Management's Discussion of Results of Operations (Excerpts)
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Overview Our Company focuses on providing cleaner, lower carbon products and services. We utilize a nationwide production, distribution and logistics system as part of an integrated value chain model to focus on converting natural fats, oils and greases into advanced biofuels. We own and operate 14 biorefineries with 12 locations in North America and two locations in Germany, which consist of 13 biomass-based diesel plants (biodiesel and renewable hydrocarbon diesel), with aggregate nameplate production capacity of 502 gallons per year ("mmgy"), and one demonstration scale fermentation facility. We also have one feedstock processing facility in Germany. We are also engaged in research and development efforts focused on the conversion of diverse feedstocks into renewable chemicals and biobased products. We are a lower-cost biomass-based diesel producer. We primarily produce our biomass-based diesel from a wide variety of lower-cost feedstocks, including inedible corn oil, used cooking oil and inedible animal fat. We also produce biomass-based diesel from virgin vegetable oils, which are more widely available and tend to be higher in price. We believe our ability to process a wide variety of feedstocks provides us with a cost advantage over many biomass-based diesel producers, particularly those that rely primarily on higher cost virgin vegetable oils, such as soybean oil or canola oil. We expanded our business internationally by acquiring a majority interest in what is now known as REG Germany, GmbH, or REG Germany, in December 2014. We continued to acquire additional shares throughout 2015 and 2016, and in January 2017, we acquired full equity ownership of REG Germany. REG Germany is a fully-integrated company that utilizes used cooking oil and other waste feedstocks to produce biomass-based diesel at its two biorefineries in Germany. The combined nameplate production capacity is approximately 50 mmgy. We sell petroleum-based heating oil and diesel fuel, which enables us to offer additional biofuel blends, while expanding our customer base. We sell heating oil and ultra-low sulfur diesel ("ULSD") at terminals throughout the northeastern U.S. as well as BioHeat® blended heating fuel at one of our existing Northeast terminal locations. In 2015, we expanded our sales of additional biofuel blends to Midwest terminal locations and look to potentially expand in other areas across North America. In January 2014, we acquired a development-stage industrial biotechnology business focusing on microbial fermentation to develop and produce renewable chemicals, fuels and other products. We acquired a 75 mmgy nameplate capacity renewable hydrocarbon diesel ("RHD") biorefinery located in Geismar, Louisiana in June 2014. Our Geismar facility had been idled by its previous owner, began operating again by us in October 2014 and was shut down between April 2015 and early March 2016 due to two separate fires that occurred in April and September 2015. Our Geismar facility has been running at high utilization rates since early October 2016. In August 2015, we acquired our Grays Harbor facility, a 100 mmgy nameplate biodiesel plant and terminal at the Port of Grays Harbor, Washington. This acquisition expanded our production fleet to the west coast of the United States. The Grays Harbor location includes 18 million gallons of storage capacity and a terminal that can accommodate feedstock intake and fuel delivery on deep-water PANAMAX class vessels. It also possesses significant rail and truck transport capabilities. To date, the production facility's primary feedstock has been canola oil. In March 2016, we acquired our 20 mmgy nameplate biodiesel refinery located in DeForest, Wisconsin, or REG Madison, which produces biodiesel from yellow grease, rendered animal fats, and inedible corn oil, and also produces refined vegetable oils using our patented technology currently in use at our Seneca, Illinois plant. The facility has both truck and rail capabilities. In June 2017, we experienced a fire at our Madison facility, resulting in the shutdown of the facility. During the three and six months ended June 30, 2017, we sold 160 million and 282 million total gallons of fuel, including 16 million and 30 million gallons of biomass-based diesel that we purchased from third parties and resold, 10 million and 21 million biomass-based diesel gallons produced by REG Germany and 18 million and 40 million petroleum-based diesel gallons, respectively. During 2016, we sold 567 million total gallons, including 77 million biomass-based gallons we purchased from third parties and resold, 45 million biomass-based diesel gallons produced by REG Germany and 54 million petroleum-based diesel gallons. Our businesses are organized into three reportable segments – the Biomass-based Diesel segment, the Services segment and the Renewable Chemicals segment. Biomass-based Diesel Segment Our Biomass-based Diesel segment includes: • the operations of the following biomass-based diesel production facilities: • a 12 mmgy nameplate biodiesel production facility located in Ralston, Iowa; • a 35 mmgy nameplate biodiesel production facility located near Houston, Texas; • a 45 mmgy nameplate biodiesel production facility located in Danville, Illinois; • a 30 mmgy nameplate biodiesel production facility located in Newton, Iowa; • a 60 mmgy nameplate biodiesel production facility located in Seneca, Illinois; • a 30 mmgy nameplate biodiesel production facility located near Albert Lea, Minnesota; • a 15 mmgy nameplate biodiesel production facility located in New Boston, Texas; • a 30 mmgy nameplate biodiesel production facility located in Mason City, Iowa; • a 75 mmgy nameplate RHD production facility located in Geismar, Louisiana; • a 27 mmgy nameplate biodiesel production facility located in Emden, Germany; • a 23 mmgy nameplate biodiesel production facility located in Oeding, Germany; • a 100 mmgy nameplate biodiesel production facility located in Grays Harbor, Washington; and • a 20 mmgy nameplate biodiesel production facility located in DeForest, Wisconsin. • purchases and resales of biomass-based diesel, petroleum-based diesel, Renewable Identification Numbers ("RINs") and Low Carbon Fuel Standard credits, or LCFS credits, and raw material feedstocks acquired from third parties; • sales of biomass-based diesel produced under toll manufacturing arrangements with third-party facilities using our feedstocks; and • incentives received from federal and state programs for renewable fuels. We derive a small portion of our revenues from the sale of glycerin, free fatty acids and other co-products of the biomass-based diesel production process. In 2016 and for the three and six months ended June 30, 2017, our revenues from the sale of co-products were less than five percent of our total Biomass-based Diesel segment revenues. For the three and six months ended June 30, 2017, revenues from the sale of petroleum-based heating oil and diesel fuel acquired from third parties, along with the sale of these items further blended with biodiesel produced at wholly owned facilities or purchased from third parties, were approximately five percent and seven percent, respectively, of our total revenues. In accordance with EPA regulations, we generate 1.5 to 1.7 RINs for each gallon of biomass-based diesel we produce. RINs are used to track compliance with Renewable Fuel Standard 2, or RFS2, using the EPA moderated transaction system, or EMTS. RFS2 allows us to attach between zero and 2.5 RINs to any gallon of biomass-based diesel we sell. When we attach 1.5 to 2.5 RINs to a sale of biomass-based diesel gallons, a portion of our selling price for a gallon of biomass-based diesel is generally attributable to RFS2 compliance; however no cost is allocated to the RINs generated by our biomass-based diesel production as RINs are a form of government incentive and not a result of the physical attributes of the biomass-based diesel production. In addition, RINs, once obtained through the production and sales of gallons of biomass-based diesel, may be separated by the acquirer and sold separately. We regularly obtain RINs from third parties for resale, and the value of these RINs is reflected in “Prepaid expenses and other assets” on our Condensed Consolidated Balance Sheets. At each balance sheet date, this RIN inventory is valued at the lower of cost or net realizable value and any resulting adjustments are reflected in our cost of goods sold for the period. The cost of RINs obtained from third parties is determined using the average cost method. Because we do not allocate costs to RINs generated by our biomass-based diesel production, fluctuations in the value of our RIN inventory represent fluctuations in the value of RINs we have obtained from third parties. At June 30, 2017, we had approximately 60.0 million biomass-based diesel RINs and 1.4 million advanced biofuel RINs available to be sold, as compared to 16.8 million biomass-based diesel RINs and 0.2 million advanced biofuel RINs held for sale at December 31, 2016, respectively. According to the Oil Pricing Information System ("OPIS"), the median closing price at June 30, 2017 was $1.11 and $1.09 per biomass-based diesel RIN and advanced biofuel RIN, respectively compared to $1.055 and $1.055 at December 31, 2016, respectively, per biomass-based diesel RIN and advanced biofuel RIN, respectively. We generate Low Carbon fuel Standard ("LCFS") credits for our low carbon fuels or blendstocks when our qualified low carbon fuels are imported into California. LCFS credits are used to track compliance with California’s LCFS. As a result, a portion of the selling price for a gallon of biomass-based diesel sold into California is also attributable to LCFS compliance. Like RINs, LCFS credits that we generate are a form of government incentive and not a result of the physical attributes of the biomass-based diesel production. Therefore, no cost is allocated to the LCFS credit when it is generated, regardless of whether the LCFS credit is transferred with the biomass-based diesel produced or held by us. At June 30, 2017, we held for sale approximately 13,000 LCFS credits, increasing from 5,000 credits at December 31, 2016. According to OPIS, the median closing price at June 30, 2017 and December 31, 2016 was $78.00 and $93.00, respectively, per LCFS credit. Services Segment Our Services segment includes: • biomass-based diesel facility management and operational services, whereby we provide day-to-day management and operational services to biomass-based diesel production facilities; and • construction management services, whereby we act as the construction management and general contractor for the construction of biomass-based diesel production facilities. During recent years, we have utilized our construction management expertise internally to upgrade our facilities, such as our facilities located in Albert Lea, New Boston, Mason City and Newton. In October 2016, we completed a $34.5 million upgrade to our Danville facility. In November 2016, we started a $24 million expansion project at our Ralston facility. In June 2017, we completed the $20 million acquisition of approximately 82 acres of land at and in close proximity to our Geismar, Louisiana biorefinery from Lion Copolymer. The purchase includes the termination of a ground lease and acquires the land we previously leased for our Geismar operations, and approximately 61 additional acres in parcels adjacent to and near the facility. We plan to improve and utilize the new acreage to support existing production capacity and future expansion opportunities using the Services segment. Renewable Chemicals Segment Our Renewable Chemicals segment includes: • research and development activities focusing on microbial fermentation to develop and produce renewable chemicals, additional advanced biofuels and other biobased products; • collaborative research and development and other service activities to continue to build out the technology platform; and • the operations of a demonstration scale fermentation facility located in Okeechobee, Florida. In January 2016, ExxonMobil Research and Engineering Company entered into an agreement with our subsidiary, REG Life Sciences, LLC ("REG Life Sciences"), to develop technology for the production of biodiesel by fermenting renewable cellulosic sugars from sources such as agricultural waste. In October 2016, REG Life Sciences sold and delivered its first commercial product, a specialty fatty acid. REG Life Sciences developed, produced, sold and delivered approximately one metric ton of the renewable, multi-functional chemical to Aroma Chemical Services International. Fatty acids is one of three product areas REG Life Sciences has focused on, along with esters and alcohols. In November 2016, the Company's Board of Directors authorized a review of strategic alternatives for REG Life Sciences. There can be no assurance that this ongoing strategic review will result in any specific action or transaction or that any action taken or transaction we may enter into will prove to be beneficial to stockholders. Factors Influencing Our Results of Operations The principal factors affecting our operations are the market prices for biomass-based diesel and the feedstocks used to produce biomass-based diesel, as well as governmental programs designed to create incentives or requirements for the production and use of biomass-based diesel. Governmental programs favoring biomass-based diesel production and use Biomass-based diesel has historically been more expensive than petroleum-based diesel, when excluding the value of biomass-based diesel incentives and credits. The biomass-based diesel industry’s growth has largely been the result of federal and state programs that require or incentivize biomass-based diesel, which allows biomass-based diesel to compete with petroleum-based diesel on price. On July 1, 2010, RFS2 was implemented, stipulating volume requirements for the amount of biomass-based diesel and other advanced biofuels that must be utilized in the United States each year. Under RFS2, Obligated Parties, including petroleum refiners and fuel importers, must show compliance with these standards. Currently, biodiesel and renewable hydrocarbon diesel RINs meet three categories of an Obligated Party’s annual renewable fuel required volume obligation, or RVO—biomass-based diesel, undifferentiated advanced biofuel and undifferentiated renewable fuel. The federal biodiesel mixture excise tax credit, or the BTC, has historically provided a $1.00 refundable tax credit per gallon to the first blender of biomass-based diesel with petroleum-based diesel fuel. The BTC became effective January 1, 2005, but since January 1, 2010 it has lapsed and been reinstated a number of times. For example, the BTC lapsed on January 1, 2014 and was retroactively reinstated for 2014 on December 19, 2014 and lapsed again on January 1, 2015. On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 was signed into law, which reinstated and extended a set of tax provisions, including the retroactive reinstatement for 2015 and extension for 2016 of the BTC. The BTC again lapsed on January 1, 2017 and has not been reinstated as of the date of this report. During the six months ended June 30, 2017, the Company recognized $26.7 million as BTC revenue out of the $26.9 million deferred BTC revenue that was outstanding as of December 31, 2016. When the BTC has lapsed in the past, it has been reinstated by Congress. As a result of this history of retroactive reinstatement of the BTC, we and many other biomass-based diesel industry producers have adopted contractual arrangements with customers and vendors specifying the allocation and sharing of any retroactively reinstated incentive. As of June 30, 2017, we estimate that if the BTC is reinstated on the same terms as in 2016, our net income and Adjusted EBITDA for the quarter and year to date ended June 30, 2017 will increase by approximately $58 million and $98 million, respectively. It is uncertain whether the BTC will be reinstated and if reinstated, whether it would be reinstated retroactively or on the same terms. The modification or failure to reinstate the BTC would adversely affect our future financial results. Biomass-based diesel and feedstock price fluctuations Our operating results generally reflect the relationship between the price of biomass-based diesel, including credits and incentives, and the price of feedstocks used to produce biomass-based diesel. Biomass-based diesel is a low carbon, renewable alternative to petroleum-based diesel fuel and is primarily sold to the end user after it has been blended with petroleum-based diesel fuel. Biomass-based diesel prices have historically been heavily influenced by petroleum-based diesel fuel prices. Accordingly, biomass-based diesel prices have generally been impacted by the same factors that affect petroleum prices, such as crude oil supply and demand balance, worldwide economic conditions, wars and other political events, OPEC production quotas, changes in refining capacity and natural disasters. Regulatory and legislative factors also influence the price of biomass-based diesel. Biomass-based diesel RIN pricing, a value component that was introduced via RFS2 in July 2010, has had a significant impact on biomass-based diesel pricing. The following table shows for 2014, 2015, 2016 and the first half of 2017 the high and low average monthly contributory value of RINs, as reported by OPIS to the average B100 spot price of a gallon of biodiesel, as reported by The Jacobsen in terms of dollars per gallon. Value of RINs acquired from third parties and held in inventory remained fairly stable in the first half of 2017 and resulted in a $0.4 million write-down to lower of cost or net realizable value for the first six months of 2017. At June 30, 2017, the write-down to lower of cost or net realizable value of RINs was $0.2 million. See “Note 5 – Other Assets” to our Condensed Consolidated Financial Statements. We enter into forward contracts to sell RINs and we use risk management position limits to manage RIN exposure. During 2016, feedstock expense accounted for 78% of our production cost, while methanol and chemical catalysts expense accounted for 5% and 3% of our costs of goods sold, respectively. Feedstocks for biomass-based diesel production, such as inedible corn oil, used cooking oil, inedible animal fat, canola oil and soybean oil are commodities and market prices for them will be affected by a wide range of factors unrelated to the price of biomass-based diesel and petroleum-based diesel fuels. During 2016, 72% of our feedstocks were comprised of inedible corn oil, used cooking oil and inedible animal fats with the remainder coming from refined vegetable oils. The graph below illustrates the spread between the cost of producing one gallon of biodiesel made from soybean oil to the cost of producing one gallon of biodiesel made from a lower-cost feedstock from January 2013 to June 30, 2017. The results were derived using assumed conversion factors for the yield of each feedstock and subtracting the cost of producing one gallon of biodiesel made from each respective lower-cost feedstock from the cost of producing one gallon of biodiesel made from soybean oil. (1) Used cooking oil prices are based on the monthly average of the daily low sales price of Missouri River yellow grease as reported by The Jacobsen (based on 8.5 pounds per gallon). (2) Inedible corn oil prices are reported as the monthly average of the daily distillers’ corn oil market values delivered to Illinois as reported by The Jacobsen (based on 8.2 pounds per gallon). (3) Choice white grease prices are based on the monthly average of the daily low prices of Missouri River choice white grease as reported by The Jacobsen (based on 8.0 pounds per gallon). (4) Soybean oil (crude) prices are based on the monthly average of the daily closing sale price of the nearby soybean oil contract as reported by CBOT (based on 7.5 pounds per gallon). Historically, our results of operations generally benefit when the spread between biomass-based diesel prices and feedstock prices widens and will be harmed when this spread narrows. The following graph shows feedstock cost data for choice white grease and soybean oil on a per gallon basis compared to the per gallon sale price data for biodiesel, and the spread between biodiesel and each of soybean oil and choice white grease, from January 2013 to June 30, 2017. During the second quarter of 2017, NY Harbor ULSD prices ranged from a high of $1.6506 per gallon in April to a low of $1.3648 per gallon in June with the average price for the quarter of $1.5062 per gallon. Energy prices were range bound throughout second quarter 2017. European UCOME prices remained relatively flat for second quarter 2017 as demand was impacted by biodiesel imports from China and Southeast Asia. Feedstock supplies were larger than prior year, which were offset by strong demand that drove pricing higher. More recent soybean oil prices have been trending higher due to declines in soybean crop conditions caused from hot and dry weather patterns across major growing regions in the Midwest. The soybean oil price increase has been limited by a larger current inventory of soybeans and increasing palm oil production in Southeast Asia. Relatively low priced feed cost along with continued strong demand for pork and beef has continued to lead to expansions in the US hog and cattle industries. Both hog and cattle slaughter numbers in the second quarter of 2017 were again higher than the prior year. In March 2017, the National Biodiesel Fair Trade Coalition ("Coalition") filed an antidumping and countervailing duty petition with the U.S. Department of Commerce and the U.S. International Trade Commission ("ITC"), arguing that Argentine and Indonesian companies were violating trade laws by flooding the U.S. market with dumped and subsidized biodiesel. The Coalition is made up of the National Biodiesel Board and U.S. biodiesel producers. On May 5, 2017, the ITC agreed to proceed with an investigation regarding this matter. In relation to this antidumping and countervailing duty petition, the Coalition filed a new allegation in July 2017 that "critical circumstances" exist with respects to imports of biodiesel from Argentina. The critical circumstance provision in antidumping and countervailing duties laws allows for the imposition of duties on imports that enter the U.S. prior to preliminary determinations of subsidization and dumping. The Coalition found that imports of biodiesel from Argentina jumped 144.5 percent since the March 2017 petition was filed. Risk Management The profitability of producing biomass-based diesel largely depends on the spread between prices for feedstocks and biomass-based diesel, including incentives, each of which is subject to fluctuations due to market factors and each of which is not significantly correlated. Adverse price movements for these commodities directly affect our operating results. We attempt to protect cash margins for our own production and our third-party trading activity by entering into risk management contracts that mitigate the impact on our margins from price volatility in feedstocks and biomass-based diesel. We create offsetting positions by using a combination of forward fixed-price physical purchases and sales contracts on feedstock and biomass-based diesel, including risk management futures contracts, swaps and options primarily on the New York Mercantile Exchange NY Harbor ULSD and CBOT Soybean Oil; however, the extent to which we engage in risk management activities varies substantially from time to time, and from feedstock to feedstock, depending on market conditions and other factors. In making risk management decisions, we utilize research conducted by outside firms to provide additional market information in addition to our internal research and analysis. Inedible corn oil, used cooking oil, inedible animal fat, canola oil and soybean oil were the primary feedstocks we used to produce biomass-based diesel in 2016 and the first six months of 2017. We utilize several varieties of inedible animal fat, such as beef tallow, choice white grease and poultry fat derived from livestock. There is no established futures market for these lower-cost feedstocks. The purchase prices for lower-cost feedstocks are generally set on a negotiated flat price basis or spread to a prevailing market price reported by the USDA price sheet or The Jacobsen. Our efforts to risk manage against changing prices for inedible corn oil, used cooking oil and inedible animal fat have involved entering into futures contracts, swaps or options on other commodity products, such as CBOT Soybean Oil and New York Mercantile Exchange NY Harbor ULSD. However, these products do not always experience the same price movements as lower-cost feedstocks, making risk management for these feedstocks challenging. We manage feedstock supply risks related to biomass-based diesel production in a number of ways, including, where available, through long-term supply contracts. The purchase price for soybean oil under these contracts may be indexed to prevailing CBOT soybean oil market prices with a negotiated market basis. We utilize futures contracts, swaps and options to risk manage, or lock in, the cost of portions of our future feedstock requirements generally for varying periods up to one year. Our ability to mitigate our risk of falling biomass-based diesel prices is limited. We have entered into forward contracts to supply biomass-based diesel. However, pricing under these forward sales contracts generally has been indexed to prevailing market prices, as fixed price contracts for long periods on acceptable terms have generally not been available. There is no established market for biomass-based diesel futures in the United States. Our efforts to hedge against falling biomass-based diesel prices generally involve entering into futures contracts, swaps and options on other commodity products, such as diesel fuel and New York Mercantile Exchange NY Harbor ULSD. However, price movements on these products are not highly correlated to price movements of biomass-based diesel. We generate 1.5 to 1.7 biomass-based diesel RINs for each gallon of biomass-based diesel we produce and sell. We also obtain RINs from third-party transactions which we hold for resale. There is no established futures market for RINs, which severely limits the ability to risk manage the price of RINs. We enter into forward contracts to sell RINs, and we use risk management position limits to manage RIN exposure. As a result of our strategy, we frequently have gains or losses on derivative financial instruments that are conversely offset by losses or gains on forward fixed-price physical contracts on feedstocks and biomass-based diesel or inventories. Gains and losses on derivative financial instruments are recognized each period in operating results while corresponding gains and losses on physical contracts are generally not recognized until quantities are delivered or title transfers. Our results of operations are impacted when there is a period mismatch of recognized gains or losses associated with the change in fair value of derivative instruments used for risk management purposes at the end of the reporting period but the purchase or sale of feedstocks or biomass-based diesel has not yet occurred resulting in the offsetting gain or loss that will be recognized in a later accounting period. We recorded risk management gains of $9.8 million and $18.0 million from our derivative financial instrument activity for the three and six months ended June 30, 2017, respectively, compared to losses of $30.5 million and $34.8 million for the three and six months ended June 30, 2016, respectively. Changes in the value of these futures, swaps or options instruments are recognized in current income or loss. Seasonality Our operating results are influenced by seasonal fluctuations in the demand for biodiesel. Our biodiesel sales tend to decrease during the winter season due to blending concentrations being reduced to adjust for performance during colder weather. Colder seasonal temperatures can cause the higher cloud point biodiesel we make from inedible animal fats to become cloudy and eventually gel at a higher temperature than petroleum-based diesel or lower cloud point biodiesel made from soybean oil, canola oil or inedible corn oil. Such gelling can lead to plugged fuel filters and other fuel handling and performance problems for customers and suppliers. Reduced demand in the winter for our higher cloud point biodiesel can result in excess supply of such higher cloud point biodiesel and lower prices for such biodiesel. In addition, most of our production facilities are located in colder Midwestern states in proximity to feedstock origination, and our costs of shipping can increase as more biodiesel is transported to warmer climate states during winter. To mitigate some of these seasonal fluctuations, we have upgraded our Newton and Danville biorefineries to produce distilled biodiesel from low-cost feedstocks, thus allowing the product to have improved cold-weather performance. RIN prices may also be subject to seasonal fluctuations. The RIN is dated for the calendar year in which it is generated, commonly referred to as the RIN vintage. Since 20% of an Obligated Party's annual RVO can be satisfied by prior year RINs, most RINs must come from biofuel produced or imported during the RVO year. As a result, RIN prices can be expected to decrease as the calendar year progresses if the RIN market is oversupplied compared to that year's RVO and increase if it is undersupplied. Industry capacity, production and imports Our operating results are influenced by our industry’s capacity and production, including in relation to RFS2 production requirements. Under RFS2, Obligated Parties are entitled to satisfy up to 20% of their annual requirement with prior year RINs. Biomass-based diesel production and/or imports, as reported by EMTS, was 2.60 billion gallons for 2016, 790 million gallons higher than 2015. In the first half of 2017, according to EMTS data, 1.13 billion gallons of biomass-based diesel were produced and/or imported into the U.S., compared to the equivalent 1.07 billion gallons over the same period in 2016. During 2016 and 2015, the amount of imported biodiesel gallons qualifying under RFS2 in the D4 biomass-based diesel category increased from 334.2 million gallons in 2015 to approximately 692.9 million gallons in 2016, according to the information from the EIA. Results of Operations Three and six months ended June 30, 2017 and 2016 Revenues. Our revenues decreased $23.2 million, or 4%, in the three months ended June 30, 2017, but increased $97.8 million, or 11%, for the six months ended June 30, 2017 as compared to the three and six months ended June 30, 2016. The decrease in revenues for the second quarter was primarily due to lower average selling price, coupled with the impact of the lapse of the BTC on January 1, 2017 and higher imported gallons compared to the second quarter of 2016. The absence of the BTC revenues resulted in a decrease of $86.3 million and $127.8 million, or 89% and 82%, respectively, in government incentive revenues in the three and six months ended June 30, 2017 compared to the same periods in 2016. The increase in revenues for the first half of 2017 was largely driven by an increase in total gallons sold compared to prior year, which resulted from an increase in RHD gallons sold and the impact of distillation upgrades completed in 2016 at the Danville, Illinois biorefinery. Biomass-based diesel revenues including government incentives decreased $23.2 million, or 4%, over the same quarter last year, but increased by $97.0 million, or 11%, for the six months ended June 30, 2017. Gallons sold in the second and first half of 2017 increased by 10.1 million gallons and 34.3 million gallons, or 7% and 14%, respectively. Our average B100 sales price per gallon decreased $0.41 and $0.21, or 13% and 7%, respectively, for the three and six months ended June 30, 2017, compared to $3.27 and $3.11 for the three and six months ended June 30, 2016, respectively. The fluctuations in average sales price contributed to a $61.5 million and $52.1 million decrease in revenues for the three months ended June 30, 2017, respectively, when applied to the number of gallons sold during the same periods of 2016. The increase in gallons sold for the three and six months ended June 30, 2017 accounted for a revenue increase of $28.9 million and $99.5 million, respectively for the three and six months ended June 30, 2017, using pricing for the same periods of 2016. Sales of separated RIN inventory were $67.3 million and $124.7 million for the three and six months ended June 30, 2017, respectively, as compared to $60.8 million and $86.6 million for the three and six months ended June 30, 2016, respectively. Costs of goods sold. Our costs of goods sold decreased $28.4 million, or 5% for the second quarter, but increased $92.7 million , or 11%, in the six month period. Costs of goods sold as a percentage of revenues were 94% and 95%, respectively, for the three and six months ended June 30, 2017 and 95% for both three and six months ended June 30, 2016. The slight decrease in cost of goods sold as a percentage of revenues during the three ended June 30, 2017 was primarily due to feedstock prices trending lower. Biomass-based diesel costs of goods sold also increased in the three and six months ended June 30, 2017 due to a 7% and 14% increase in gallons sold, respectively. Average prices for lower-cost feedstocks were $0.29 per pound for the three and six months ended June 30, 2017, as compared to $0.30 and $0.27 per pound for the three and six months ended June 30, 2016. Soybean oil costs were $0.31 and $0.32 per pound for the three and six months ended June 30, 2017, respectively, as compared to $0.33 per pound for the three and six months ended June 30, 2016. Canola oil costs were $0.33 and $0.34 per pound for the three and six months ended June 30, 2017, respectively, as compared to $0.33 per pound for the three and six months ended June 30, 2016. We recorded risk management gains of $9.8 million and $18.0 million from our derivative financial instrument activity for the three and six months ended June 30, 2017, respectively, compared to risk management losses of $30.5 million and $34.8 million for the three and six months ended June 30, 2016, respectively. The fluctuation in risk management gains and losses was mainly due to price volatility in the energy markets. Costs of goods sold for separated RIN inventory sales were $33.9 million and $80.5 million for the three and six months ended June 30, 2017 and $61.2 million and $87.7 million for the three and six months ended June 30, 2016, respectively. Lower of cost or net realizable value writedown on RINs was $0.3 million and $0.4 million and $4.2 million and $4.4 million during the three and six months ended June 30, 2017 and June 30, 2016, respectively. Biomass-based diesel costs of goods sold for the three months ended June 30, 2017 also included a loss of $4.0 million as a result of the land purchase and lease termination transactions at our Geismar facility in June 2017. Selling, general and administrative expenses. Our selling, general and administrative, or SG&A, expenses were $22.8 million and $45.7 million, or 4% and 5% of total revenue, for the three and six months ended June 30, 2017 and $20.9 million and $40.6 million, or 4% and 5% of total revenue, for the three and six months ended June 30, 2016, respectively. This represents an increase of $2.0 million and $5.1 million, or 9% and 13%, respectively, over the same respective periods of last year. The increase year over year was primarily due to increases in employee related expenses, such as payroll and stock compensation, associated with growth, international expansion and integration of our European operations. Research and development expense. Our research and development expenses were $3.2 million and $6.8 million for the three and six months ended June 30, 2017, compared to $4.4 million and $8.4 million for the three and six months ended June 30, 2016, respectively. The majority of the research and development expenses were related to activities of the Renewable Chemicals segment, which is seeking to bring industrial biotechnology products to market and drive growth. Other income (expense), net. Other expense was $37.0 million and $42.6 million for the three and six months ended June 30, 2017 compared to other income of $9.4 million and $9.6 million for the same periods in 2016. Other income (expense) is primarily comprised of change in value of contingent consideration, change in fair value of convertible debt conversion liability, interest expense, interest income and the other non-operating items. Other income (expense), net for the three and six months ended June 30, 2016 also included a gain on involuntary conversion, which represented the amount of insurance proceeds in excess of the net book value of the property damage recorded by us related to the April 2015 fire at our Geismar facility. Our insurance policies cover replacement costs incurred to replace the property damaged by the fire. Income tax expense. We recognized an income tax expense of $2.0 million and $3.0 million for the three and six months ended June 30, 2017 as compared to tax expense of $1.3 million and $2.0 million for the same periods in 2016. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. Our effective tax rate differs from the statutory tax rate primarily due to the fact that we have a valuation allowance on our domestic deferred tax assets and most of our foreign deferred tax assets. Adjusted EBITDA We use earnings before interest, taxes, depreciation and amortization, adjusted for certain additional items, identified in the table below, or Adjusted EBITDA, as a supplemental performance measure. We present Adjusted EBITDA because we believe it assists investors in analyzing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA to evaluate, assess and benchmark our financial performance on a consistent and a comparable basis and as a factor in determining incentive compensation for our executives. Adjusted EBITDA is a supplemental performance measure that is not required by, or presented in accordance with, generally accepted accounting principles, or GAAP. Adjusted EBITDA should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as alternatives to cash flows from operating activities or a measure of our liquidity or profitability. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for any of our results as reported under GAAP. Some of these limitations are: • Adjusted EBITDA does not reflect our cash expenditures for capital assets or the impact of certain cash charges that we consider not to be an indication of our ongoing operations; • Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital requirements; • Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness; • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect cash requirements for such replacements; • stock-based compensation expense is an important element of our long term incentive compensation program, although we have excluded it as an expense when evaluating our operating performance; and • other companies, including other companies in the industry, may calculate these measures differently than we do, limiting their usefulness as a comparative measure. Liquidity and Capital Resources Sources of liquidity. At June 30, 2017, the total of our cash and cash equivalents was $87.6 million, compared to $116.2 million at December 31, 2016. At June 30, 2017, we had total assets of $1,060.5 million, compared to $1,136.6 million at December 31, 2016. At June 30, 2017, we had term debt before debt issuance costs of $215.3 million, compared to term debt of $217.9 million at December 31, 2016. The debt is subject to various financial covenants. We were in compliance with all restrictive financial covenants associated with the borrowings as of June 30, 2017. REG Ralston In April 2017, REG Ralston, LLC ("REG Ralston") entered into a construction loan agreement ("Construction Loan Agreement") with First Midwest Bank. The Construction Loan Agreement allows REG Ralston to borrow up to $20.0 million during the construction period at REG Ralston and convert it into an amortizing term debt thereafter. The loan has a maturity date of October 19, 2025. The loan requires monthly principal payments after the construction period and interest to be charged using prime rate plus 0.5% per annum. The loan agreement contains various loan covenants. At June 30, 2017, we have not made any borrowings under this Construction Loan Agreement. Cash flows. In the first six months of 2017, we used $1.5 million of cash in operations. We received approximately $85.8 million from the 2016 BTC receivable, of which $2.1 million was paid to our vendors and customers. This compares to the first six months of 2016 BTC receipts of $242.1 million. In addition during the first half of 2017, approximately $50.9 million of operating cash was used to build up our other assets, including RINs inventory. Our net cash flows used in investing activity was impacted by the release of our restricted cash related to our petroleum-based sales and Geismar land purchase and payments of $32.0 million for our continued investments in our plant and office facilities. Financing activities were impacted by our repayments under the Danville and Newton borrowings, together with contingent consideration payments made related to our past acquisitions. Capital expenditures. We have three partially constructed plants, one near New Orleans, Louisiana, one in Emporia, Kansas, one in Clovis, New Mexico and a non-operational plant near Atlanta, Georgia. We expect additional investments of approximately $165 million to $270 million in the aggregate, excluding working capital requirements, would be required before these plants would be able to commence production. These facilities would add an expected 150 mmgy to our nameplate production capacity. Our Clovis plant is currently being operated as a terminal facility. We plan to make significant capital expenditures when debt or equity financing becomes available to complete construction of these four facilities. During the six months ended June 30, 2017, our capital expenditures were $32.0 million from various projects, the majority of which were at facilities such as New Boston, Madison, Seneca, Geismar and Ralston. In June 2017, we completed an acquisition for $20 million of approximately 82 acres of land in Geismar, Louisiana, which includes the land our Geismar biorefinery has leased for its operations that was terminated by this acquisition, as well as more than 61 adjacent acres, which we plan to improve and utilize to support existing production capacity and future expansion opportunities. During 2016, our capital expenditures were $60.7 million, including $13.9 million towards the planned $34.5 million upgrade to our Danville facility and $9.1 million in repairs and upgrades to bring our Geismar facility back on-line in March 2016. Our budgeted capital expenditures for the remainder of 2017 are approximately $30 million to $40 million, including repairs and upgrades to the Madison facility following the fire at that facility in June 2017 and upgrades to the Ralston, Geismar and Grays Harbor facilities, among others. We continue to be in discussions with lenders in an effort to enter into equity and debt financing arrangements to meet our projected financial needs for facilities under construction and capital improvement projects for our operating facilities. Since these discussions are ongoing, we are uncertain when or if financing will be available. The financing may consist of common or preferred stock, debt, project financing or a combination of these financing techniques. Additional debt would increase our leverage and interest costs and would likely be secured by certain of our assets. Additional equity or equity-linked financings would likely have a dilutive effect on our existing and future stockholders. It is likely that the terms of any project financing would include customary financial and other covenants on our project subsidiaries, including restrictions on the ability to make distributions, to guarantee indebtedness and to incur liens on the plants of such subsidiaries. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary objectives of our investment activity are to preserve principal, provide liquidity and maximize income without significantly increasing risk. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we maintain a portfolio of cash equivalents in short-term investments in money market funds. Commodity Price Risk Over the period from January 2013 through June 30, 2017, average diesel prices based on Platts reported pricing for Group 3 (Midwest) have ranged from a high of approximately $3.30 per gallon reported in January 2013 to a low of approximately $0.85 per gallon in January 2016, with prices averaging $2.12 per gallon during this period. Over the period January 2013 to June 30, 2017, soybean oil prices (based on daily closing nearby futures prices on the Chicago Board of Trade for crude soybean oil) have ranged from a high of $0.5311 per pound, or $3.98 per gallon of biodiesel, in February 2013 to a low of $0.2605 per pound, or $1.95 per gallon, in September 2015 assuming 7.5 pounds of soybean oil yields one gallon of biodiesel with closing sales prices averaging $0.3611 per pound, or $2.71 per gallon. Over the period from January 2013 through June 30, 2017, animal fat prices (based on prices from The Jacobsen Missouri River, for choice white grease) have ranged from a high of $0.4625 per pound in June 2013 to a low of $0.1600 per pound in December 2015, with sales prices averaging $0.2822 per pound during this period. Over the period from July 2013 through June 30, 2017, RIN prices (based on prices from OPIS) have ranged from a high of $1.47 in July 2013 to a low of $0.24 in November 2013, with sales prices averaging $0.77 during this period. Adverse fluctuations in feedstock prices as compared to biomass-based diesel prices result in lower profit margins and, therefore, represent unfavorable market conditions. The availability and price of feedstocks are subject to wide fluctuations due to unpredictable factors such as weather conditions during the growing season, rendering volumes, carry-over from the previous crop year and current crop year yield, governmental policies with respect to agriculture and supply and demand. We have prepared a sensitivity analysis to estimate our exposure to market risk with respect to our sales contracts, lower-cost feedstock requirements, soybean oil requirements and the related exchange-traded contracts for the first half of 2017. Market risk is estimated as the potential loss in fair value, resulting from a hypothetical 10% adverse change in the fair value of our lower-cost feedstock and soybean oil requirements and biomass-based diesel sales. We attempt to protect operating margins by entering into risk management contracts that reduce the risk of price volatility related to anticipated purchases of feedstocks, such as inedible animal fat and inedible corn oil and energy prices. We create offsetting positions by using a combination of forward physical purchases and sales contracts on feedstock and biomass-based diesel, including risk management futures contracts, swaps and options primarily on NYMEX NY Harbor ULSD and CBOT Soybean Oil; however, the extent to which we engage in risk management activities varies substantially from time to time, and from feedstock to feedstock, depending on market conditions and other factors. A 10% adverse change in the prices of NYMEX NY Harbor ULSD would have had a negative effect on the fair value of these instruments of $10.8 million at June 30, 2017. A 10% adverse change in the price of CBOT Soybean Oil would have had below $0.2 million negative effect on the fair value of these instruments of at June 30, 2017. Interest Rate Risk Our weighted average interest rate on variable rate debt balances for the six months ended June 30, 2017 was 3.52%. A hypothetical increase in interest rate of 10% would not have a material effect on our annual interest expenses or consolidated financial statements. Inflation To date, inflation has not significantly affected our operating results, though costs for petroleum-based diesel fuel, feedstocks, construction, labor, taxes, repairs, maintenance and insurance are all subject to inflationary pressures. Inflationary pressure in the future could affect our ability to sell the biomass-based diesel we produce, maintain our production facilities adequately, build new biomass-based diesel production facilities and expand our existing facilities as well as the demand for our facility construction management and operations management services.