Green Plains Partners: Volumes Officially Become A Problem

Source: By Tristan R. Brown, Seeking Alpha • Posted: Friday, September 21, 2018

Last month, I wrote that Green Plains Partners was exposed to the potential for declining throughput volumes due to its reliance on ethanol production at its parent company Green Plains.

Reuters reported this week that Green Plains is idling roughly 20% of its production capacity in response to some of the weakest Q3 margins of the last decade.

The MLP’s distribution coverage ratio fell below 1x in Q2 despite a lack of distribution growth in the last two quarters. Now, it faces reduced throughput volumes.

Persistent weakness in the ethanol sector makes a distribution cut by Green Plains Partners more likely than a distribution increase.

Last month, I wrote that ethanol logistics MLP Green Plains Partners (GPP) “might have a volumes problem in the near future.” This prediction was premised on the presence of weakening corn ethanol production margins that had the potential to result in lower production volumes at parent company Green Plains, Inc. (GPRE). The MLP’s business model is based primarily on ethanol throughput volumes that are in turn almost entirely derived from Green Plains, Inc. This reliance benefited Green Plains Partners and its unitholders earlier this decade as Green Plains, Inc. embarked on a major capacity expansion program that resulted in steady distribution growth and unit price appreciation at the MLP. The reliance also threatened to reverse this progress if Green Plains, Inc. ever lost its growth potential, however.

That risk became a reality this week after Reuters reported that Green Plains, Inc. is idling production at two of its Iowa ethanol facilities that represent a combined 20% of the company’s total production capacity. While the company countered that the idling was merely a “flexing” of production in response to market conditions rather than a long-term idling, DTN points out that it also submitted a SEC filing at the end of August stating that it was “reassessing” the production volume guidance that was given during the Q2 earnings call. This suggests that Green Plains, Inc. is already in the process of reducing its overall production volumes in response to poor margins even if its facilities are not entering sustained shutdowns. The unit price of Green Plain Partners immediately fell by 5% on the news, resulting in an overall decline of almost 10% since the beginning of August (see figure). Investors have reason to be concerned that even the temporary idling of roughly 300 million gallons of annual capacity will result in slowing distribution growth for the MLP and possibly even a distribution cut if production is reduced enough.