96.91 Corn Oil (pounds) 20,273 $ 0.20 19,551 $ 0.25 Product Cost Information Quantity Average Price Quantity Average Price Corn (bushels) 29,357 $ 3.25 29,517 $ 3.15 Natural Gas (therms) 2,106 $ 3.92 2,123 $ 3.36 Net Sales Net sales for fiscal 2018 were$133.8 million , compared to$143.5 million for fiscal 2017, a decrease of$9.7 million or 7%. The decrease was a result of lower ethanol and corn oil prices combined with a decrease in ethanol gallons and distillers' tons sold, partially offset by an increase in distillers' price and corn oil pounds sold. The decrease in ethanol and increase in distillers' prices is the result of various factors, including but not limited to, market demand for our products, the spread between ethanol/distillers, corn prices and overall gasoline demand. Ethanol gallons sold decreased 0.9 million gallons or 1% in fiscal 2018, compared to fiscal 2017. Corn oil pounds sold increased 0.7 million pounds or 4% in fiscal 2018, compared to fiscal 2017. The increase in corn oil pounds sold is the result of increased production efficiency at both plants. 17
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Cost of Goods Sold
Cost of goods sold for fiscal 2018 was$133.6 million , compared to$130.2 million for fiscal 2017, an increase of$3.4 million . An increase in corn and natural gas costs represented a portion of the increase in cost of goods sold in fiscal 2018. Corn costs represented 72.0% and 71.6% of cost of sales for the fiscal years 2018 and 2017, respectively. Corn prices increased approximately 3% in fiscal 2018 from fiscal 2017; however, we used 1% fewer corn bushels in fiscal 2018 than in fiscal 2017, due to lower ethanol production in fiscal 2018. Natural gas costs represented 6.2% and 5.5% of cost of sales for fiscal years 2018 and 2017, respectively. The cost of natural gas per mmbtu increased 17% in fiscal 2018, compared to fiscal 2017. The increased cost of natural gas in fiscal 2018 was due to lower stocks coming out of the withdrawal season, which is the colder season from November through March, in 2017. These lower stock levels drove prices higher in fiscal 2018.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses consist primarily of recurring administrative personnel compensation, legal, technology, consulting, insurance and accounting fees.
Overall selling, general and administrative costs decreased by approximately$1.1 million to$2.7 million in fiscal 2018, compared to fiscal 2017. The decrease was primarily a result of higher costs in fiscal 2017 related to the tear down of the smallerAberdeen plant, certain taxes paid in connection with transporting our ethanol in the state ofWashington , and employee incentive compensation. As a percentage of net sales, fiscal 2018 selling, general and administrative expenses decreased to 2.0%, compared to 2.6% for fiscal 2017.
Interest Expense
Interest expense for fiscal 2018 was$0.7 million compared to$0.9 million in fiscal 2017. Fiscal 2018 interest expense included$0.6 million of variable rate interest related to our outstanding debt and$0.1 million of amortization of deferred financing costs. Fiscal 2017 interest expense included$0.8 million of variable rate interest related to our outstanding debt and$0.1 million of amortization of deferred financing costs.
Changes in Financial Position for the Year ended
Current Assets
The decrease in current assets atSeptember 30, 2019 compared toSeptember 30, 2018 of$8.2 million was primarily due to principal payments of$1.0 million , capital expenditures of$7.4 million and cash from operation of$9.8 million , offset by proceeds from debt of$10.8 million .
Property, Plant and Equipment
The
Current Liabilities
Accounts payable and accrued expenses decreased by$1.0 million atSeptember 30, 2019 compared toSeptember 30, 2018 . The primary reason for the increase is a difference of timing of payments to vendors along with a change in classification of the railcar damage accrual from current to long-term.
Current Portion of Long-Term Debt and Long-term Debt
The current portion of long-term debt increased by
Long-term debt decreased by
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CAPITAL RESOURCES
During fiscal 2019, we conducted our business activities and plant operations through the parent company,Advanced BioEnergy , and its primary operating subsidiary,ABE South Dakota . ABE Fairmont has had minimal activity since theDecember 2012 sale of the Fairmont facility. The liquidity and capital resources for each entity are based on that entity's existing financing arrangements and capital structure. In fiscal 2019,Advanced BioEnergy was highly restricted in its ability to use the cash and other financial resources ofABE South Dakota for the benefit ofAdvanced BioEnergy , with the exception of allowable distributions as defined under the Master Credit Agreement with AgCountry. With theDecember 19, 2019 repayment of our obligations to AgCountry, the Master Credit Agreement and related agreements were terminated in accordance with their terms.Advanced BioEnergy, LLC
ABE had cash and cash equivalents of
From time to time, ABE may receive certain allowable distributions fromABE South Dakota , subject to compliance with the terms and conditions of the Master Credit Agreement. ABE will not receive any distribution fromABE South Dakota for its fiscal 2019 financial results. In connection with the execution of a rail car sublease, the Company, as parent ofABE South Dakota , agreed to post a$2.5 million irrevocable and non-transferable standby letter of credit inMay 2012 for the benefit ofNGL Crude Logistics, LLC ("NGL" f/k/a Gavilon) as security for the payment obligations ofABE South Dakota under certain agreements with NGL. The Company deposited$2.5 million in a restricted account as collateral for this letter of credit and classified it as restricted cash. EffectiveMay 15, 2014 , the letter of credit and corresponding deposit of collateral were decreased by$1.0 million in conjunction with an amendment to the rail car sublease. EffectiveJune 27, 2016 , the letter of credit and corresponding deposit of collateral was decreased by$0.5 million in conjunction with an amendment to the rail car sublease. EffectiveJuly 31, 2018 , the letter of credit was terminated and the corresponding collateral requirement was eliminated.
ABE Fairmont
ABE Fairmont was dissolved in fiscal 2019 and did not exist at
ABE South Dakota
AgCountry Master Credit Agreement
OnDecember 19, 2019 , all amounts outstanding under the Master Credit Agreement datedDecember 29, 2015 , as amended ("Master Credit Agreement") betweenABE South Dakota as borrower and AgCountry Farm Credit Services, PCA as lender ("AgCountry") were repaid in full. The total amount repaid was approximately$31.0 million , which was repaid from the purchase price from the Asset Sale described above. The$31.0 million payment consisted of the following amounts outstanding as of the closing date of the Asset Sale:$30.5 million in principal,$0.4 million in interest and$0.1 million in fees and expenses. Effective upon the repayment, the Master Credit Agreement and all related documents were terminated in accordance with their terms and AgCountry released its security interest in, and liens and mortgages on, all of the properties, rights and assets ofABE South Dakota .
Below is a summary of the Master Credit Agreement and its terms that were in
effect as of
OnDecember 29, 2015 ,ABE South Dakota entered into the Master Credit Agreement with AgCountry to refinance its existing 2010 Senior Credit Agreement. OnDecember 29, 2015 , the Company also entered into (i) a First Supplement to the Master Credit Agreement covering a$10.0 million Revolving Term Facility and (ii) a Second Supplemental covering a$20.0 million Term Loan. The transaction funded onDecember 30, 2015 . The$20.0 million Term Loan had a fixed interest rate ("Fixed Rate") atSeptember 30, 2019 . The Fixed Rate was equal to 6.32%. OnOctober 26, 2018 , the Company elected to lock in a fixed rate of 6.4%, rather than a variable rate, on the remaining balance of the Term Loan. OnJanuary 2, 2019 , the Company entered into an Interest Rate Conversation Agreement with AgCountry, under which the Fixed Rate of 6.4% was reduced to 6.32% for the remainder of the loan term. BeginningApril 1, 2016 , the Company began making quarterly principal payments of$1.0 million , plus accrued interest, on the Term Loan. The Term Loan was originally scheduled to be fully amortized over five years with the final payment onJanuary 1, 2021 . As described below, the payments originally due in January, April, July andOctober 2019 have been deferred and are now due at the end of the term, orJanuary 1, 2021 . AtSeptember 30, 2019 , the outstanding balance on the Term Loan was$9.0 million . 19 -------------------------------------------------------------------------------- The$10.0 Revolving Term Facility has a variable rate ("Variable Rate") equal to the one-month LIBOR rate of plus an initial Margin of 350 basis points. AtSeptember 30, 2019 , the Variable Rate was equal to the one-month LIBOR rate of 2.20% plus a Margin of 350 basis points. Borrowings under the Revolving Term Facility may be advanced, repaid and re-borrowed during the term. The Company is required to make quarterly interest payments on the Revolving Term Facility, with the full principal amount outstanding due onJanuary 1, 2021 . Under the Revolving Term Facility, the Company is required to pay unused commitment fees of 50 basis points. AtSeptember 30, 2019 , the balance of the Revolving Term Facility was$10.0 million .
The Margin will (i) decrease to 3.25% when the aggregate principal balance of
all outstanding loans and the unfunded commitment level is
On
The Master Credit Agreement also included customary financial and non-financial covenants that limit capital expenditures, distributions and debt and require minimum working capital, owner's equity, current ratio, debt to EBITDA ratio, and fixed charge coverage ratios as follows as ofSeptember 30, 2019 :
•
million at
calculated as (i) (a) current assets plus (b) the amount available under
the Revolving Term Facility, less (ii) current liabilities, measured
quarterly.
•
divided by (ii) total assets. This ratio was to be measured annually at
fiscal year-end and would have increased by 2% each fiscal year, from 40%
at
covenant was eliminated by the First Amendment (as defined below).
•
liabilities of not less than 1.2 to 1.0.
•
is defined as total interest bearing debt, while EBITDA is defined as
earnings before interest, taxes, depreciation, and amortization. The debt
to EBITDA ratio will be measured quarterly, but tested annually at each fiscal year end.
•
measured quarterly, but tested annually at each fiscal year end. The fixed
charge coverage ratio is calculated by dividing EBITDA by the sum of scheduled payments of principal and interest, capital expenditures, any cash taxes, and distributions. WhenABE South Dakota has achieved and maintained an owners' equity ratio of 60.0% and working capital of$15.0
million, then the minimum fixed charge coverage ratio requirement will be
reduced to 1.00:1.00. If the owners' equity ratio subsequently declines
below 60.0%, or working capital declines below$15.0 million , then the 1.15:1.00 minimum fixed charge ratio covenant will be reinstated.
•
without prior consent of AgCountry, and is limited from incurring
additional debt over certain amounts without prior approval, and making
additional investments without prior approval of AgCountry.
•
excess of 40% of pre-tax net income in a given year without the prior consent of Ag Country. WhenABE South Dakota achieves and maintains owners' equity ratio of 60.0% and working capital of$15.0 million , then it may pay member dividends of 100.0% of pre-tax net income. If the
owner's equity ratio declines below 60.0%, or working capital declines
below
Dakota regains compliance.
before and after any distribution.
A number of these covenants have been amended in connection with subsequent term loans, a construction loan, and amendments and waivers as described below.
2016 Term Loan
OnSeptember 28, 2016 ,ABE South Dakota entered into the Third Supplement to the Master Credit Agreement ("2016 Term Loan") with AgCountry to finance the corn oil extraction system at theHuron plant. The total loan commitment for the 2016 Term Loan was$1.7 million , and the loan has a variable interest rate equal to the one-month LIBOR rate plus a "Margin" of 350 basis points. BeginningJanuary 1, 2017 , the Company began making quarterly payments of accrued interest on the 2016 Term Loan. A total of$1.1 million of the$1.7 million commitment was drawn from this loan. OnApril 1, 2017 , the Company began making quarterly principal payments of$212,500 on the 2016 Term Loan. As ofSeptember 30, 2019 , the 2016 Term Loan was paid in full. 20
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2018 Construction and Term Loan
OnMarch 13, 2018 ,ABE South Dakota entered into the Fourth Supplement to the Master Credit Agreement ("2018 Term Loan") with AgCountry to finance a grain storage and receiving facility at theAberdeen plant. The agreement provides for a$5.0 million multiple advance credit facility. The loan has a variable interest rate equal to the one-month LIBOR rate plus a "Margin" of 350 basis points. During the construction period, the Company will make quarterly interest payments in arrears on the first day of each quarter. Upon completion of construction, the Company will begin making quarterly principal payments in the amount of$250,000 per quarter, plus accrued interest. The 2018 Term Loan will be fully amortized over five years, with the final payment onJuly 1, 2024 . AtSeptember 30, 2019 ,$4.3 million had been drawn on the 2018 Term Loan, and$47,000 in loan fees and closing costs had been incurred, which have been classified as deferred financing costs and will be amortized as interest expense over the term of the loan.
2019 Short-Term Revolving Credit Loan
OnAugust 7, 2019 ,ABE South Dakota entered into the Fifth Supplement to the Master Credit Agreement ("2019 Revolving Loan"), with AgCountry to provide a$6.5 million short-term revolving credit loan. The 2019 Revolving Loan was obtained to finance working capital needs through the closing of the Asset Sale, as well as the purchase of approximately 800,000 bushels of corn. The 2019 Revolving Loan has a variable interest rate equal to the one-month LIBOR rate plus a Margin of 400 basis points. Borrowings under the Revolving Loan may be advanced, repaid and re-borrowed during the term, except during an outstanding Event of Default. The Company is required to make monthly interest payments on the Revolving Loan which beganSeptember 1, 2019 , with the full principal amount outstanding due on the earlier ofNovember 1, 2019 or the date on which the obligations have been declared or have automatically become due and payable, whether by acceleration or otherwise. AtSeptember 30, 2019 , the balance of the 2019 Revolving Loan was$6.5 million
Amendments and Waivers to Master Credit Agreement
OnSeptember 28, 2016 ,ABE South Dakota entered into a Limited Waiver and First Amendment to the Master Credit Agreement ("First Amendment") to (i) eliminate the Owner's Equity Ratio Covenant, (ii) temporarily increase the Capital Expenditures Covenant to$3.0 million for fiscal 2016 to finance the corn oil extraction system at theHuron plant, and (iii) waive other post-closing obligations. OnNovember 19, 2016 ,ABE South Dakota received a waiver to the Master Credit Agreement from AgCountry that waived certain Events of Default related to the Working Capital requirement and the Total Outstanding Debt to EBITDA Ratio atSeptember 30, 2016 . OnOctober 16, 2017 ,ABE South Dakota received a waiver to the Master Credit Agreement from AgCountry that waived an Event of Default related to the Capital Expenditure Covenant for fiscal 2017. The Capital Expenditure Covenant for fiscal 2016 was increased to$3.0 million due to the addition of the corn oil extraction system atHuron . However, a portion of the capital expenditure cost was incurred in fiscal 2017, so an additional waiver was granted for this period. OnMarch 13, 2018 , in conjunction with the 2018 Term Loan,ABE South Dakota entered into a Second Amendment to the Master Credit Agreement ("Second Amendment") to temporarily increase the Capital Expenditures Covenant to$6.0 million per year for the years endingSeptember 30, 2018 and 2019. The covenant will revert back to$2.0 million per year for all years ending afterSeptember 30, 2019 . As a result of a depressed margin environment in fiscal 2019 and fiscal 2018,ABE South Dakota requested waivers for certain specific Events of Default in fiscal 2019 and atSeptember 30, 2018 , and requested covenant amendments for specific future covenants for whichABE South Dakota projected possible non-compliance. AlthoughABE South Dakota's lender, AgCountry Farm Credit Services, PCA, granted certain waivers and covenant amendments to the Master Credit Agreement, as discussed below, we were unable to meet other certain covenant and payment obligations subsequent to those waived and accordingly, an Event of Default occurred. OnOctober 19, 2018 ,ABE South Dakota entered into a Limited Waiver and Third Amendment to the Master Credit Agreement ("Third Amendment") to waive certain Events of Default related to covenant compliance as ofSeptember 30, 2018 and temporarily amend certain future covenants. The Third Amendment included the following covenant waiver and amendments: (i) the Fixed Charge Coverage Ratio was waived as ofSeptember 30, 2018 and reduced to a ratio of 1.00:1.00 as ofSeptember 30, 2019 , and reverts back to 1.15:1.00 atSeptember 30, 2020 , (ii) the Working Capital Covenant was reduced to$10 million atSeptember 30, 2018 andDecember 31, 2018 ,$9 million atMarch 31, 2019 andJune 30, 2019 , then increased to$10 million atSeptember 30, 2019 and$12 million atSeptember 30, 2020 and all times thereafter, (iii) the Capital Expenditures covenant was increased to$8.0 million for the year endingSeptember 30, 2019 , and reverts back to$2.0 million for all subsequent years, and (iv) the outstanding Debt to EBITDA Ratio was waived atSeptember 30, 2018 and will revert back to the requirement that it be less than 4:00:1:00 on the last day of each fiscal year end beginningSeptember 30, 2019 . 21 -------------------------------------------------------------------------------- OnDecember 28, 2018 ,ABE South Dakota entered into a Limited Waiver and Deferral Agreement and Fourth Amendment to the Master Credit Agreement ("Fourth Amendment") to defer three future principal payments and waive and temporarily amend certain future covenants. The Fourth Amendment included the following covenant waivers and amendments:
(i) defer the next three principal payments due
1, 2019 until the Term Loan maturity date onJanuary 1, 2021 ; (ii) waive the Fixed Charge Coverage Ratio atSeptember 30, 2019 , (iii) amend the Working Capital Covenant to$4 million atDecember 31, 2018 and subsequent months until increasing to$5 million atSeptember 30, 2020 , and increasing to$12 million atSeptember 30, 2021 , (iv) waive theSeptember 30, 2019 Debt to EBITDA Ratio, and
(v) add a Cash Sweep Covenant whereby
pay additional principal at the end of each fiscal year in the amount of
30 percent of Free Cash Flow. In order for a Cash Sweep payment to be
made,
and after the payment. Free Cash Flow is defined as: fiscal year EBITDA
less interest expense, scheduled principal payments, and non-financed
maintenance capital expenditures. The Fourth Amendment would also restrict
future dividend payments until all covenants revert back to originally set
levels.
OnJuly 17, 2019 ,ABE South Dakota entered into a Limited Waiver Agreement to the Master Credit Agreement ("Limited Waiver") to waive the Event of Default related to compliance with the Working Capital Covenant atMay 31, 2019 andJune 30, 2019 . As a condition to AgCountry granting the Limited Waiver,ABE South Dakota's parent company,Advanced BioEnergy, LLC was required to make a cash investment not less than$300,000 to be available forABE South Dakota's working capital needs.
On
OnOctober 9, 2019 ,ABE South Dakota entered into a Third Limited Waiver and Deferral Agreement ("Third Limited Waiver") to: (i) waive outstanding Events of Default related to compliance with the Working Capital and Current Ratio covenants atSeptember 30, 2019 , (ii) extend the funding period of the 2018 Term Loan toNovember 1, 2019 , (iii) amend the repayment obligations of the 2018 Term Loan to beginJanuary 1, 2020 , and (iv) defer the principal payment dueOctober 1, 2019 to the Term Loan Maturity Date.
CASH FLOWS
The following table shows our cash flows for the years ended
Years Ended September 30 2019 2018 2017 (In thousands) (In thousands) (In thousands) Net cash provided by (used in) operating activities$ (9,755 ) $ 1,508$ 13,186 Net cash used in investing activities (7,318 ) (3,861 ) (2,663 ) Net cash provided by (used in) financing activities 9,769 (4,724 ) (7,135 ) Cash Flow from Operations
Our cash flows from operations in fiscal 2019 were lower compared to fiscal 2018, primarily due to decreased margins in fiscal 2019.
Our cash flows from operations in fiscal 2018 were lower compared to fiscal 2017, primarily due to decreased margins in fiscal 2018.
Cash Flow from Investing Activities
We used more cash for investing activities in fiscal 2019 compared to fiscal 2018, primarily as a result of$7.4 million spent on capital expenditures in fiscal 2019 compared to$4.2 million in fiscal 2018. We used more cash for investing activities in fiscal 2018 compared to fiscal 2017, primarily as a result of$4.2 million spent on capital expenditures in fiscal 2018 compared to$3.0 million in fiscal 2017. 22
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Cash Flow from Financing Activities
We had more cash provided by financing activities in fiscal 2019 versus fiscal 2018 primarily due to debt proceeds of$10.8 million in fiscal 2019. In fiscal 2019$1.0 million was used for debt payments versus$4.7 million in fiscal 2018. We used less cash for financing activities in fiscal 2018 versus 2017 primarily due to a$3.8 million distribution to unit holders in fiscal 2017. This was offset by$1.1 million drawn from the 2016 Term Loan for theHuron corn oil project in fiscal 2017. It was also offset by debt payments of$4.7 million in fiscal 2018 versus$4.4 million in fiscal 2017.
CREDIT ARRANGEMENTS
A summary of debt in effect atSeptember 30, 2019 is as follows (in thousands, except percentages): September 30, 2019 September 30, September 30, Interest Rate 2019 2018ABE South Dakota : Senior debt principal - fixed 6.32 % 9,000 - Senior debt principal - variable 5.70 % 14,312 20,000 Short term revolving line 6.20 % 6,500 - Deferred financing costs N/A (219 ) (262 ) Total outstanding$ 29,593 $ 19,738 CONTRACTUAL OBLIGATIONS The following table summarizes our contractual obligations as ofSeptember 30, 2019 . Years Ending September 30, 2020 2021 2022 2023 2024 Thereafter Total Long-term debt obligations(1)$ 29,593 $ - $ - $ - $ - $ -$ 29,593 Operating lease obligations(2) 3,633 3,379 2,666 1,939 735 - 12,352
Total contractual obligations
(1) Amounts represent principal and interest due under our credit facilities,
assuming contractual maturities.
(2) Operating lease obligations consist primarily of rail cars, mobile equipment
and office space. In connection with the closing of the Asset Sale, the Company assigned or cancelled any and all lease commitments above as they relate toABE South Dakota and will have no further payment obligations. Following the closing of the Asset sale, ABE has future commitments for fiscal 2020 of$163,000 , fiscal 2021 of$153,000 and fiscal 2022 of$3,000 , which it will resolve through the liquidation, dissolution and winding up pursuant to the Plan of Liquidation.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Note 1 to our consolidated financial statements contains a summary of our significant accounting policies, many of which require the use of estimates and assumptions. Accounting estimates are an integral part of the preparation of financial statements and are based upon management's current judgment. We used our knowledge and experience about past events and certain future assumptions to make estimates and judgments involving matters that are inherently uncertain and that affect the carrying value of our assets and liabilities. We believe that of our significant accounting policies, the following are noteworthy because changes in these estimates or assumptions could materially affect our financial position and results of operations:
Revenue Recognition
EffectiveOctober 1, 2018 , the Company adopted the new guidance of Accounting Standard Codification ("ASC") Topic 606, "Revenue from Contracts with Customers" (Topic 606) using the modified retrospective approach. Topic 606 requires the Company to recognize revenue to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which ABE expects to be entitled in exchange for those goods or services. The new guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company generally recognizes revenue at a point in time. The majority of the Company's contracts with customers have one performance obligation and a contract duration of one year or less. The adoption of this new guidance did not result in any change to our recognition of revenue. 23 -------------------------------------------------------------------------------- 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 is are transferred to our customers when a railcar or truck is loaded , in an amount that reflects the consideration that we expect to receive in exchange for those goods. • Sales of ethanol • Sales of distillers grains • Sales of distillers corn oil
We disclose disaggregation of revenue according to product line, along with accounts receivable from contracts with customers, in Note 7.
Commodity Sales and Purchase Contracts, Derivative Instruments
The Company enters into forward sales contracts for ethanol, distillers and corn oil, and purchase contracts for corn and natural gas. The Company classifies these sales and purchase contracts as normal sales and purchase contracts and accordingly these contracts are not marked to market. These contracts provide for the sale or purchase of an item other than a financial instrument or derivative instrument that will be delivered in quantities expected to be sold or used over a reasonable period in the normal course of business. On occasion, the Company has entered into derivative contracts to hedge the Company's exposure to price risk related to forecasted corn purchases and forecasted ethanol sales. Accounting for derivative contracts requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. Although the Company believes its derivative positions are economic hedges, it has not designated any of these positions as hedges for accounting purposes and has recorded its derivative positions on its balance sheet at their fair value, with changes in fair value recognized in current period earnings. In addition, certain derivative financial instruments that meet the criteria for derivative accounting treatment also qualify for a scope exception to derivative accounting, as they are considered normal purchases and sales. The availability of this exception is based on the assumption that the Company has the ability and it is probable that it will deliver or take delivery of the underlying item. Derivatives that are considered to be normal purchases and sales are exempt from derivative accounting treatment, and are accounted for under accrual accounting. Inventories Ethanol inventory, raw materials, work-in-process and parts inventory are valued using methods that approximate the lower of cost (first-in, first-out) or net realizable value ("NRV"). Distillers' grains and related products are stated at NRV. In the valuation of inventories and purchase and sale commitments, the Company determines NRV by estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation computed using the straight-line method over the estimated useful lives:
Office equipment 3-7 Years Other equipment 1-5 Years Process equipment 15 Years Buildings 40 Years
Interest capitalized in property and equipment was
24 -------------------------------------------------------------------------------- Maintenance and repairs are charged to expense as incurred; major improvements and betterments are capitalized. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount on the asset group may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows from operations are less than the carrying value of the asset group. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the estimated fair value.
INTEREST RATE/FOREIGN EXCHANGE RISK
Our future earnings may be affected by changes in interest rates due to the impact those changes have on our interest expense on borrowings under our credit facility. As ofSeptember 30, 2019 , we had$20.8 million of outstanding borrowings with variable interest rates. With each 1% increase in interest rates we will incur additional annual interest charges of$0.21 million .
We have no international sales. Substantially all of our purchases are
denominated in
IMPACT OF INFLATION
We believe that inflation has not had a material impact on our results of operations since inception.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
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