Attached files
| file | filename |
|---|---|
| EX-23.1 - EXHIBIT 23.1 KPMG CONSENT - DARLING INGREDIENTS INC. | ex231-kpmg2017.htm |
| EX-32 - SEC 906 CERTIFICATION - DARLING INGREDIENTS INC. | ex32-2017x10k.htm |
| EX-31.2 - SEC 302 CERTIFICATION - DARLING INGREDIENTS INC. | ex312-2017x10k.htm |
| EX-31.1 - SEC 302 CERTIFICATION - DARLING INGREDIENTS INC. | ex311-2017x10k.htm |
| EX-23.2 - EXHIBIT 23.2 KPMG CONSENT - DARLING INGREDIENTS INC. | ex232-kpmg2017.htm |
| EX-21 - EXHIBIT 21 SUBSIDIARIES - DARLING INGREDIENTS INC. | ex21-2017.htm |
| EX-10.36 - EXHIBIT 10.36 SENIOR EXEC - DARLING INGREDIENTS INC. | ex1036senexecterm.htm |
| 10-K - DARLING INGREDIENTS 2017 10-K - DARLING INGREDIENTS INC. | dar-2017123010xk.htm |
Exhibit 99.1
DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Independent Auditors’ Report
The Board of Managers
Diamond Green Diesel Holdings LLC and subsidiary:
We have audited the accompanying consolidated financial statements of Diamond Green Diesel Holdings LLC and its subsidiary, which comprise the consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated statements of income, members’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diamond Green Diesel Holdings LLC and subsidiary as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.
/s/ KPMG LLP
San Antonio, Texas
February 9, 2018
DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
2017 | 2016 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 123,361,296 | $ | 166,917,712 | ||||
Receivables | 23,045,513 | 54,123,377 | ||||||
Receivables—due from related party | 13,174,959 | 13,952,095 | ||||||
Inventory | 36,660,050 | 31,243,313 | ||||||
Prepaid expenses and other | 6,536,051 | 2,497,117 | ||||||
Total current assets | 202,777,869 | 268,733,614 | ||||||
Property, plant and equipment, at cost | 510,442,859 | 412,005,794 | ||||||
Accumulated depreciation | (75,114,825 | ) | (57,134,362 | ) | ||||
Property, plant and equipment, net | 435,328,034 | 354,871,432 | ||||||
Deferred charges and other assets, net | 4,654,926 | 12,164,086 | ||||||
Total assets | $ | 642,760,829 | $ | 635,769,132 | ||||
LIABILITIES AND MEMBERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of related party debt | $ | 17,022,938 | $ | 17,022,938 | ||||
Accounts payable | 25,251,274 | 9,835,764 | ||||||
Accounts payable—due to related party | 13,541,208 | 11,466,319 | ||||||
Accrued interest—due to related party | 1,098,952 | 1,446,976 | ||||||
Taxes other than income taxes | 423,567 | 138,243 | ||||||
Other accrued expenses | 389,204 | 313,020 | ||||||
Total current liabilities | 57,727,143 | 40,223,260 | ||||||
Related party debt, less current portion | 36,730,093 | 53,753,031 | ||||||
Other long-term liabilities | 450,265 | 417,645 | ||||||
Commitments | ||||||||
Members’ equity: | ||||||||
Paid-in capital | 223,377,260 | 223,377,260 | ||||||
Retained earnings | 324,476,068 | 317,997,936 | ||||||
Total members’ equity | 547,853,328 | 541,375,196 | ||||||
Total liabilities and members’ equity | $ | 642,760,829 | $ | 635,769,132 | ||||
See Notes to Consolidated Financial Statements.
2
DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Operating revenues | $ | 633,908,283 | $ | 527,670,493 | ||||
Costs and expenses: | ||||||||
Cost of sales | 498,005,554 | 308,396,359 | ||||||
Operating expenses | 47,915,976 | 43,269,764 | ||||||
General and administrative expenses | 1,590,840 | 1,556,616 | ||||||
Depreciation, amortization and accretion expense | 28,954,533 | 27,821,073 | ||||||
Total costs and expenses | 576,466,903 | 381,043,812 | ||||||
Operating income | 57,441,380 | 146,626,681 | ||||||
Other income, net | 1,342,813 | 551,078 | ||||||
Interest and debt expense: | ||||||||
Incurred | (4,874,449 | ) | (7,970,753 | ) | ||||
Capitalized | 2,568,388 | 616,942 | ||||||
Interest and debt expense, net | (2,306,061 | ) | (7,353,811 | ) | ||||
Net income | $ | 56,478,132 | $ | 139,823,948 | ||||
See Notes to Consolidated Financial Statements.
3
DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY
Diamond | Darling | Total | ||||||||||
Alternative | Green | Members’ | ||||||||||
Energy, LLC | Energy LLC | Equity | ||||||||||
Balances as of December 31, 2015 | $ | 225,775,624 | $ | 225,775,624 | $ | 451,551,248 | ||||||
Cash distributions to members | (25,000,000 | ) | (25,000,000 | ) | (50,000,000 | ) | ||||||
Net income | 69,911,974 | 69,911,974 | 139,823,948 | |||||||||
Balances as of December 31, 2016 | 270,687,598 | 270,687,598 | 541,375,196 | |||||||||
Cash distributions to members | (25,000,000 | ) | (25,000,000 | ) | (50,000,000 | ) | ||||||
Net income | 28,239,066 | 28,239,066 | 56,478,132 | |||||||||
Balances as of December 31, 2017 | $ | 273,926,664 | $ | 273,926,664 | $ | 547,853,328 | ||||||
See Notes to Consolidated Financial Statements.
4
DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 56,478,132 | $ | 139,823,948 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation, amortization and accretion expense | 28,954,533 | 27,821,073 | ||||||
Inventory valuation adjustment | (2,738,434 | ) | (1,921,883 | ) | ||||
Other noncash expense | 21,607 | 26,600 | ||||||
Decrease in receivables | 31,077,864 | 118,085,181 | ||||||
(Increase) decrease in receivables—due from related party | 777,136 | (8,186,237 | ) | |||||
(Increase) decrease in inventory | (2,678,303 | ) | 8,961,386 | |||||
Increase in prepaid expenses and other | (4,038,934 | ) | (1,557,090 | ) | ||||
Increase in accounts payable | 2,030,620 | 2,982,267 | ||||||
Increase in accounts payable—due to related party | 2,053,106 | 1,202,881 | ||||||
Decrease in accrued interest—due to related party | (1,205,085 | ) | (1,769,505 | ) | ||||
Increase in taxes other than income taxes | 13,632 | 27,083 | ||||||
Increase in other accrued expenses | 3,653 | 90,695 | ||||||
Net cash provided by operating activities | 110,749,527 | 285,586,399 | ||||||
Cash flows from investing activities: | ||||||||
Capital expenditures | (83,261,884 | ) | (14,895,477 | ) | ||||
Deferred turnaround and catalyst costs | (4,021,122 | ) | (19,761,217 | ) | ||||
Other investing activities, net | — | (193,318 | ) | |||||
Net cash provided by (used in) investing activities | (87,283,006 | ) | (34,850,012 | ) | ||||
Cash flows from financing activities: | ||||||||
Repayments of related party debt | (17,022,937 | ) | (78,065,604 | ) | ||||
Cash distributions to members | (50,000,000 | ) | (50,000,000 | ) | ||||
Net cash used in financing activities | (67,022,937 | ) | (128,065,604 | ) | ||||
Net increase (decrease) in cash | (43,556,416 | ) | 122,670,783 | |||||
Cash as of beginning of period | 166,917,712 | 44,246,929 | ||||||
Cash as of end of period | $ | 123,361,296 | $ | 166,917,712 | ||||
Supplemental cash flow information: | ||||||||
Accrued capital expenditures | 17,998,531 | 2,610,533 | ||||||
Accrued turnaround and catalyst expenditures | 270,936 | 1,050,980 | ||||||
Capitalized interest | 2,568,388 | 616,942 | ||||||
Interest paid | 5,222,464 | 9,566,760 | ||||||
See Notes to Consolidated Financial Statements.
5
DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION
Diamond Green Diesel Holdings LLC (DGD Holdings) was formed on January 21, 2011 as a joint venture between Diamond Alternative Energy, LLC, an indirect wholly owned subsidiary of Valero Energy Corporation (Valero), and Darling Green Energy LLC, a subsidiary of Darling Ingredients Inc. (Darling). Diamond Alternative Energy, LLC and Darling Green Energy LLC are collectively referred to herein as the “Members.”
DGD Holdings, through its wholly owned subsidiary Diamond Green Diesel LLC (DGD), operates a biomass-based diesel unit having a design feed capacity of 10,000 barrels per day that processes animal fats, used cooking oils, and other vegetable oils into renewable green diesel (the Plant). The Plant is located next to Valero’s St. Charles Refinery in Norco, Louisiana. DGD Holdings and DGD are collectively referred to herein as the “Company.”
The Company completed construction of the Plant and began operations in June 2013.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
These consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). All significant intercompany accounts and transactions have been eliminated in consolidation.
Management has evaluated subsequent events that occurred after December 31, 2017 through February 9, 2018, the date these consolidated financial statements were issued. Any material subsequent events that occurred during this time have been properly recognized or disclosed in these consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances could result in revised estimates.
Cash
Cash consists of demand deposits with a financial institution.
Receivables
Trade receivables are carried at original invoice amount. The Company has not had any uncollectible receivables, and therefore, no allowance for doubtful accounts was recorded as of December 31, 2017 and 2016.
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DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventory
Inventory is valued at the lower of cost or market. The cost of feedstocks purchased for processing and refined products (primarily renewable green diesel) are determined under the last-in, first-out (LIFO) method using the dollar-value LIFO method. The cost of supplies are determined principally under the weighted-average cost method.
Prepaid Expenses
Prepaid expenses are costs incurred for which the services or goods will be received in a future period. The prepaid expenses are recorded as an asset when paid and recognized as an expense in the period the services or goods are utilized.
Property, Plant and Equipment
The cost of property, plant and equipment purchased or constructed, including betterments, is capitalized. However, the cost of repairs to and normal maintenance of property assets is expensed as incurred. Betterments are those which extend the useful life, increase the capacity or improve the operating efficiency of the asset, or improve the safety of our operations. The cost includes interest and certain overhead costs allocable to the construction activities. See Note 5 for additional discussion.
Depreciation of processing units is recorded on a straight-line basis over the estimated useful life using the composite method of depreciation. Also under the composite method of depreciation, the historical cost of a minor property asset (net of salvage value) that is retired or replaced is charged to accumulated depreciation and no gain or loss is recognized in income. However, a gain or loss is recognized in income for a major property asset that is retired, replaced or sold and for an abnormal disposition of a property asset (primarily involuntary conversions). Gains and losses are reflected in depreciation, amortization and accretion expense, unless such amounts are reported separately due to materiality.
Depreciation of the administrative building and computer hardware is recorded on a straight-line basis over the estimated useful lives of the related assets using the component method of depreciation. Precious metals, which are used as a catalyst in the units to process feedstock into renewable green diesel, are not depreciated, but the cost of precious metals not recovered from the reclamation process are charged to operating expenses.
Impairment of Assets
Long-lived assets, which include property, plant and equipment, are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. A long-lived asset is not recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If a long-lived asset is not recoverable, an impairment loss is recognized for the amount by which the carrying amount of the long-lived asset exceeds its fair value, with fair value determined based on discounted estimated net cash flows or other appropriate methods.
Asset Retirement Obligation
The Company records a liability, which is referred to as an asset retirement obligation, at fair value for the estimated cost to retire a tangible long-lived asset at the time that the Company incurs that liability, which is generally when the asset is purchased, constructed or leased. The Company records the liability when there is a legal obligation to incur costs to retire the asset and when a reasonable estimate of the fair value of the liability can be made.
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DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Charges and Other Assets
“Deferred charges and other assets, net” include the following:
• | turnaround costs, which are incurred in connection with planned major maintenance activities and which are deferred when incurred and amortized on a straight-line basis over the period of time estimated to lapse until the next turnaround occurs; |
• | fixed-bed catalyst costs, representing the cost of catalyst that is changed out at periodic intervals when the quality of the catalyst has deteriorated beyond its prescribed function, which are deferred when incurred and amortized on a straight-line basis over the estimated useful live of the specific catalyst; |
• | a license acquired in 2015 that provides for an increase in the feedstock that can be processed at the Plant per calendar year; and |
• | utility deposits. |
Revenue Recognition
Revenues for products sold are recorded upon delivery of the products to the customers, which is the point at which title to the products is transferred, and when payment has either been received or collection is reasonably assured. The Renewable Identification Number (RIN), which is created at the time of production, is also sold along with the finished product.
Product Shipping and Handling Costs
Costs incurred for shipping and handling of products are included in cost of sales.
Blenders Tax Credit
Prior to January 1, 2017, biodiesel blenders registered with the Internal Revenue Service were eligible for a tax incentive in the amount of $1.00 per gallon of renewable diesel blended with petroleum diesel to produce a mixture containing at least 0.1 percent diesel fuel. Only blenders that produced and sold or used the qualified biodiesel mixture as a fuel in their trade or business were eligible for the tax credit. As a blender, the Company recognized credits of $160,554,453 related to this biodiesel blenders credit during the year ended December 31, 2016. The biodiesel blenders tax credit was not approved by Congress beyond December 31, 2016. Therefore, the Company did not receive this tax benefit during 2017.
Operating Expenses
Operating expenses primarily consist of costs charged to the Company by Valero in accordance with the Operations Agreement for day-to-day operations of the Plant, as further described in Note 10. In addition, operating expenses include maintenance expenses, chemicals, waste disposal, professional fees, insurance, property tax and other outside services.
General and Administrative Expenses
General and administrative expenses consist primarily of fees for administrative services provided by Valero, as further described in Note 10.
Income Taxes
The Company is a limited liability corporation and is not a taxpaying entity for federal income tax purposes. Accordingly, no provision for income taxes is made in these consolidated financial statements. Income or loss from the Company is taxable to the Members in their individual federal tax returns.
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DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivatives and Hedging
All derivative instruments are recorded in the balance sheet as either assets or liabilities measured at their fair values. The gain or loss on the derivative instrument, if any, is recognized in income as incurred. The cash flow effects of the derivative instruments are reflected in operating activities in the statements of cash flows. See Note 12 for additional discussion.
Concentration Risk
For the year ended December 31, 2017, the Company sold a majority of its renewable diesel to four major customers, including Valero, which accounted for 31 percent of the sales of renewable diesel. The other three third-party customers accounted for 25 percent, 19 percent, and 10 percent of the sales of renewable diesel. The Company sold 28 percent of its renewable diesel to Valero and 29 percent, 15 percent, and 10 percent to three third-party customers for the year ended December 31, 2016.
The Company purchased 39 percent and 36 percent of its raw materials from Darling for the years ended December 31, 2017 and 2016, respectively. The Company purchased 17 percent, 12 percent, and 10 percent from three third-party suppliers for the year ended December 31, 2017, and 18 percent, 12 percent, and 10 percent from three third-party suppliers for the year ended December 31, 2016.
See Note 10 for additional discussion of the Company’s contracts with Valero and Darling.
3. RECEIVABLES
Receivables consisted of the following:
December 31, | |||||||
2017 | 2016 | ||||||
Receivables—trade | $ | 33,536,682 | $ | 19,001,568 | |||
Blenders tax credit receivable | — | 32,382,471 | |||||
Commodity derivative contract receivables (see Note 11) | 2,683,790 | 2,739,338 | |||||
Total receivables | $ | 36,220,472 | $ | 54,123,377 | |||
Receivables—due from related party | $ | 13,174,959 | $ | 13,952,095 | |||
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DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INVENTORIES
Inventories consisted of the following:
December 31, | |||||||
2017 | 2016 | ||||||
Feedstocks | $ | 27,682,060 | $ | 27,584,472 | |||
Finished products | 8,698,640 | 6,167,691 | |||||
Supplies | 279,350 | 229,584 | |||||
Lower of cost or market inventory valuation reserve | — | (2,738,434 | ) | ||||
Inventories | $ | 36,660,050 | $ | 31,243,313 | |||
Inventories are valued at the lower of cost or market. As of December 31, 2016, the market values of the feedstocks and finished products fell below the Company’s historical LIFO inventory costs, and consequently, the Company recorded a valuation reserve of $2,738,434. As of December 31, 2017, the Company reevaluated its inventories and determined that the replacement cost (market value) exceeded the LIFO carrying amount by $832,935. As a result, the Company recorded a change in the valuation reserve that resulted in a net benefit to the Company’s results of operations of $2,738,434 for the year ended December 31, 2017. For the year ended December 31, 2016, the change in the valuation reserve resulted in a net benefit to the Company’s results of operations of $1,921,883.
During the year ended December 31, 2016, the Company had a net liquidation of LIFO inventory layers that increased cost of sales by $212,307.
5. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment consisted of the following:
December 31, | |||||||
2017 | 2016 | ||||||
Processing units | $ | 397,216,385 | $ | 387,530,163 | |||
Administrative building | 2,934,905 | 2,790,785 | |||||
Precious metals | 5,164,318 | 5,164,318 | |||||
Computer hardware | 1,319,686 | 1,319,686 | |||||
Capital spares | 1,103,208 | 256,170 | |||||
Asset retirement obligation | 177,993 | 177,993 | |||||
Construction in progress | 102,526,364 | 14,766,679 | |||||
Property, plant and equipment, at cost | 510,442,859 | 412,005,794 | |||||
Accumulated depreciation | (75,114,825 | ) | (57,134,362 | ) | |||
Property, plant and equipment, net | $ | 435,328,034 | $ | 354,871,432 | |||
Depreciation expense for the years ended December 31, 2017 and 2016 was $18,193,280 and $17,884,509, respectively.
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DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. DEFERRED CHARGES AND OTHER ASSETS
“Deferred charges and other assets, net” primarily includes turnaround and catalyst costs, which are deferred and amortized as discussed in Note 1. Amortization expense for deferred catalyst costs was $6,225,322 and $3,467,732 for the years ended December 31, 2017 and 2016, respectively. Amortization expense for turnaround costs was $4,515,246 and $6,450,184 for the years ended December 31, 2017 and 2016, respectively.
7. ASSET RETIREMENT OBLIGATION
The Company recorded an asset retirement obligation for the estimated cost to remove all tangible long-lived assets from the leased premises as required by the Company’s lease agreement with Valero, which requires it to remove all improvements upon termination of the lease unless otherwise instructed by Valero. The obligation is estimated considering the likelihood, which the Company believes is low, that the Company will be required by Valero to perform under the asset retirement obligation. This obligation was recorded upon completion of the Plant in June 2013.
Changes in the asset retirement obligation were as follows:
December 31, | ||||||||
2017 | 2016 | |||||||
Balance as of beginning of year | $ | 207,821 | $ | 197,361 | ||||
Accretion expense | 11,015 | 10,460 | ||||||
Balance as of end of year | $ | 218,836 | $ | 207,821 | ||||
The Company does not expect any short-term spending, and as a result, there is no current liability reported for asset retirement obligations as of December 31, 2017 and 2016. Accretion expense is reflected in depreciation, amortization and accretion expense.
There are no assets that are legally restricted for purposes of settling the Company’s asset retirement obligations.
8. MEMBERS’ CONTRIBUTIONS AND DISTRIBUTIONS
Pursuant to the Diamond Green Diesel Holdings LLC Amended and Restated Limited Liability Company Agreement, contributions were made prior to the Plant commencing operations based on the percentage of units held by each Member. Each Member holds 1,116,886 units, and therefore, owns a 50 percent ownership interest in DGD Holdings. Each Member receives one vote per unit. No contributions were made by the Members during the years ended December 31, 2017 or 2016.
Net income or loss of the Company for a fiscal year will be allocated between the Members based on the proportionate share of the Members’ ownership interests. Generally, the Company is prohibited from making distributions to its Members until certain conditions required by the loan from Valero (see Note 10) are satisfied. The Company distributed $50,000,000 to the Members during 2017 and 2016, respectively.
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DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases land from Valero in Norco, Louisiana on which the Plant is built, which is adjacent to Valero’s St. Charles refinery. See Note 10 for further discussion.
In addition, the Company leases various equipment and has an agreement with the Kansas City Southern Railway Company to lease land next to the railroad on which the Company’s scale track is located. As of December 31, 2017, future minimum rentals for these leases were as follows:
Year Ending December 31: | |||
2018 | $ | 267,334 | |
2019 | 43,880 | ||
2020 | 44,482 | ||
2021 | 27,246 | ||
2022 | 21,933 | ||
Thereafter | 229,501 | ||
Total minimum rental payments | $ | 634,376 | |
Rental expense for the leases was $508,270 and $18,368 for the years ended December 31, 2017 and 2016, respectively, and is reflected in operating expenses.
10. RELATED-PARTY TRANSACTIONS
Overview
The Company does not have any employees. It has entered into agreements with its Members, primarily Valero, to provide day-to-day operations, management and administrative functions. The Company has also obtained debt financing from Valero to fund the majority of the construction costs of the Plant. These related-party transactions cannot be presumed to be carried out on an arm’s length basis as the requisite conditions of competitive, free-market dealings may not exist. Following is a description of various agreements between the Company and its Members.
Debt Agreement
The Company has a loan facility with Valero, which allowed the Company to borrow up to an amount equal to 60 percent of the estimated construction costs of the Plant. The Company borrowed the maximum under the loan facility of $221,298,189. Interest on the loan facility accrues at a rate of 8 percent per annum. During the construction period, all unpaid interest was added to the principal balance outstanding under the loan installments, with the first payment paid on October 1, 2013. Principal payments are made in equal consecutive quarterly installments, with the first principal payment paid on July 1, 2014.
The Company is required to make prepayments upon certain qualifying events. There were two separate qualifying events during 2016 that required the Company to make prepayments of $54,742,859 and $6,299,808. In addition, during 2016, the Company’s board of managers approved the expansion of the
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DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Plant’s feed capacity to 18,000 barrels per day. Related to the approval of this expansion, Valero agreed to temporarily suspend the mandatory prepayments. As such, no additional prepayments were made during 2016 or 2017.
The loan facility matures on April 30, 2027 and is secured by all property and equity interests of the Company. During the years ended December 31, 2017 and 2016, the Company paid $5,222,464 and $9,562,737, respectively, in interest on this loan.
Principal payments on the related-party debt as of December 31, 2017 were due as follows:
Year Ending December 31: | |||
2018 | $ | 17,022,938 | |
2019 | 17,022,938 | ||
2020 | 17,022,938 | ||
2021 | 2,684,217 | ||
Total | $ | 53,753,031 | |
Revolving Loan Agreement
During 2015, the Company entered into a $10,000,000 revolving loan agreement (the Revolver) with Valero and Darling, whereby each Member has a commitment of $5,000,000. The Revolver matures on December 31, 2018. The Company may request additional one-year extensions subject to Valero and Darling consenting to extend their individual commitments.
Outstanding borrowings under the Revolver are due on the last day of each calendar month and bear interest at a rate per annum equal to the sum of the one-month LIBO rate plus 2.5 percent. During the year ended December 31, 2016, the Company borrowed and repaid $5,000,000 under the Revolver. The Company paid $4,023 in interest on the Revolver during 2016. There were no borrowings under the Revolver during 2017.
Lease Agreement
As discussed in Note 9, the Company leases land from Valero. The lease is an operating lease and expires on May 31, 2031, with up to four optional renewal periods of five years each.
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DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2017, future minimum rentals for the lease were as follows:
Year Ending December 31: | |||
2018 | $ | 343,037 | |
2019 | 348,182 | ||
2020 | 353,404 | ||
2021 | 358,705 | ||
2022 | 364,086 | ||
Thereafter | 3,288,285 | ||
Total minimum rental payments | $ | 5,055,699 | |
Rental expense is being recognized on a straight-line basis and was $359,573 for each of the years ended December 31, 2017 and 2016, and is reflected in operating expenses.
Operations Agreement
Pursuant to the Operations Agreement, Valero operates the Plant and performs certain day-to-day operations and management functions for the Company as an independent contractor. During the 20-year term of the agreement, Valero charges for all dedicated operating and personnel costs, and for all routine and non-routine services in accordance with the contractual billing rates, which are adjusted for inflation annually on January 1. The Company recorded $10,683,566 and $10,046,197 of operating expenses charged under the Operations Agreement for the years ended December 31, 2017 and 2016, respectively.
In addition, the Company pays Valero a monthly administrative fee. For the years ended December 31, 2017 and 2016, the Company recorded $1,590,840 and $1,556,616, respectively, of monthly administrative fees in general and administrative expenses.
Tank Storage and Rail Loading Agreement
Effective March 31, 2017, the Company entered into a commercial agreement with a subsidiary of Valero to construct and operate a rail loading facility located at Valero’s St. Charles Refinery for the purpose of loading the Company’s renewable diesel onto railcars. The construction of the rail loading facility was completed in April 2017, and Valero began providing services to the Company in May 2017. In addition, Valero will construct a new 180,000 barrel storage tank and provide storage services to the Company. The construction of the new tank is expected to be complete in the first quarter of 2018. The agreement has an initial term that ends on June 30, 2033. The agreement contains minimum commitments for the Company’s use of the assets. For the year ended December 31, 2017, the Company recorded $2,831,540 of fees charged under this agreement in operating expenses.
Other Agreements
Effective July 2013, following notification by the Company that the Plant was ready to commence commercial service, three additional agreements became effective. Following the initial 20-year term, these agreements will automatically renew for a period of five years on an evergreen basis, unless terminated by one of the parties. Below is a description of the agreements.
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DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Raw Material Supply Agreement
Under the Raw Material Supply Agreement, Darling is obligated to offer to supply all of the feedstock requirements to the Company. Darling will provide competitive pricing based on the delivery terms. However, the Company is not obligated to purchase all or any part of its feedstock requirements from Darling and will pursue the lowest cost feedstock supply to the Plant. For the years ended December 31, 2017 and 2016, the Company purchased $172,288,245 and $149,625,424, respectively, of raw materials from Darling.
Product Offtake Agreement
Under the Product Offtake Agreement, Valero is required to market all of the renewable green diesel produced at the Plant. Valero markets the renewable green diesel to third parties as well as to its affiliates and receives a marketing fee. In addition, Valero is required to purchase the recovered light ends liquid produced at the Plant. The Company has entered into contracts with Valero to sell renewable green diesel in varying amounts through December 2019. For the year ended December 31, 2017, the Company sold $192,998,403 of renewable green diesel and $46,896,695 of recovered light ends liquid to Valero, which is recorded in operating revenues, and incurred $2,097,191 in marketing fees to Valero, which is recorded in cost of sales. For the year ended December 31, 2016, the Company sold $136,425,688 of renewable green diesel and $41,686,578 of recovered light ends liquid to Valero, and incurred $1,876,727 in marketing fees to Valero.
Services and Utilities Supply Agreement
Under the Services and Utilities Supply Agreement, Valero provides the Company with water, certain industrial gases which are produced or otherwise available at Valero’s St. Charles Refinery, and certain services, such as water treatment and terminalling services that are needed for the operation of the Plant. Prices charged by Valero are at prevailing market rates. The Company supplies Valero with fuel gas and steam produced at the Plant and charges Valero at prevailing market rates. For the years ended December 31, 2017 and 2016, the Company’s net purchases of industrial gases and other services from Valero was $28,005,801 and $23,261,570, respectively.
The agreement allows these charges to be netted each month, with a net receivable from or payable to Valero each period which is settled 15 days after receipt of the invoice.
Other
For the years ended December 31, 2017 and 2016, the Company purchased $11,265,212 and $13,450,422 of feedstock from Valero. The Company also purchased $307,453 and $239,359 of ultra-low-sulfur diesel from Valero for the years ended December 31, 2017 and 2016, respectively.
11. FAIR VALUE MEASUREMENTS
General
U.S. GAAP requires that certain assets and liabilities be measured at fair value on a recurring or nonrecurring basis in our balance sheets, which are presented below under “Recurring Fair Value Measurements.” Recurring fair value measurements of assets or liabilities are those that GAAP requires or permits in the balance sheet at the end of each reporting period, such as derivative financial instruments.
U.S. GAAP also requires the disclosure of the fair values of financial instruments when an option to elect fair value accounting has been provided, but such election has not been made. A debt obligation is an example
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DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of such a financial instrument. The disclosure of the fair values of financial instruments not recognized at fair value in the balance sheet is presented below under “Other Financial Instruments.”
U.S. GAAP provides a framework for measuring fair value and establishes a three-level fair value hierarchy that prioritizes inputs to valuation techniques based on the degree to which objective prices in external active markets are available to measure fair value. Following is a description of each of the levels of the fair value hierarchy.
• | Level 1 - Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities. |
• | Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
• | Level 3 - Unobservable inputs for the asset or liability. Unobservable inputs reflect our own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include occasional market quotes or sales of similar instruments or our own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant judgment. |
Recurring Fair Value Measurements
The tables below present information about the Company’s assets and liabilities recognized at their fair values in the balance sheets categorized according to the fair value hierarchy of the inputs utilized by the Company to determine the fair values as of December 31, 2017 and 2016.
The Company has elected to offset the fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty, including any related cash collateral assets or obligations as shown below; however, fair value amounts by hierarchy level are presented on a gross basis in the tables below. The Company does not have any derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.
December 31, 2017 | |||||||||||||||||||||||||||||||
Fair Value Hierarchy | Total Gross Fair Value | Effect of Counter-party Netting | Effect of Cash Collateral Netting | Net Carrying Value on Balance Sheet | Cash Collateral Paid or Received Not Offset | ||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||||
Commodity derivative contracts | $ | 4,821,805 | $ | — | $ | — | $ | 4,821,805 | $ | (4,821,805 | ) | $ | — | $ | — | $ | — | ||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||
Commodity derivative contracts | 10,756,566 | — | — | 10,756,566 | (4,821,805 | ) | (5,934,761 | ) | — | (2,683,790 | ) | ||||||||||||||||||||
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DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2016 | ||||||||||||||||||||||||||||||
Fair Value Hierarchy | Total Gross Fair Value | Effect of Counter-party Netting | Effect of Cash Collateral Netting | Net Carrying Value on Balance Sheet | Cash Collateral Paid or Received Not Offset | |||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||
Commodity derivative contracts | $ | 3,575,476 | $ | — | $ | — | $ | 3,575,476 | (3,575,476 | ) | $ | — | $ | — | $ | — | ||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||
Commodity derivative contracts | 7,913,986 | — | — | 7,913,986 | (3,575,476 | ) | (4,338,510 | ) | — | (2,739,338 | ) | |||||||||||||||||||
The Company is exposed to market risks related to the volatility in the price of the feedstock used in its operations and finished products produced at the Plant and enters into commodity derivative contracts, which consist primarily of exchange-traded futures. See Note 12 for further discussion. These contracts are measured at fair value using the market approach. Exchange-traded futures are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy.
Other Financial Instruments
Financial instruments that the Company recognizes in its balance sheets at their carrying amounts are shown in the following table:
December 31, 2017 | December 31, 2016 | ||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Financial assets: | |||||||||||||||
Cash | $ | 123,361,296 | $ | 123,361,296 | $ | 166,917,712 | $ | 166,917,712 | |||||||
Financial liabilities: | |||||||||||||||
Debt | 53,753,031 | 55,391,298 | 70,775,969 | 72,635,963 | |||||||||||
The methods and significant assumptions used to estimate the fair value of these financial instruments are as follows:
• | The fair value of cash is the carrying value due to the low level of credit risk of these assets (Level 1). |
• | The fair value of debt is determined using the discounted cash flow method based on quoted prices provided by third-party brokers (Level 3). |
12. PRICE RISK MANAGMENT ACTIVITIES
The Company is exposed to market risks related to the volatility in the price of commodities and enters into derivative instruments to manage these risks. The only type of derivative instruments that the Company enters into are those related to the various commodities the Company purchases or produces as the Company is exposed to market risks related to the volatility in the price of the feedstock used in its operations and finished products produced at the Plant. All derivative instruments are recorded as either assets or liabilities
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DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
measured at their fair values. When the Company enters into a derivative instrument, it is designated as an economic hedge. Economic hedges represent commodity derivative instruments that are used to manage price volatility in feedstock purchase contracts. Economic hedges are not designated as a fair value hedge or a cash flow hedge for accounting purposes, usually due to the difficulty of establishing the required documentation at the date that the derivative instrument is entered into that would allow the Company to achieve “hedge deferral accounting.” For the Company’s economic hedges, the derivative instrument is recorded at fair value and changes in the fair value of the derivative instrument are recognized currently in income.
As of December 31, 2017, the Company had the following outstanding commodity derivative instruments that were entered into as economic hedges, which mature in 2018. The information presents the notional volume of outstanding contracts by type of instrument (volumes in thousands of barrels for ultra-low sulfur diesel and thousands of pounds for soybean oil).
Derivative Instrument | Notional Contract Volumes | ||
Soybean oil: | |||
Futures - long | 76,079 | ||
Futures - short | 154,378 | ||
Ultra-low-sulfur diesel: | |||
Futures - long | 38 | ||
Futures - short | 1,039 | ||
Fair Values of Derivative Instruments
The following tables provide information about the fair values of the Company’s derivative instruments as of December 31, 2017 and 2016 and the line items in the balance sheets in which the fair values are reflected. See Note 11 for additional information related to the fair values of the Company’s derivative instruments.
December 31, 2017 | |||||||||
Balance Sheet Location | Asset Derivatives | Liability Derivatives | |||||||
Derivatives not designated as hedging instruments | |||||||||
Commodity contracts | Receivables | $ | 4,821,805 | $ | 10,756,566 | ||||
December 31, 2016 | |||||||||
Balance Sheet Location | Asset Derivatives | Liability Derivatives | |||||||
Derivatives not designated as hedging instruments | |||||||||
Commodity contracts | Receivables | $ | 3,575,476 | $ | 7,913,986 | ||||
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DIAMOND GREEN DIESEL HOLDINGS LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Effect of Derivative Instruments on Statements of Income
The following table provides information about the gain or loss recognized in income on the Company’s derivative instruments, and the income statement line item in which such gains and losses are reflected.
Derivatives Designated as Economic Hedges | Location of Gain (Loss) Recognized in Income on Derivatives | |||||||||
Year Ended December 31, | ||||||||||
2017 | 2016 | |||||||||
Commodity contracts | Cost of sales | $ | (11,004,452 | ) | $ | (6,098,622 | ) | |||
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