Major financial swings

By Ron Kotrba | November 02, 2012

The largest U.S. biodiesel producer, Renewable Energy Group Inc., with 210 million gallons of owned/operated biodiesel production capacity, originally anticipated its third quarter adjusted earnings before the deduction of interest, tax and amortization expenses (EBITDA) at a gain of $10 million to $15 million. It later issued guidance stating its third quarter EBITDA would result in a loss of $2 million to $7 million. While its final figures were due out at press time, this represents a significant financial swing, one largely blamed on movements in commodity prices and “a steep depreciation in the price of RINs” and, as a result, tighter margins than expected. Earlier this year, biodiesel RINs were close to $1.50. Just recently, biodiesel RINs dipped down to near 40 cents.

“Despite these fluctuations in our markets, we remain optimistic about the long-term prospects for REG and the biodiesel industry,” says Daniel Oh, president and CEO of REG. “The recent finalization of the 2013 [renewable volume obligation] provides growing demand for the next year. Our flexible feedstock technology gives us a long-term advantage as a low-cost producer, since we can adjust to fluctuations in feedstock prices. Furthermore, REG continues to have a strong balance sheet with cash to sustain our growth strategy. Our risk management positions serve the economic purpose of reducing the effect of changing commodity prices and protecting the margin and profitability of contracted biodiesel sales. Volatile commodity fuel prices late in the quarter affected the market value of financial contracts, causing most of the reduction in adjusted EBITDA; however, the cash margin earned from biodiesel sales is protected by utilizing these financial contracts. From an accounting perspective, we must recognize such risk management losses in the third quarter, although the biodiesel sale that a position is protecting may occur in the fourth quarter. A secondary driver of our results was the decline in biodiesel RIN prices of approximately 35 percent during the quarter, which negatively impacted our revenue and resulted in tighter margin per gallon sold than expected. RINs can and do trade separately from energy and fluctuate in value based on supply and demand.”

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