Description

Executive Summary

We’ve previously written about Green Plains Inc (“GPRE) here (https://www.valueinvestorsclub.com/idea/GREEN_PLAINS_INC/2563225454). That idea has done well, and GPRE continues to transform from a commodity ethanol producer to a high value specialty agricultural producer. This idea is a near term and more event-driven idea on GPRE’s MLP - Green Plains Partners (“GPP”). In the midst of COVID shutdowns last year (impacting ethanol demand substantially), Green Plains Partners cut its dividend by 75% about a year ago, and refi’d its debt with the goal of redirecting all excess free cash flow to pay down debt. The balance of the debt is due at the end of this year and after that happens GPP will go back to paying its full dividend. So this entity will go from paying a 50 cent per year dividend, to $1.81 per share. GPP’s shares are not reflecting this pro forma dividend as they currently trade at ~$12 per share - or a 15% pro forma dividend yield. 

We think that sometime this year, GPP’s shares will reflect this increased dividend and trade at a 9-12% dividend yield (the AMLP index trades at 8-9%). This would leave GPP’s share price at $15-20, or 20-60% upside in the next 3-6 months. And GPP’s cash flows are supported by a contractual minimum volume commitment by GPRE, so we view this as an idea with an exceptional risk-reward.

Background

Green Plains Partners, Inc is a Master Limited Partnership related to its parent, Green Plains Inc. GPP holds all of the storage and transportation assets related to GPRE’s eleven ethanol plants. That includes pipelines, storage tanks, railcars, and distribution terminals associated with GPRE’s ethanol operations. 

The partnership was started in 2015, back when the MLP space was “hot”. It gave GPRE access to cheap capital, as the MLP would issue debt/equity to buy the relevant assets of GPRE’s ethanol plants. Having more assets allowed GPP to grow its dividend at a measured pace, and cater to yield focused investors. 

GPP is 51% owned by GPRE, and 49% owned by public unit holders. 95% of GPP’s revenue comes from GPRE, and is driven by minimum volume commitments equal to 91% of GPRE’s operating capacity. 

The MLP initially did well the first 1-2 years after IPO, as GPRE had good ethanol production and slowly dropped assets into the entity. The entity funded these dropdowns with debt and the dividend grew (a standard MLP playbook).

However over the past few years prior to COVID, GPRE’s production struggled and declined both from asset sales, as well as reduced levels of production due to a challenging supply/demand environment. Here’s four years’ worth of quarterly production for GPRE - while product capacity has decline almost 30% (due to plant sales), operating capacity/utilization has been consistently below 90% levels. 

GPP therefore over the past few years the business found itself over levered, and its parent shrinking their ethanol assets (due to a new strategy focused on high protein animal feed), leaving GPP orphaned.

When COVID hit in 2020 and reduced driving demand substantially, and therefore ethanol demand, GPRE was left on the hook for the minimum volume commitment to GPP, despite a 50%+ drop in volumes. So GPRE made the decision to cut GPP’s dividend by 75% (no change to minimum volume commitments), refi its debt, and redirect most of its cash flow to pay down debt and reduce leverage at GPP. A 75% dividend cut further orphaned the asset, and we believe this has created the current opportunity. 

Investment Thesis

After its dividend cut in April 2020, GPRE refi’d GPP’s debt in June 2020, with an 18 month fully amortizing loan. The loan is being paid down with excess cash flow as well as the proceeds received from GPRE’s recent asset sales. We believe that sometime this year, GPRE will transition GPP to a normalized dividend - which equates to nearly $2 per share in distributable cash flow. With shares currently trading at $12, that represents a 15% dividend yield. 

That loan is to be fully amortized by December 31, 2021, and currently stands at $98mm at 12/31/20. GPRE recently sold an asset and paid down an additional $27mm in debt. And after that, there is a required monthly amortization schedule GPP is required to follow. 

A simple GPP P&L and FCF build shows the loan will have a ~$35mm remaining debt balance by the end of the year. We’ve discussed with the company its plan to deal with the remaining debt at the end of this year - while they don’t have a finalized plan yet, they have noted that they will probably refi the balance by the end of the year. We believe at a conservative debt to EBITDA ratio of 1x, that would leave $47mm of normalized debt on the entity. Using the 91% minimum volume commitment, we get to $1.90 per share in distributable cash flow. 

GPP should go back to paying out most of that as dividend - at a 95% payout ratio that’s $1.81 in dividends, and a 1.05x coverage ratio. At various dividend yields, GPP shares should be worth between $15-20 per share:

That gives you anywhere from 20-60% upside to GPP today. This investment's IRR should be better than this, given the situation will get resolved within the next 3-6 months and the dividend should be higher within the next year. 

We also believe there are a few potential upsides to the situation that could cause this to trade at the lower end of our dividend yield range:

1. With GPRE’s focus on high protein, they should be done upgrading the whole platform by mid-2022. Once completed, GPRE should run at utilization rates higher than the minimum volume commitment. Our pro forma model only calculates the 91% minimum utilization by GPRE. For every 1% increase in GPRE’s utilization adds 2 cents per distributable cash flow per share and GPRE has said they should operate at 95% once all their upgrades are done, adding 8 additional cents of distributable cash flow
   
   

2. An activist fund called Railroad Ranch Capital that has recently filed a 13D disclosing ownership of ~5% of shares. As per their 13D, they too believe shares should be valued at $16 to $21 per share, similar to our numbers above. GPRE is still the majority owner, however an activist should provide a mild nudge for the board of GPP to pursue and correct any undervaluation that may remain once the dividend is reinstated
   
   
   

3. And if a prolonged undervaluation remains, we believe the most likely outcome is that GPRE collapses the MLP into itself, and keeps the assets and cash flow for themselves. This could most likely be done in a stock for stock transaction, and would have to be done at a premium to the current share price (approved by an independent conflicts committee already appointed by the board)

Finally, we’d add that this situation presents lower than average risk - GPRE’s required minimum volume commitment combined with the forced amortization/refi required by the debt expiring this year means shareholders can have confidence in the ~$2 in distributable cash flow starting in 2022. 

We believe there are two main risks here:

1. The market pricing of yield-based assets and if GPP is still perceived as orphaned. As already mentioned, we believe the activist or even GPRE would push to correct any undervaluation in shares. And shareholders will still receive a double digit dividend yield on any undervalued shares.
   
   

2. Uncertainty in the ethanol regulatory environment. The RFS - or renewable fuel standards, are “expiring” in 2023. What that means is that specified statutory volumes of ethanol are not set past the year 2023 - however this does not mean that the RFS goes away. Congress is currently working on the next iteration of the program and needs to have something set by 2022. With the current democratic administration and a focus on climate change, all indications point to a program that will require ethanol in the future, though it is unclear in what shape or form. 

Catalyst

• Debt refi
• Dividend increase