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Green Plains Partners - Some Risks To Be Aware Of

Summary

This ethanol storage spin-off has an exciting annual yield (11.2%), but I believe that GPP is a perfect example of what the low-interest rate environment allowed to prop up.

The company is completely reliant on the parent as it generates 92% of the revenue from GPRE, which in turn funds the operations and the distributions.

This makes GPP a leveraged bet on ethanol and the parent company. If the parent was to encounter any issue, the share price could plummet quickly.

Especially when the stock is now trading at 60x its book value, which is substantially higher than other similar YieldCo structures.

Thus I believe that investors should avoid the stock.

Company Introduction

Green Plains Partners (NASDAQ:GPP) is a master limited partnership that is focused on storage, transportation and operation of terminal services for ethanol companies. The company was spun off from Green Plain Inc. (NASDAQ:GPRE), one of the biggest ethanol producers in the US. GPRE is so far the biggest customer of GPP as it was accounting for 92% of revenues for the six months ended FY2016.

GPP had its IPO in June 2015 after which the following corporate structure became effective.

Its revenue is segmented in the following areas:

Its revenue is segmented in the following areas:

  • Storage and throughput services. This segment is focused on handling the produced ethanol exclusively for GPRE. The company gets compensated on the basis of what amount of volume (throughput) is handled. GPP's assets were originally owned by GPRE and thus all of the facilities are near the production plants of GPRE and are unable to generate income from other customers.
  • Railcar Capacity. This is where GPP is operating the transport of ethanol from the storages to the terminals for GPRE.
  • Terminal Services. GPP operates terminals, where the produced ethanol is being transported to local areas. This is the only revenue stream where GPP is able to incur revenue from other parties than GPP.

Investment Thesis

In a low-interest rate market, most investors are pushed to search for yield and it is possible that it leads them to places where they would not previously invest (i.e. everything with a yield higher than 2% is a buy). I believe that GPP is a great example of what this environment and the subsequent 'hunt for yield' has managed to create, sustain and to an extent prop up as seen in the below share price development of GPP.

As mentioned, GPP is a spin-off from its ethanol production parent, but it is far away from being a truly public company, and I believe that due to the following points, investors should stay away from the stock.

  • Any affiliated revenue is created solely at the discretion of GPRE. While the shareholders are getting a cut on this discretionary cash flow, it could disappear swiftly as it is under complete control of GPRE.
  • Apart from uncertain M&A comments, the management is not working on any specific project that would boost the unaffiliated revenue, and therefore GPP is going to be reliant on its parent for the foreseeable future.
  • Conflicts of interest are obvious and significant due to the nature of operations (no arm's length contracts etc.). GPRE uses GPP mainly to raise further liquidity and capital; this is visible in intercompany asset purchases at elevated prices.
  • The share price matters and one could think about GPP as wildly overvalued. The asset base is slim and the stock currently trades at 60x times its book value, much more than what other YieldCos are trading at.

All these points then mean that whoever owns the shares of GPP is just making a 'leveraged bet' on the parent and while shareholders might benefit from the current yield, any negative developments of GPRE will invariably lead to a substantial share price correction of GPP. One could think about GPP as just as an 'unusual' bond. The investors paid the 'principal' via the IPO and now collects 'interest', but GPRE, the issuer of the 'bond' is not obliged to pay anything back and therefore the 'principal' is at significant risk. More so when GPP is highly reliant on GPRE.

Connection to the parent

The main issue of the stock is its reliance on GPRE, which can increase or decrease cash flows at their will. GPP has several contracts with GPRE in place as to how much throughput (ethanol stored at each facility) GPRE needs to deliver to GPP, but these minimum commitment agreements can be adjusted without any major issues. Moreover, because these agreements were signed by one party (GPRE management as seen below), I would like to understand how they were priced.

Source: Omnibus agreement

The current operating margin of GPP is around 50%. Why did GPRE choose this profitability? Was it just to create attractive yield in order to prop up the share price? Maybe. Certainly, no one can say that this was a commercial agreement that was a...


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