REG announces Q4, full year 2020 financials, includes $38M adjustment on BTC claims in Seneca
Renewable Energy Group Inc. announced its financial results for the fourth quarter and full year for 2020. REG generated $2.1 billion in revenue in 2020 on 651 million gallons of fuel sold and 519 million gallons of biodiesel and renewable diesel produced. Sales of blends of biodiesel and renewable diesel were up 57 percent last year.
The company also announced that it is restating financial statements for 2018 and 2019, and for the first three quarters of 2020, to reflect a $38.2 million adjustment over those periods as a result of the company not being the proper claimant for certain federal biodiesel mixture excise tax credits (BTC) on biodiesel it sold between January 2017 through September 2020. The company is working with its customers on BTC re-filings on these gallons to recover as much of the $38.2 million in revenue as possible.
“REG’s resilient business model enabled us to deliver strong financial results, with $120 million of net income from continuing operations available to common stockholders, supported by record production, despite the array of externally driven challenges we faced in 2020,” said Cynthia (CJ) Warner, REG president and CEO. “In the face of the pandemic, we were able to adjust operations to ensure safety while fulfilling customer demand for our essential transportation fuels. We used our flexible feedstock approach to sustain margins and profitability even as the pandemic dramatically impacted feedstock supply and pricing. The adjusted EBITDA of nearly $200 million exemplifies the soundness of our strategy and underscores our belief that REG can sustainably deliver earnings over the long term.”
Warner continued, “At REG, we are continuing to build on renewable energy’s positive momentum and on our track record as a leader of the transition to sustainability. We expect robust demand for renewable diesel and biodiesel to continue into 2021, benefiting from economic recovery combined with strong public support for an option to decarbonize that is available now. We are confident that our focused strategy and expansion plan will deliver long-term success and significant value for our shareholders and other stakeholders.”
Biodiesel Tax Credit Assessment
The restatement is the result of the company not being the proper claimant for certain BTC payments on biodiesel it sold between Jan. 1, 2017, and Sept. 30, 2020. REG qualifies for the BTC when it blends petroleum diesel with biodiesel. Due to failures in the diesel additive system at the company’s facility in Seneca, Illinois, petroleum diesel was periodically not added to certain loads. As a result, the company’s customers who received these loads and subsequently added petroleum diesel are the proper claimants on these biodiesel gallons rather than the company’s REG Seneca subsidiary.
The company discovered the blending discrepancy in connection with its preparation for a standard IRS audit of its BTC filings. The company self-reported the findings to the IRS and initiated an investigation overseen by the audit committee of the company’s board of directors. The company concluded this discrepancy is limited to Seneca. In addition, all of the company’s other U.S. biorefineries have passed their relevant IRS audits.
REG reached agreement on Feb. 23, 2021, with the IRS on a $40.5 million assessment, excluding interest, to correct the REG Seneca BTC claims. This reflects assessments of $14.8 million, $9.9 million, $7.6 million and $8.2 million for the tax years 2017, 2018, 2019, and the first three quarters of 2020, respectively. The $2.3 million difference between the $40.5 million tax liability and $38.2 million in revenue being restated is a result of the company’s ability to recover the BTC in instances where another REG subsidiary blended the biodiesel with petroleum diesel and was thus the proper claimant. The company is working with its customers on BTC re-filings on these gallons to recover as much of the $38.2 million as possible.
“Operational excellence is fundamental to REG’s success,” Warner said. “Ensuring this is reflected across all areas of our business—from sourcing to delivery—is a top priority. REG takes the matter at our Seneca facility seriously, and we have taken steps to strengthen our operations, enhance our internal controls and assurance processes, and implement additional policies and controls designed to ensure proper BTC-related blending and BTC filing going forward. It is important to note that this situation has no impact on the total amount of BTC credits actually generated, and it does not impact the robust demand for our biodiesel products, the durability of our business model, or the value we bring to our customers.”
The company has established additional policies and controls designed to ensure that the correct amount of petroleum diesel is being blended at all of the company’s facilities, including Seneca, and that the company properly files for the BTC going forward. These include:
For the Seneca facility:
Limiting the loading to modes where the existing system is known to be functional, until the system is redesigned to work in all operating modes; and
Implemented a control system calculation and readout tool that enables the loading operator to validate that the proper number of petroleum diesel gallons were added to each load;
Then, to further reinforce the company’s system-wide controls and assurances:
Performing additional local reconciliations weekly to validate that the amount of petroleum diesel used matches the amount of petroleum diesel required to be blended; and
The company is now reviewing monthly inventory reconciliations prior to filing for BTC to re-confirm that the required volume of petroleum diesel has been blended.
Restatement of Financial Results
While the BTC adjustment in each individual year is not material, the company determined that the aggregate BTC adjustment is material in 2019. As a result, the company is restating its financial statements for the years ended Dec. 31, 2019, and 2018 and the quarters ended March 31, June 30 and Sept. 30, 2019 and 2018. The 2017 BTC was recognized as revenue in the first quarter of 2018, so the BTC assessment does not affect the company’s 2017 GAAP financial statements. A material weakness in the company’s internal control over financial reporting directly related to the restatement was found to exist as of Dec. 31, 2020, and Dec. 31, 2019. The company has taken the remediation actions described above to address this material weakness.
REG today filed with the SEC an amended Form 10-K for the year ended Dec. 31, 2019. The amended Form 10-K includes additional details regarding the restatement for the years ended Dec. 31, 2019 and 2018. In addition, REG expects to file on March 1, 2021, its Form 10-K for the year ended Dec. 31, 2020, which will include amended financial results for the quarters ended March 31, June 30 and Sept. 30, 2020, that reflect an immaterial restatement for those periods.
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