UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
o Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the fiscal quarter ended April 30, 2010
o Transition report under Section 13 or 15(d) of the Exchange Act of 1934.
Commission file number 00051277
GRANITE FALLS ENERGY, LLC
(Name of small business issuer in its charter)
Minnesota |
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41-1997390 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
15045 Highway 23 SE |
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Granite Falls, MN |
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56241-0216 |
(Address of principal executive offices) |
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(Zip Code) |
320-564-3100
(Issuers
telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer x |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: As of June 1, 2010 there were 30,656 membership units outstanding.
PART I - FINANCIAL INFORMATION
GRANITE FALLS ENERGY, LLC
Condensed Balance Sheets
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April 30, |
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October 31, |
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2010 |
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2009 |
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(unaudited) |
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ASSETS |
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|
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||
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Current Assets |
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|
|
|
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Cash |
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$ |
8,541,953 |
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$ |
5,716,506 |
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Restricted cash |
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628,853 |
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1,110,673 |
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Accounts receivable - primarily related party |
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1,755,501 |
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3,340,018 |
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Inventory |
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3,726,579 |
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2,851,640 |
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Derivative instruments |
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55,586 |
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816,812 |
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Prepaid expenses and other current assets |
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246,649 |
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179,622 |
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Total current assets |
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14,955,121 |
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14,015,271 |
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Property, Plant and Equipment |
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Land and improvements |
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3,490,107 |
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3,490,107 |
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Railroad improvements |
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4,127,738 |
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4,127,738 |
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Process equipment and tanks |
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59,892,184 |
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59,585,019 |
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Administration building |
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279,734 |
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279,734 |
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Office equipment |
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135,912 |
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135,912 |
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Rolling stock |
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558,633 |
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558,633 |
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Construction in progress |
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25,793 |
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237,828 |
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68,510,101 |
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68,414,971 |
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Less accumulated depreciation |
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29,414,579 |
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25,989,953 |
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Net property, plant and equipment |
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39,095,522 |
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42,425,018 |
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Other Assets |
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Deferred financing costs, net of amortization |
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21,152 |
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32,894 |
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Total Assets |
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$ |
54,071,795 |
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$ |
56,473,183 |
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LIABILITIES AND MEMBERS EQUITY |
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Current Liabilities |
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Current portion of long-term debt |
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$ |
66,594 |
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$ |
74,961 |
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Accounts payable |
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1,364,586 |
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1,529,688 |
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Corn payable to FCE - related party |
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1,113,278 |
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1,565,042 |
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Derivative instruments |
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455,376 |
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Accrued liabilities |
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527,270 |
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379,010 |
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Total current liabilities |
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3,071,728 |
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4,004,077 |
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Long-Term Debt, less current portion |
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274,074 |
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370,136 |
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Commitments and Contingencies |
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Members Equity, 30,656 units authorized, issued, and outstanding |
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50,725,993 |
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52,098,970 |
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Total Liabilities and Members Equity |
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$ |
54,071,795 |
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$ |
56,473,183 |
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Notes to the Unaudited Condensed Financial Statements are an integral part of this Statement.
GRANITE FALLS ENERGY, LLC
Condensed Statements of Operations
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Three Months |
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Three Months |
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Ended |
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Ended |
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April 30, |
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April 30, |
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2010 |
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2009 |
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(Unaudited) |
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(Unaudited) |
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Revenues |
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$ |
22,237,999 |
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$ |
21,529,863 |
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Cost of Goods Sold - primarily related party |
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20,507,901 |
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22,089,595 |
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Gross Profit (Loss) |
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1,730,098 |
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(559,732 |
) |
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Operating Expenses |
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462,770 |
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518,509 |
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Operating Income (Loss) |
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1,267,328 |
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(1,078,241 |
) |
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Other Income (Expense) |
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Other income, net |
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4,454 |
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31,339 |
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Interest income |
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27,978 |
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2,468 |
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Interest expense |
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(1,513 |
) |
(26,809 |
) |
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Total other income, net |
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30,919 |
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6,998 |
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Net Income (Loss) |
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$ |
1,298,247 |
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$ |
(1,071,243 |
) |
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Weighted Average Units Outstanding - Basic and Diluted |
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30,656 |
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30,656 |
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Net Income (Loss) Per Unit - Basic and Diluted |
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$ |
42.35 |
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$ |
(34.94 |
) |
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Distributions Per Unit |
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$ |
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$ |
|
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Notes to the Unaudited Condensed Financial Statements are an integral part of this Statement.
GRANITE FALLS ENERGY, LLC
Condensed Statements of Operations
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Six Months |
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Six Months |
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Ended |
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Ended |
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April 30, |
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April 30, |
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2010 |
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2009 |
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(Unaudited) |
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(Unaudited) |
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Revenues |
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$ |
45,662,561 |
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$ |
42,312,605 |
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Cost of Goods Sold - primarily related party |
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41,585,523 |
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43,161,411 |
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Gross Profit (Loss) |
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4,077,038 |
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(848,806 |
) |
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Operating Expenses |
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971,712 |
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1,039,484 |
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Operating Income (Loss) |
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3,105,326 |
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(1,888,290 |
) |
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Other Income (Expense): |
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Other income (expense), net |
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86,408 |
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(631,503 |
) |
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Interest income |
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42,271 |
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5,706 |
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Interest expense |
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(8,582 |
) |
(63,642 |
) |
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Total other income (expense), net |
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120,097 |
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(689,439 |
) |
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Net Income (Loss) |
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$ |
3,225,423 |
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$ |
(2,577,729 |
) |
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Weighted Average Units Outstanding - Basic and Diluted |
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30,656 |
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30,907 |
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Net Income (Loss) Per Unit - Basic and Diluted |
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$ |
105.21 |
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$ |
(83.40 |
) |
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Distributions Per Unit |
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$ |
150.00 |
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$ |
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Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
GRANITE FALLS ENERGY, LLC
Condensed Statements of Cash Flows
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Six Months |
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Six Months |
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Ended |
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Ended |
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April 30, |
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April 30, |
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2010 |
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2009 |
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(unaudited) |
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(unaudited) |
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Cash Flows from Operating Activities: |
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Net income (loss) |
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$ |
3,225,423 |
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$ |
(2,577,729 |
) |
Adjustments to reconcile net income (loss) to net cash provided by operations: |
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Depreciation and amortization |
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3,436,368 |
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3,158,106 |
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Change in fair value of derivative instruments |
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331,588 |
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128,451 |
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Changes in assets and liabilities: |
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Restricted cash |
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481,820 |
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(418,487 |
) |
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Derivative instruments |
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(25,738 |
) |
525,418 |
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Accounts receivable |
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1,584,517 |
|
865,043 |
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Inventory |
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(874,939 |
) |
140,838 |
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Prepaid expenses and other current assets |
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(67,027 |
) |
(146,130 |
) |
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Accounts payable |
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(616,866 |
) |
1,000,017 |
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Due to broker |
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(238,581 |
) |
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Accrued liabilities |
|
148,260 |
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(1,344,199 |
) |
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Net Cash Provided by Operating Activities |
|
7,623,406 |
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1,092,747 |
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Cash Flows from Investing Activities: |
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Capital expenditures |
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(91,905 |
) |
(81,071 |
) |
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Construction in process |
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(3,225 |
) |
(101,351 |
) |
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Net Cash Used in Investing Activities |
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(95,130 |
) |
(182,422 |
) |
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Cash Flows from Financing Activities: |
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Payments on revolving line of credit, net |
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(470,500 |
) |
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Payments on long-term debt |
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(104,429 |
) |
(36,739 |
) |
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Member distributions paid |
|
(4,598,400 |
) |
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Net Cash Used in Financing Activities |
|
(4,702,829 |
) |
(507,239 |
) |
||
|
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Net Increase in Cash |
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2,825,447 |
|
403,086 |
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Cash Beginning of Period |
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5,716,506 |
|
37,773 |
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||
|
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Cash End of Period |
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$ |
8,541,953 |
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$ |
440,859 |
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|
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Supplemental Cash Flow Information |
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Cash paid during the period for: |
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|
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Interest expense |
|
$ |
8,587 |
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$ |
52,833 |
|
|
|
|
|
|
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Supplemental Disclosure of Noncash Investing, Operating and Financing Activities |
|
|
|
|
|
||
|
|
|
|
|
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Accounts receivable offset by repurchase of membership units |
|
$ |
|
|
$ |
500,000 |
|
Transfer of construction in process to fixed assets |
|
$ |
215,260 |
|
$ |
|
|
Notes to the Unaudited Condensed Financial Statements are an integral part of this Statement.
GRANITE FALLS ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
April 30, 2010
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed balance sheet as of October 31, 2009 is derived from audited financial statements. The unaudited interim condensed financial statements of Granite Falls Energy, LLC (the Company) reflect all adjustments consisting only of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of financial position and results of operations and cash flows. The results for the three and six month periods ended April 30, 2010 are not necessarily indicative of the results that may be expected for a full fiscal year. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) are condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), although the Company believes that the disclosures made are adequate to make the information not misleading. These condensed financial statements should be read in conjunction with the Companys audited financial statements and notes thereto included in its annual report for the year ended October 31, 2009 filed on Form 10-K with the SEC.
Nature of Business
Granite Falls Energy, LLC (GFE or the Company) is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers grains, and crude corn oil near Granite Falls, Minnesota and sells these products throughout the continental United States. GFEs plant has an approximate annual production capacity of 50 million gallons.
Accounting Estimates
Management uses estimates and assumptions in preparing these condensed financial statements in accordance with generally accepted accounting principles in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for the following significant matters, among others: economic lives of property, plant, and equipment, realizability of accounts receivable, valuation of derivatives and inventory, and analysis of long-lived assets impairment. Actual results may differ from previously estimated amounts, and such differences may be material to our condensed financial statements. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made.
Revenue Recognition
The Company generally sells ethanol and related products pursuant to marketing agreements. Revenues from the production of ethanol and the related products are recorded when the customer has taken title and assumed the risks and rewards of ownership, prices are fixed or determinable, and collectability is reasonably assured. Title is generally assumed by the buyer at the Companys shipping point.
In accordance with the Companys agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales as earned. These fees and commissions are recorded net of revenues as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products. Ethanol marketing fees and commissions totaled approximately $207,000 and $177,000 for the three month periods ended April 30, 2010 and 2009, respectively. Ethanol marketing fees and commissions totaled approximately $386,000, and $326,000 for the six month periods ended April 30, 2010 and 2009, respectively. Distillers grain marketing fees and commissions totaled approximately $36,000 and $30,000 for the three month periods ended April 30, 2010 and 2009, respectively. Distillers grain marketing fees and commissions totaled approximately $78,000 and $70,000 for the six month periods ended April 30, 2010 and 2009, respectively.
GRANITE FALLS ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
April 30, 2010
Derivative Instruments
From time to time the Company enters into derivative transactions to hedge its exposures to commodity price fluctuations. The Company is required to record these derivatives in the balance sheet at fair value.
In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings. If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Changes in the fair value of undesignated derivatives are recorded in the statement of operations.
Additionally, the Company is required to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from accounting and reporting requirements, and therefore, are not marked to market in our financial statements.
2. RISKS AND UNCERTAINTIES
The Company has certain risks and uncertainties that it experiences during volatile market conditions. These volatilities can have a severe impact on operations. The Companys revenues are derived from the sale and distribution of ethanol, distillers grains, and corn oil to customers primarily located in the U.S. Corn for the production process is supplied to our plant primarily from local agricultural producers and from purchases on the open market. For the three month period ended April 30, 2010, ethanol sales averaged 85% of total revenues and corn costs averaged 65% of cost of goods sold.
The Companys operating and financial performance is largely driven by the prices at which they sell ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, and unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. Our largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and our risk management program used to protect against the price volatility of these commodities.
The Company has a revenue concentration in that its revenue is generated from the sales of just three products, ethanol, distillers grains, and corn oil.
3. INVENTORY
Inventories consist of the following:
|
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April 30,
|
|
October 31,
|
|
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Raw materials |
|
$ |
1,506,833 |
|
$ |
1,123,979 |
|
Spare parts |
|
502,837 |
|
495,104 |
|
||
Work in process |
|
537,920 |
|
542,312 |
|
||
Finished goods |
|
1,178,989 |
|
690,245 |
|
||
Totals |
|
$ |
3,726,579 |
|
$ |
2,851,640 |
|
GRANITE FALLS ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
April 30, 2010
The Company performs a lower of cost or market analysis on inventory to determine if the market values of certain inventories are less than their carrying value, which is attributable primarily to decreases in market prices of corn and ethanol.
4. DERIVATIVE INSTRUMENTS
In order to reduce the risk caused by market fluctuations, the Company occasionally hedges its anticipated corn, natural gas, and denaturant purchases and ethanol sales by entering into options and futures contracts. These contracts are used with the intention to fix the purchase price of anticipated requirements of corn, natural gas, and denaturant in the Companys ethanol production activities and the related sales price of ethanol. The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter markets. Although the Company believes its commodity derivative positions are economic hedges, none have been formally designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings or losses. Gains and losses from ethanol related derivative instruments, including unrealized changes in the fair value of these positions, are included in the results of operations and are classified as a component of revenue. Gains and losses from corn, natural gas, and denaturant derivative instruments, including unrealized changes in the fair value of these positions, are included in the results of operations and are classified as a component of costs of goods sold.
As of April 30, 2010, the total notional amount of the Companys outstanding corn derivative instruments was approximately 90,000 bushels that were entered into to hedge forecasted corn purchases through July 2010. As of April 30, 2010, the total notional amount of the Companys outstanding natural gas derivative instruments was approximately 26,000 million British thermal units (MMBTU) that were entered into to hedge forecasted natural gas purchases through May 2010. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding as disclosed above.
The following tables provide details regarding the Companys derivative instruments at April 30, 2010, none of which are designated as hedging instruments
|
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Balance Sheet
|
|
Assets |
|
Liabilities |
|
||
|
|
|
|
|
|
|
|
||
Corn contracts |
|
Derivative instruments |
|
$ |
12,150 |
|
$ |
|
|
Natural gas contracts |
|
Derivative instruments |
|
43,436 |
|
|
|
||
|
|
|
|
|
|
|
|
||
Totals |
|
|
|
$ |
55,586 |
|
$ |
|
|
In addition, as of April 30, 2010 the Company maintains approximately $28,853 of restricted cash related to margin requirements for the Companys derivative instrument positions.
The following tables provide details regarding the Companys derivative instruments at October 31, 2009, none of which are designated as hedging instruments
|
|
Balance Sheet
|
|
Assets |
|
Liabilities |
|
||
|
|
|
|
|
|
|
|
||
Ethanol contracts |
|
Derivative instruments |
|
$ |
|
|
$ |
(386,160 |
) |
Corn contracts |
|
Derivative instruments |
|
743,250 |
|
|
|
||
Natural gas contracts |
|
Derivative instruments |
|
|
|
(69,270 |
) |
||
Denaturant contracts |
|
Derivative instruments |
|
73,562 |
|
|
|
||
|
|
|
|
|
|
|
|
||
Totals |
|
|
|
$ |
816,812 |
|
$ |
(455,376 |
) |
GRANITE FALLS ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
April 30, 2010
In addition, as of October 31, 2009 the Company maintains approximately $510,673 of restricted cash related to margin requirements for the Companys derivative instrument positions.
The following tables provide details regarding the gains and (losses) from Companys derivative instruments in statements of operations, none of which are designated as hedging instruments:
|
|
Statement of |
|
Three-Months Ended April 30, |
|
||||
|
|
Operations location |
|
2010 |
|
2009 |
|
||
|
|
|
|
|
|
|
|
||
Ethanol contracts |
|
Revenue |
|
$ |
10,408 |
|
$ |
|
|
Corn contracts |
|
Cost of Goods Sold |
|
40,173 |
|
(3,921 |
) |
||
Natural gas contracts |
|
Cost of Goods Sold |
|
(68,337 |
) |
(167,727 |
) |
||
Denaturant contracts |
|
Cost of Goods Sold |
|
54,417 |
|
20,847 |
|
||
|
|
|
|
|
|
|
|
||
Total gain (loss) |
|
|
|
$ |
36,661 |
|
$ |
(147,801 |
) |
|
|
Statement of |
|
Six-Months Ended April 30, |
|
||||
|
|
Operations location |
|
2010 |
|
2009 |
|
||
|
|
|
|
|
|
|
|
||
Ethanol contracts |
|
Revenue |
|
$ |
(103,132 |
) |
$ |
119,248 |
|
Corn contracts |
|
Cost of Goods Sold |
|
(179,254 |
) |
(108,463 |
) |
||
Natural gas contracts |
|
Cost of Goods Sold |
|
(113,710 |
) |
(160,083 |
) |
||
Denaturant contracts |
|
Cost of Goods Sold |
|
64,508 |
|
20,847 |
|
||
|
|
|
|
|
|
|
|
||
Total gain (loss) |
|
|
|
$ |
(331,588 |
) |
$ |
(128,451 |
) |
5. REVOLVING LINE OF CREDIT
The Company has a Loan Agreement with a bank. Under the Loan Agreement, the Company has a revolving line of credit with a maximum of $6,000,000 available and is secured by substantially all of the Companys assets. The interest rate on the revolving line of credit is at 0.25 percentage points above the prime rate as reported by the Wall Street Journal, with a minimum rate of 5.0%. The interest rate on the revolving line of credit at April 30, 2010 was 5.0%, the minimum rate under the terms of the agreement. At April 30, 2010 and October 31, 2009, the Company had no outstanding balance on this line of credit. The Company is required to maintain a savings account balance with the Bank totaling 10% of the maximum amount available on the line of credit to serve as collateral on this line of credit. At April 30, 2010 and October 31, 2009, this amount totaled $600,000, and is included in restricted cash.
The Company also has letters of credit totaling $413,853 with the bank as part of a credit requirement of Northern Natural Gas.
6. LONG-TERM DEBT
Long-term debt consists of the following:
|
|
April 30, 2010 |
|
October 31, 2009 |
|
||
Economic Development Authority (EDA) Loans: |
|
|
|
|
|
||
City of Granite Fall / MIF |
|
$ |
262,769 |
|
$ |
292,956 |
|
Western Minnesota RLF |
|
|
|
71,423 |
|
||
Chippewa County |
|
77,899 |
|
80,718 |
|
||
Total EDA Loan |
|
340,668 |
|
445,097 |
|
||
Less: Current Maturities |
|
(66,594 |
) |
(74,961 |
) |
||
Total Long-Term Debt |
|
$ |
274,074 |
|
$ |
370,136 |
|
GRANITE FALLS ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
April 30, 2010
The estimated maturities of long term debt at April 30, 2010 are as follows:
2010 |
|
$ |
66,594 |
|
2011 |
|
67,379 |
|
|
2012 |
|
68,175 |
|
|
2013 |
|
68,983 |
|
|
2014 |
|
22,262 |
|
|
Thereafter |
|
47,275 |
|
|
Total |
|
$ |
340,668 |
|
EDA Loans:
On February 1, 2006, the Company signed a Loan Agreement with the City of Granite Falls, MN (EDA Loan Agreement) for amounts to be borrowed from several state and regional economic development authorities. The original amounts are as follows:
Amounts borrowed under the EDA Loan Agreements are secured by a second mortgage on all of the assets of the Company. On March 24, 2010, the RLF loan was paid in full and there were no prepayment penalties assessed.
8. MEMBERS EQUITY
The Company has one class of membership units. The units have no par value and have identical rights, obligations and privileges. Income and losses are allocated to all members based upon their respective percentage of units held. As of April 30, 2010 and October 31, 2009, the Company had 30,656 membership units issued and outstanding.
In November 2009, the Company declared a cash distribution of $150 per unit or $4,598,400 for unit holders of record as of November 19, 2009. The distribution was paid on December 16, 2009.
GRANITE FALLS ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
April 30, 2010
9. FAIR VALUE
Various inputs are considered when determining the value financial instruments. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below.
· Level 1 inputs are quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
· Level 2 inputs include the following:
· Quoted prices in active markets for similar assets or liabilities.
· Quoted prices in markets that are not active for identical or similar assets or liabilities.
· Inputs other than quoted prices that are observable for the asset or liability.
· Inputs that are derived primarily from or corroborated by observable market data by correlation or other means.
· Level 3 inputs are unobservable inputs for the asset or liability.
The following table provides information on those assets and liabilities measured at fair value on a recurring basis.
|
|
|
|
|
|
Fair Value Measurement Using |
|
|||||||||
|
|
Carrying Amount
|
|
Fair Value
|
|
Quoted
|
|
Significant
|
|
Significant
|
|
|||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Derivative Instruments |
|
$ |
55,586 |
|
$ |
55,586 |
|
$ |
55,586 |
|
$ |
|
|
$ |
|
|
The fair value of the derivative instruments are based on quoted market prices in an active market.
|
|
|
|
|
|
Fair Value Measurement Using |
|
|||||||||
|
|
Carrying Amount
|
|
Fair Value
|
|
Quoted
|
|
Significant
|
|
Significant
|
|
|||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Derivative Instruments |
|
$ |
816,812 |
|
$ |
816,812 |
|
$ |
816,812 |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Derivative Instruments |
|
$ |
(455,376 |
) |
$ |
(455,376 |
) |
$ |
(455,376 |
) |
$ |
|
|
$ |
|
|
The fair value of the derivative instruments are based on quoted market prices in an active market.
GRANITE FALLS ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
April 30, 2010
10. COMMITMENTS AND CONTINGENCIES
Construction Management and Operations Management Agreement
On August 1, 2008, the Company and Glacial Lakes Energy, LLC (GLE) executed a settlement agreement and mutual release related to the dispute with GLE over the termination of the Operating and Management Agreement. The Company has agreed to pay GLE a contingent amount of 2% of net income of the Company, as defined per the agreement, for each of the fiscal years ending October 31, 2008 and 2009 and 1.5% of net income of the Company, as defined per the agreement, for the fiscal year ending October 31, 2010. As of April 30, 2010 and October 31, 2009, the Company accrued approximately $49,000 and $14,000, respectively, for the contingent amounts due under this agreement.
11. LEGAL PROCEEDINGS
From time to time in the ordinary course of business, the Company may be named as a defendant in legal proceedings related to various issues, including without limitation, workers compensation claims, tort claims, or contractual disputes. We are not currently a party to any material pending legal proceedings and we are not currently aware of any such proceedings being contemplated.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations .
We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three and six month period ended April 30, 2010, compared to the same period of the prior fiscal year. This discussion should be read in conjunction with the condensed financial statements and notes and the information contained in the Companys Annual Report on Form 10-K for the fiscal year ended October 31, 2009.
Disclosure Regarding Forward-Looking Statements
This report contains historical information, as well as forward-looking statements. These forward-looking statements include any statements that involve known and unknown risks and relate to future events and our expectations regarding future performance or conditions. Words such as may, will, should, expect, plan, anticipate, believe, estimate, future, intend, could, hope, predict, target, potential, or continue or the negative of these terms or other similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. These forward-looking statements, and others we make from time to time, are subject to a number of risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to:
· Changes in the availability and price of corn and natural gas;
· Changes in our business strategy, capital improvements or development plans;
· Our ability to profitably operate the ethanol plant and maintain a positive spread between the selling price of our products and our raw materials costs;
· Results of our hedging transactions and other risk management strategies;
· Decreases in the market prices of ethanol and distillers grains;
· Ethanol supply exceeding demand; and corresponding ethanol price reductions;
· Changes in the environmental regulations that apply to our plant operations and changes in our ability to comply with such regulations;
· Changes in the availability of credit and our ability to generate sufficient liquidity to fund our operations, debt service requirements and capital expenditures;
· Changes in plant production capacity or technical difficulties in operating the plant;
· Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;
· Lack of transport, storage and blending infrastructure preventing ethanol from reaching high demand markets;
· Changes in federal and/or state laws (including the elimination of any federal and/or state ethanol tax incentives);
· Changes and advances in ethanol production technology;
· Effects of mergers, consolidations or contractions in the ethanol industry;
· Competition from alternative fuel additives;
· The development of infrastructure related to the sale and distribution of ethanol;
· Our inelastic demand for corn, as it is the only available feedstock for our plant;
· Our ability to retain key employees and maintain labor relations; and
· Volatile commodity and financial markets.
The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We do not undertake any duty to update forward-looking statements after the date they are made or to conform forward-looking statements to actual results or to changes in circumstances or expectations. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking
statements by these cautionary statements.
Overview
Granite Falls Energy, LLC (Granite Falls or the Company) is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers grains, and crude corn oil for sale. Our plant has an approximate annual production capacity of 50 million gallons, and our environmental permits allow us to produce ethanol at a rate of 49.9 million gallons of undenatured ethanol on a twelve month rolling sum basis.
Our operating results are largely driven by the prices at which we sell our ethanol, distillers grains, and crude corn oil as well as the other costs related to production. The price of ethanol has historically fluctuated with the price of petroleum-based products such as unleaded gasoline, heating oil and crude oil. The price of distillers grains has historically been influenced by the price of corn as a substitute livestock feed. We expect these price relationships to continue for the foreseeable future, although recent volatility in the commodities markets makes historical price relationships less reliable. Our largest costs of production are corn, natural gas, depreciation and manufacturing chemicals. The cost of corn is largely impacted by geopolitical supply and demand factors and the outcome of our risk management strategies. Prices for natural gas, manufacturing chemicals and denaturant are tied directly to the overall energy sector, crude oil and unleaded gasoline.
As of the date of this report, we have 35 full time employees. Ten of these employees are involved primarily in management and administration. The remaining employees are involved primarily in plant operations. We do not currently anticipate any significant change in the number of employees at our plant.
There have been a number of recent developments in legislation that impacts the ethanol industry. One such development concerns the federal Renewable Fuels Standard (RFS). The ethanol industry is benefited by the RFS which requires that a certain amount of renewable fuels must be used in the United States each year. In February 2010, the EPA issued new regulations governing the RFS. These new regulations have been called RFS2. The most controversial part of RFS2 involves what is commonly referred to as the lifecycle analysis of greenhouse gas emissions. Specifically, the EPA adopted rules to determine which renewable fuels provided sufficient reductions in greenhouse gases, compared to conventional gasoline, to qualify under the RFS program. RFS2 establishes a tiered approach, where regular renewable fuels are required to accomplish a 20% greenhouse gas reduction compared to gasoline, advanced biofuels and biomass-based biodiesel must accomplish a 50% reduction in greenhouse gases, and cellulosic biofuels must accomplish a 60% reduction in greenhouse gases. Any fuels that fail to meet this standard cannot be used by fuel blenders to satisfy their obligations under the RFS program. The scientific method of calculating these greenhouse gas reductions has been a contentious issue. Many in the ethanol industry were concerned that corn based ethanol would not meet the 20% greenhouse gas reduction requirement based on certain parts of the environmental impact model that many in the ethanol industry believed was scientifically suspect. However, RFS2 as adopted by the EPA provides that corn-based ethanol from modern ethanol production processes does meet the definition of a renewable fuel under the RFS program. Further, certain provisions of RFS2 as adopted may disproportionately benefit ethanol produced from sugarcane. This could make sugarcane based ethanol, which is primarily produced in Brazil, more competitive in the United States ethanol market. If this were to occur, it could reduce demand for the ethanol that we produce.
In addition to RFS2 which included greenhouse gas reduction requirements, in 2009, California passed a Low Carbon Fuels Standard (LCFS). The California LCFS requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which is measured using a lifecycle analysis, similar to RFS2. Management believes that this lifecycle analysis is based on unsound scientific principles that unfairly disadvantages corn based ethanol. Management believes that these new regulations will preclude corn based ethanol from being used in California. California represents a significant ethanol demand market. If ethanol producers are unable to supply ethanol to California, it could significantly reduce demand for the ethanol produce. Currently, several lawsuits have been filed challenging the California LCFS.
Ethanol production in the United States is benefited by various tax incentives. The most significant of these tax incentives is the federal Volumetric Ethanol Excise Tax Credit (VEETC). VEETC provides a volumetric ethanol excise tax credit of 45 cents per gallon of ethanol blended with gasoline. VEETC is scheduled to expire on
December 31, 2010. If this tax credit is not renewed, it likely would have a negative impact on the price of ethanol and demand for ethanol in the marketplace. On December 31, 2009, the biodiesel blenders tax credit was allowed to expire. Recently, Congress passed legislation to reinstate the biodiesel credit until December 31, 2010. However, the bills passed by the House and Senate must be reconciled and the final bill must be signed by the President before the biodiesel blenders tax credit will be reinstated. If the VEETC that benefits the ethanol industry is allowed to expire, it could negatively impact demand for ethanol and may harm our financial condition.
The Small Ethanol Producer Tax Credit (SEPTC) is another tax incentive allowing small ethanol producers a 10 cent per gallon federal income tax credit on up to 15 million gallons of production, annually. The credit, which is capped at $1.5 million per year per producer, is only available to ethanol producers with an annual production capacity of no more than 60 million gallons per year. The SEPTC expires December 31, 2010, along with the VEETC. In March 2010 a bill called the Renewable Fuels Reinvestment Act of 2010 was introduced to the United States House of Representatives to extend the SEPTC and VEETC for 5 years.
Another federal policy in jeopardy is the secondary tariff on imported ethanol. This is a 54 cent per gallon tariff on ethanol imports from certain countries. This tariff was designed to offset the blenders credit (VEETC) that is applied to ethanol regardless of its country of origin. The secondary tariff on imported ethanol is scheduled to expire in January 2011. However, the proposed Renewable Fuels Reinvestment Act of 2010 contains provisions extending the 54 cent per gallon tariff for five years. If this tariff is allowed to expire, imported ethanol could have a significant negative impact on ethanol prices and our profitability.
Results of Operations for the Three Months Ended April 30, 2010 and 2009
The following table shows the results of our operations and the approximate percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our unaudited statements of operations for the three months ended April 30, 2010 and 2009:
|
|
Three
Months
|
|
Three
Months
|
|
||||||
Statement of Operations Data |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
||
Revenues |
|
$ |
22,237,999 |
|
100.0 |
% |
$ |
21,529,863 |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
||
Cost of Goods Sold |
|
20,507,901 |
|
92.2 |
% |
22,089,595 |
|
102.6 |
% |
||
|
|
|
|
|
|
|
|
|
|
||
Gross Profit (Loss) |
|
1,730,098 |
|
7.8 |
% |
(559,732 |
) |
(2.6 |
)% |
||
|
|
|
|
|
|
|
|
|
|
||
Operating Expenses |
|
462,770 |
|
2.1 |
% |
518,509 |
|
2.4 |
% |
||
|
|
|
|
|
|
|
|
|
|
||
Operating Income (Loss) |
|
1,267,328 |
|
5.7 |
% |
(1,078,241 |
) |
(5.0 |
)% |
||
|
|
|
|
|
|
|
|
|
|
||
Other Income, net |
|
30,919 |
|
0.1 |
% |
6,998 |
|
0.0003 |
% |
||
|
|
|
|
|
|
|
|
|
|
||
Net Income (Loss) |
|
$ |
1,298,247 |
|
5.8 |
% |
$ |
(1,506,486 |
) |
(5.0 |
)% |
Revenues
Our revenues from operations come from three primary sources: sales of fuel ethanol, sales of distillers grains and sales of corn oil.
The following table shows the sources of our revenue for the three months ended April 30, 2010.
Revenue Sources |
|
Amount |
|
Percentage of
|
|
|
|
|
|
|
|
|
|
Ethanol sales |
|
$ |
18,996,914 |
|
85.4 |
% |
Distillers grains sales |
|
2,885,295 |
|
13.0 |
|
|
Corn oil sales |
|
345,382 |
|
1.5 |
|
|
Ethanol derivative activity gains (losses) |
|
10,408 |
|
0.1 |
|
|
Total Revenues |
|
$ |
22,237,999 |
|
100.0 |
% |
The following table shows the sources of our revenue for the three months ended April 30, 2009:
Revenue Sources |
|
Amount |
|
Percentage of
|
|
|
|
|
|
|
|
|
|
Ethanol sales |
|
$ |
17,473,968 |
|
81.1 |
% |
Distillers grains sales |
|
3,812,328 |
|
17.7 |
|
|
Corn oil sales |
|
243,567 |
|
1.2 |
|
|
Ethanol derivative activity gains (losses) |
|
|
|
|
|
|
Total Revenues |
|
$ |
21,529,863 |
|
100.0 |
% |
The following table shows additional data regarding production and price levels for our primary inputs and products for the three months ended April 30, 2010 and 2009:
Additional Data |
|
Three
Months
|
|
Three
Months
|
|
||
Ethanol sold (gallons) |
|
12,237,427 |
|
12,082,537 |
|
||
Dried distillers grains sold (tons) |
|
29,684 |
|
29,934 |
|
||
Modified distillers grains sold (tons) |
|
798 |
|
4,787 |
|
||
Corn oil sold (pounds) |
|
1,435,160 |
|
1,436,920 |
|
||
Ethanol average price per gallon (net of hedging activity) |
|
$ |
1.55 |
|
$ |
1.44 |
|
Dried distillers grains average price per ton |
|
$ |
96.04 |
|
$ |
117.14 |
|
Modified distillers grains average price per ton |
|
$ |
42.90 |
|
$ |
64.15 |
|
Corn oil average price per pound |
|
$ |
0.24 |
|
$ |
0.17 |
|
Corn costs per bushel (net of hedging activity) |
|
$ |
3.28 |
|
$ |
3.48 |
|
Revenues.
In the three month period ended April 30, 2010, ethanol sales comprised approximately 85.4% of our revenues and distillers grains sales comprised approximately 13.0% percent of our revenues, while corn oil sales comprised approximately 1.6% of our revenues. For the three month period ended April 30, 2009, ethanol sales comprised approximately 81.1% of our revenue, and distillers grains sales comprised approximately 17.7% of our revenue, without including ethanol derivatives, while corn oil sales comprised approximately 1.2% of our revenues.
Management believes that distillers grains represent a smaller proportion of our revenues during the three months ended April 30, 2010 compared to the same period of 2009 as a result of lower distillers grains prices we received during our second fiscal quarter of 2010 compared to the same period of 2009 as a result of continued distress in the livestock markets and an abundant supply of feed products.
The average ethanol sales price we received for the three month period ended April 30, 2010 was approximately 7.6% higher than our average ethanol sales price for the comparable 2009 period. Management anticipates that the price of ethanol may remain steady or increase during the third quarter of our 2010 fiscal year as a result of slowly improving worldwide economics and the expectation of increased domestic gasoline consumption as we move into the summer driving season.
Management also anticipates that our results of operations for our 2010 fiscal year will continue to be affected by volatility in the commodity markets. If plant operating margins remain low for an extended period of time, management anticipates that this could significantly impact our liquidity, especially if our raw material costs increase. Management believes the industry will need to continue to grow demand and further develop an ethanol distribution system to facilitate additional blending of ethanol and gasoline to offset the increased supply brought to the marketplace by additional production. Going forward, we are optimistic that ethanol demand will continue to grow and ethanol distribution will continue to expand as a result of the positive blend economics that are currently available to the gasoline refiners and blenders.
The price we received for our dried distillers grains decreased during the three month period ended April 30, 2010 compared to the same period of 2009. We anticipate that the market price of our dried distillers grains will continue to be volatile as a result of changes in the price of corn and competing animal feed substitutes such as soybean meal as well as volatility in distillers grains supplies related to changes in ethanol production. Economic distress in the livestock industry has resulted in decreased demand for animal feed, including distillers grains, which may result in a weaker distillers grain market during our third quarter of the 2010 fiscal year.
For the quarter ended April 30, 2010 we independently marketed our corn oil as a biodiesel feedstock and as a supplement for animal feed. Corn oil sales accounted for approximately 1.6% of our revenues during our quarter ended April 30, 2010. On April 29, 2010, we executed a Corn Oil Marketing Agreement with Renewable Products Marketing Group, Inc. (RPMG). Pursuant to the agreement, RPMG will market all of the corn oil we expect to produce. The initial term of the agreement is for one year. The agreement automatically renews for additional one year terms unless either party gives 180 days notice that the agreement will not be renewed. We have the option to cancel the agreement within 90 days of the effective date. We agreed to pay RPMG a commission based on each pound of our corn oil that is sold by RPMG.
In June 2010 we signed an amendment to our Distillers Grain Marketing Agreement with CHS. Prior to signing the amendment, we independently marketed a portion of our distillers grains to local markets. On June 1, 2010 CHS began marketing all our distillers grains except for certain distillers grains that are sold through Montevideo Intermodal. We expect that under the new agreement CHS will be marketing approximately 95% of our distillers grains on a regular basis, and the balance will be sold though Montevideo Intermodal.
We occasionally engage in hedging activities with respect to our ethanol sales. We recognize the gains or losses that result from the changes in the value of these derivative instruments in revenues as the changes occur. As ethanol prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our revenues due to the timing of the changes in value of the derivative instruments relative to the price and volume of the ethanol being hedged.
Cost of Sales
Our costs of goods sold as a percentage of revenues were approximately 92.2% for the three month period ended April 30, 2010 compared to approximately 102.6% for the same period of 2009. Our two largest costs of production are corn (65.2% of cost of goods sold for our three months ended April 30, 2010) and natural gas (9.7% of cost of goods sold for our three months ended April 30, 2010). Our cost of goods sold decreased to $20,508,000 for the three months ended April 30, 2010 from $22,090,000 in the three months ended April 30, 2009. Our per bushel corn costs decreased by approximately 5.8% for the three months ended April 30, 2010 as compared to the same period for our 2009 fiscal year. Our decreased cost of corn was the primary factor driving down our costs of goods sold.
For the three month period ended April 30, 2010, we experienced a decrease of approximately 4.0% per MMBtu in natural gas costs compared to the same period of 2009. We attribute this significant decrease in natural gas costs to the excess supply in the natural gas market. We expect the market price for natural gas to remain low in the near term as we continue to endure the worldwide economic slowdown and the resulting decreased energy demand.
We occasionally engage in hedging activities with respect to corn, natural gas or denaturant. We recognize the gains or losses that result from the changes in the value of our derivative instruments in cost of goods sold as the changes
occur. As corn, natural gas and denaturant prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged.
Operating Expense
Our operating expenses as a percentage of revenues were lower for the three month period ended April 30, 2010 than they were for the same period ended April 30, 2009. These percentages were approximately 2.1% and 2.4% for the three months ended April 30, 2010 and 2009, respectively. This decrease in operating expenses is primarily due to increased operating efficiencies and a concerted effort by management and staff to lower our operating expenses. We expect that going forward our operating expenses will remain relatively steady.
Operating Income (Loss)
Our income from operations for the three months ended April 30, 2010 was approximately 5.8% of our revenues compared to a loss of approximately 5.0% of our revenues for the three months ended April 30, 2009. For the three months ended April 30, 2010, we reported operating income of approximately $1,267,000 and for the three months ended April 30, 2009, we had an operating loss of approximately $1,078,000. This significant increase in our operating income is primarily due lower corn prices and higher ethanol prices.
Other Income (Expense)
We had total other income (net) for the three months ended April 30, 2010 of approximately $31,000 compared to other expense (net) of approximately $7,000 for the three months ended April 30, 2009. Our other expense (net) for our 2009 fiscal quarter ended April 30, 2009 was higher as a result our interest expense for that period.
Interest Expense and Interest Income
Interest expense for the three months ended April 30, 2010, was less that one tenth of one percent of our revenue and totaled approximately $1,500, compared to approximately $26,800 interest expense for the three months ended April 30, 2009. The interest expense incurred during the three months ended April 30, 2010 is attributable to our low interest loans obtained through state and regional economic development authorities. This decrease in interest expense is due to a decrease in the outstanding balance we carried on our revolving line of credit at Minnwest Bank during part of our second quarter ended April 30, 2010 compared to the same period in 2009. As of April 30, 2010, we had no outstanding balance on this line of credit.
Results of Operations for the Six Months Ended April 30, 2010 and 2009
The following table shows the results of our operations and the approximate percentage of revenues, costs of sales, operating expenses and other items to total revenues in our unaudited statements of operations for the six months ended April 30, 2010 and 2009:
|
|
Six Months
|
|
Six Months
|
|
||||||
Statement of Operations Data |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
||
Revenues |
|
$ |
45,662,561 |
|
100.0 |
% |
$ |
42,312,605 |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
||
Cost of Goods Sold |
|
41,585,523 |
|
91.1 |
% |
43,161,411 |
|
102.0 |
% |
||
|
|
|
|
|
|
|
|
|
|
||
Gross Profit (Loss) |
|
4,077,037 |
|
8.9 |
% |
(848,806 |
) |
(2.0 |
)% |
||
|
|
|
|
|
|
|
|
|
|
||
Operating Expenses |
|
971,712 |
|
2.1 |
% |
1,039,484 |
|
2.5 |
% |
||
|
|
|
|
|
|
|
|
|
|
||
Operating Income (Loss) |
|
3,105,326 |
|
6.8 |
% |
(1,888,290 |
) |
(4.5 |
)% |
||
|
|
|
|
|
|
|
|
|
|
||
Other Income (Expense), net |
|
120,097 |
|
0.3 |
% |
(689,439 |
) |
(1.6 |
)% |
||
|
|
|
|
|
|
|
|
|
|
||
Net Income (Loss) |
|
$ |
3,225,423 |
|
7.1 |
% |
$ |
(2,577,729 |
) |
(6.0 |
)% |
Revenues
Our revenues from operations come from two primary sources: sales of fuel ethanol and sales of distillers grains. We also had revenue from the sale of corn oil.
The following table shows the sources of our revenue for the six months ended April 30, 2010.
Revenue Sources |
|
Amount |
|
Percentage of
|
|
|
|
|
|
|
|
|
|
Ethanol Sales |
|
$ |
39,177,800 |
|
85.8 |
% |
Distillers Grains Sales |
|
5,858,956 |
|
12.8 |
|
|
Corn Oil Sales |
|
728,936 |
|
1.6 |
|
|
Ethanol Derivative Activity Gains/ (Losses) |
|
(103,131 |
) |
(0.2 |
) |
|
Total Revenues |
|
$ |
45,662,561 |
|
100.0 |
% |
The following table shows the sources of our revenue for the six months ended April 30, 2009:
Revenue Sources |
|
Amount |
|
Percentage of
|
|
|
|
|
|
|
|
|
|
Ethanol Sales |
|
$ |
34,238,833 |
|
81.0 |
% |
Distillers Grains Sales |
|
7,492,845 |
|
17.7 |
|
|
Corn Oil Sales |
|
461,678 |
|
1.0 |
|
|
Ethanol Derivative Activity Gains/ (Losses) |
|
119,249 |
|
0.3 |
|
|
Total Revenues |
|
$ |
43,312,605 |
|
100.0 |
% |
The following table shows additional data regarding production and price levels for our primary inputs and products for the six months ended April 30, 2010 and 2009:
Additional Data |
|
Six Months
|
|
Six Months
|
|
||
Ethanol sold (gallons) |
|
23,957,522 |
|
23,880,583 |
|
||
Dried distillers grains sold (tons) |
|
61,506 |
|
61,498 |
|
||
Modified distillers grains sold (tons) |
|
2,198 |
|
8,747 |
|
||
Corn oil sold (pounds) |
|
3,059,040 |
|
2,882,360 |
|
||
Ethanol average price per gallon (net of hedging activity) |
|
$ |
1.63 |
|
$ |
1.44 |
|
Dried distillers grains average price per ton |
|
$ |
93.51 |
|
$ |
112.68 |
|
Modified distillers grains average price per ton |
|
$ |
48.89 |
|
$ |
64.39 |
|
Corn oil average price per pound |
|
$ |
0.24 |
|
$ |
0.16 |
|
Corn costs per bushel (net of hedging activity) |
|
$ |
3.46 |
|
$ |
3.38 |
|
Revenues
In the six month period ended April 30, 2010, ethanol sales comprised approximately 85.8% of our revenues and
distillers grains sales comprised approximately 12.8% percent of our revenues, while corn oil sales comprised approximately 1.6% of our revenues. For the six month period ended April 30, 2009, ethanol sales comprised approximately 81.0% of our revenue, without accounting for ethanol hedging, and distillers grains sales comprised approximately 17.7% of our revenue, while corn oil sales comprised approximately 1.0% of our revenues.
Our revenues were higher for our first half of fiscal year 2010 compared to the same period of 2009 primarily as a result of higher ethanol prices. These higher ethanol prices, combined with lower distillers grains prices, caused ethanol sales to be larger percentage of our revenues.
The average ethanol sales price we received for the six month period ended April 30, 2010 was approximately 13.2% higher than our average ethanol sales price for the comparable 2009 period. Management attributes this increase in ethanol prices to strong ethanol price levels during our second fiscal quarter. Management anticipates the price of ethanol may increase during the second half of our 2010 fiscal year as a result of an increase in fuel demand as we move into the summer driving season which seems to be positively affecting the market prices of crude oil and gasoline.
The price we received for our dried distillers grains decreased by approximately 17% during the six month period ended April 30, 2010 compared to the same period of 2009. Management attributes this decrease in the price of our dried distillers grains to an excess supply of competitively priced livestock feeds, including distillers grains and soybean meal. We anticipate that the market price of distillers grains will continue to be volatile as a result of changes in the price of corn and competing animal feed substitutes such as soybean meal as well as volatility in distillers grains supplies related to changes in ethanol production.
Cost of Sales
Our costs of goods sold as a percentage of revenues were approximately 91% for the six month period ended April 30, 2010 compared to 102% for the same period of 2009. Our two largest costs of production are corn (69.6% of cost of goods sold for our six months ended April 30, 2010) and natural gas (10.0% of cost of goods sold for our six months ended April 30, 2010). Our cost of goods sold decreased by approximately $1,576,000 in the six months ended April 30, 2010, compared to the six months ended April 30, 2009, while our revenue for the same period increased by approximately $3,350,000. This decrease in the cost of goods sold is primarily a result of fairly steady corn prices combined with a decrease in our natural gas costs.
Operating Expense
Our operating expenses as a percentage of revenues were slightly lower for the six month period ended April 30, 2010 than they were for the same period ended April 30, 2009. These percentages were 2.1% and 2.5% for the six months ended April 30, 2010 and 2009, respectively. This decrease in operating expenses is primarily due to increased operating efficiencies and a concerted effort by our management and staff to lower our operating expenses. We expect that going forward our operating expenses will remain relatively steady.
Operating Income (Loss)
Our income from operations for the six months ended April 30, 2010 was approximately 6.8% of our revenues compared to a loss of approximately 4.5% of our revenues for the six months ended April 30, 2009. This increase in our profitability is primarily due to a decrease in the price of ethanol and the corresponding decline in our operating margins.
Other Income and Other Expense
Other income for the six months ended April 30, 2010, was approximately 0.3% of our revenue and totaled approximately $120,000. Other expense for the six months ended April 30, 2009 was approximately 1.6% of our revenue and totaled approximately $689,000. Our other expense for six months ended April 30, 2009 is high as a result of us paying $780,000 to Aventine Renewable Energy, Inc. as a termination fee we incurred in connection with our ethanol marketing agreement during our quarter ended January 31, 2009.
Interest Expense
Interest expense for the six months ended April 30, 2010, was approximately $8,600. Interest expense for the six months ended April 30, 2009 was approximately $63,600. This reduction in interest expense is due primarily to a reduction in our outstanding debt.
Changes in Financial Condition for the Six Months Ended April 30, 2010
The following table highlights the changes in our financial condition for the three months ended April 30, 2010 from our previous fiscal year ended October 31, 2009:
|
|
April 30, 2010 |
|
October 31, 2009 |
|
||
Current Assets |
|
$ |
14,955,121 |
|
$ |
14,015,271 |
|
Current Liabilities |
|
$ |
3,071,728 |
|
$ |
4,004,077 |
|
Long-Term Debt |
|
$ |
274,074 |
|
$ |
370,136 |
|
Members Equity |
|
$ |
50,725,993 |
|
$ |
52,098,970 |
|
Total assets were approximately $54,072,000 at April 30, 2010 compared to approximately $56,473,000 at October 31, 2009. This decrease in total assets is primarily a result of a cash distribution in the amount of approximately $4,600,000 paid out to members in December 2009.
Current assets totaled approximately $14,955,000 at April 30, 2010, a slight increase from approximately $14,015,000 at October 31, 2009. The change resulted primarily due to an increase in cash from the Company generating approximately $7,600,000 in cash from operating activities that was offset by a $4,600,000 dividend.
Total current liabilities decreased and totaled approximately $3,072,000 at April 30, 2010 and $4,004,000 at October 31, 2009. Long-term debt decreased slightly from approximately $370,000 at October 31, 2009 to approximately $274,000 at April 30, 2010 as we continue to pay down our EDA loans. In March 2010 we paid off our loan from the Western Minnesota Revolving Loan Fund in the amount of $67,000.
Plant Operations
Management anticipates our plant will continue to operate at our currently permitted capacity of 49.9 million gallons per year. In June 2009, we submitted an application package to the Minnesota Pollution Control Agency (MPCA) to allow the facility to operate at a production rate of 70 million gallons per year of undenatured ethanol. Our application to increase the plants permitted production capacity is currently pending with the MPCA. We expect to have sufficient cash generated by continuing operations, current lines of credit and cash reserves to cover our usual operating costs, which consist primarily of our corn supply, our natural gas supply, staffing expense, office expense, audit and legal compliance, working capital costs and debt service obligations.
Trends and Uncertainties Impacting the Ethanol and Distillers Grains Industries and Our Future Revenues
Our revenues primarily consist of sales of the ethanol and distillers grains we produce; however, we also realize revenue from the sale of corn oil we separate from our distillers syrup. Management anticipates stronger ethanol demand and higher ethanol prices as a result of slowly improving worldwide economic conditions. The ethanol industry needs to continue to expand the market for distillers grains in order to maintain current distillers grains prices. In addition, previous economic distress in the livestock industry has resulted in decreased livestock numbers and reduced demand for animal feed, including all types of distillers grains, which may contribute to a weaker distillers grain market during the second half of the 2010 fiscal year. The following charts show the general price information released by The Jacobsen Publishing Company for ethanol and distillers grains through April 2010.
According to the Renewable Fuels Association (RFA), as of April 27, 2010, there were 201 ethanol plants nationwide with the capacity to produce approximately 13.5 billion gallons of ethanol annually. The RFA estimates that plants with an annual production capacity of approximately 12.8 billion gallons are currently operating and that approximately 5.1% of the nameplate production capacity is not currently operational. Management believes the production capacity of the ethanol industry is greater than ethanol demand which may continue to depress ethanol prices. This overcapacity issue may be exacerbated by increased production from plants that had previously slowed their rate of production or idled altogether due to poor operating margins.
Currently, ethanol is primarily blended with conventional gasoline for use in standard (non-flex fuel) vehicles to create a blend which is 10% ethanol and 90% conventional gasoline. Estimates indicate that approximately 135 billion gallons of gasoline are sold in the United States each year. However, gasoline demand may be shrinking in the United States as a result of the global economic slowdown. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 13.5 billion gallons. This is commonly referred to as the blending wall, which represents a limit where more ethanol cannot be blended into the national gasoline pool. This is a theoretical limit since it is believed it would not be possible to blend ethanol into every gallon of gasoline that is used in the United States and it discounts higher percentage blends of ethanol such as E85 used in flex fuel vehicles. Many believe that the ethanol industry reached this blending wall in 2009. In addition, the Renewable Fuels Standard (RFS) requires the use of 36 billion gallons of renewable fuels being used each year by 2022. The
Energy Independence and Security Act of 2007 also requires the increased use of advanced biofuels, which are alternative biofuels produced without using corn starch such as cellulosic ethanol and biomass-based diesel, with a minimum of 21 billion gallons of the mandated 36 billion gallons of renewable fuel required to come from advanced biofuels by 2022, leaving a maximum of 15 billion gallons to come from corn based production facilities such as ours.
In order to meet the RFS and expand demand for ethanol, higher blends of ethanol must be utilized in conventional automobiles. Such higher blends of ethanol have recently become a contentious issue. Automobile manufacturers and environmental groups have fought against higher ethanol blends. Currently, state and federal regulations prohibit the use of higher ethanol blends in conventional automobiles and vehicle manufacturers have indicated that using higher blends of ethanol in conventional automobiles would void the manufacturers warranty. Without increases in the allowable percentage blends of ethanol, demand for ethanol may not continue to increase. An ethanol industry interest group has requested that the Administrator of the United Stated Environmental Protection Agency approve a waiver of the 10% limit on ethanol blending and increase the limit on the amount of ethanol in our nations gasoline supply to 15%. The EPA must grant or deny this waiver at some point in 2010. If the waiver is granted and current blend economics persist, we expect ethanol demand to increase. The ethanol industry must continue to expand demand for ethanol in order to support the market price of ethanol.
Trends and Uncertainties Impacting the Corn and Natural Gas Markets and Our Future Cost of Goods Sold
Our costs of our goods sold consist primarily of costs relating to the corn and natural gas supplies necessary to produce ethanol and distillers grains for sale. We grind approximately 1,450,000 bushels of corn each month. For the quarter ended April 30, 2010, our average cost of corn, net of hedging activity, was approximately $3.28 per bushel, which is approximately $0.20 lower than our cost of corn for the same period ended April 30, 2009.
Corn prices could increase during our 2010 fiscal year should we experience unfavorable weather conditions which affect expected corn yields for the fall of 2010. In addition, if demand for corn increases significantly as a result of improved global economic conditions or from increased ethanol production in the United States due to the implementation of a 15% ethanol blend, we could experience increased corn prices. Further, concern remains regarding the quality of the corn that was harvested in 2009. Poor quality corn contains less starch, which may reduce the amount of ethanol that can be produced per bushel of corn and could negatively impact distillers grains prices.
Natural gas is also an important input commodity to our manufacturing process. Our natural gas usage is approximately 115,000 million British thermal units (mmBTU) per month. We continue to work to find ways to limit our natural gas price risk through efficient usage practices, research of new technologies, and pricing and hedging strategies. We use a marketing firm and an energy consultant for our natural gas procurement and will work with them on an ongoing basis to mitigate our exposure to volatile gas prices.
Management anticipates that natural gas prices will be relatively stable in the next several months with the regular seasonal reductions in natural gas premium prices following the winter months. However, should we experience more robust economic recovery, it could increase demand for energy which could lead to increases in natural gas prices. Further, should we experience any natural gas supply disruptions, including disruptions from hurricane activity, we may experience significant increases in natural gas prices.
Compliance with Environmental Laws
We are subject to extensive air, water and other environmental regulations and we have been required to obtain a number of environmental permits to construct and operate the plant. As such, any changes that are made to the plant or its operations must be reviewed to determine if amended permits need to be obtained in order to implement these changes. We received amended permits in September 2008 to allow production to increase from 45 million gallons per year of undenatured ethanol to 49.9 million gallons.
The National Pollutant Discharge Elimination System/State Disposal System (NPDES/SDS) permit, which regulates the water treatment, water disposal and stormwater systems at the facility, requires renewal every five
years. We submitted a renewal application to the MPCA in October 2008. We are allowed to continue operations under our current permit requirements until the MPCA renews the water discharge permit.
In June 2009, we submitted an application package to the MPCA to allow the facility to operate at a production rate of 70 million gallons per year of undenatured ethanol. This application included the possibilities of exploring/expanding our alternatives with respect to the increase of production or optimization of operations. The renewal application for the NPDES/SDS permit was incorporated into this package for MPCA consideration.
The application submittal required numerous documents covering all aspects of the facility including: Environmental Assessment Worksheet (EAW), air modeling, Air Permit, NPDES/SDS permit, Aboveground Storage Tank (AST) permit, Construction Stormwater permit, and various other support documentation. Currently, we are working with the MPCA to answer questions and provide further information to the MPCA regarding this application. Our application to increase the plants permitted production capacity is currently pending with the MPCA.
The majority of the work being performed on the application involves the air modeling and water discharge from the facility. Air modeling is a process of determining the impact the facility has on the surrounding area, community and in the region itself. The area of concern is the particles smaller than 2.5 microns (clay dust), called fugitive emissions. We are evaluating operational considerations for decreasing the effect of fugitive emissions.
The other area of discussion is the NPDES/SDS permit. The MPCA and EPA have regulations regarding the quantity and quality of the water being discharged from the site into area water sources. These regulations are designed to protect and improve the waters of the state. We continue to evaluate options to modify operations to meet these regulations. The water discharge issue is a challenging task that will require a long term plan to meet these current regulations.
Contracting Activity
Farmers Cooperative Elevator Company supplies our corn. Eco-Energy, LLC markets our ethanol, and CHS, Inc. markets our distillers grains. Each of these contracts is critical to our success and we are very dependent on each of these companies. Accordingly, the financial stability of these partners is critical to the successful operation of our business.
For the quarter ended April 30, 2010 we independently marketed our corn oil as a biodiesel feedstock and as a supplement for animal feed. Corn oil sales accounted for approximately 1.6% of our revenues during our quarter ended April 30, 2010. On April 29, 2010, we executed a Corn Oil Marketing Agreement with Renewable Products Marketing Group, Inc. (RPMG). Pursuant to the agreement, RPMG will market all of the corn oil we expect to produce. The initial term of the agreement is for one year. The agreement automatically renews for additional one year terms unless either party gives 180 days notice that the agreement will not be renewed. We have the option to cancel the agreement within 90 days of the effective date. We agreed to pay RPMG a commission based on each pound of our corn oil that is sold by RPMG.
In June 2010 we signed an amendment to our Distillers Grain Marketing Agreement with CHS. Prior to signing the amendment, we independently marketed a portion of our distillers grains to local markets. On June 1, 2010 CHS began marketing all our distillers grains except for certain distillers grains that are sold through Montevideo Intermodal. We expect that under the new agreement CHS will be marketing approximately 95% of our distillers grains on a regular basis, and the balance will be sold though Montevideo Intermodal.
We independently market a small portion of our ethanol production as E-85 to local retailers and all of the corn oil we produce is presently sold on the spot market.
Commodity Price Risk Protection
We seek to minimize the risks from fluctuations in the prices of corn, ethanol and natural gas through the use of derivative instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as
appropriate. We do not use hedge accounting which would match the gain or loss on our hedge positions to the specific commodity contracts being hedged. Instead, we are using fair value accounting for our hedge positions, which means that as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of goods sold. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.
As of April 30, 2010, the fair values of our derivative instruments are reflected as net assets in the amount of $55,586. As of October 31, 2009, we recorded a net asset for our derivative instruments in the amount of $361,436. There are several variables that could affect the extent to which our derivative instruments are impacted by fluctuations in the price of corn, ethanol, denaturant or natural gas. However, it is likely that commodity cash prices will have the greatest impact on the derivative instruments with delivery dates nearest the current cash price. As we move forward, additional protection may be necessary. As the prices of these hedged commodities move in reaction to market trends and information, our statement of operations will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for Granite Falls.
As of April 30, 2010, we had entered into derivative instruments to hedge 90,000 bushels of our future corn purchases through July 2010 for the purpose of minimizing risk from future market price fluctuations. We have used various option contracts as vehicles for these hedges.
As of April 30, 2010, we had price protection in place for approximately 44% of our natural gas needs through September 2010. As we move forward, we may determine that additional price protection for natural gas purchases is necessary to reduce our susceptibility to price increases. However, we may not be able to secure natural gas for prices less than current market price and we may not recover high costs of production resulting from high natural gas prices, which may raise our costs of production and reduce our net income.
The derivative accounts are reported at fair value as designated by our broker. We have categorized the cash flows related to the hedging activities in the same category as the item being hedged. We expect substantially all of our hedge positions outstanding as of April 30, 2010 to be realized and recognized by July 2010.
Critical Accounting Estimates
Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.
Liquidity and Capital Resources
The following table shows cash flows for the six months ended April 30, 2010 and 2009:
|
|
2010 |
|
2009 |
|
||
Net cash provided by operating activities |
|
$ |
7,623,406 |
|
$ |
1,092,747 |
|
Net cash used in investing activities |
|
$ |
(95,130 |
) |
$ |
(182,422 |
) |
Net cash used in financing activities |
|
$ |
(4,702,829 |
) |
$ |
(507,239 |
) |
Net increase (decrease) in cash |
|
$ |
2,825,447 |
|
$ |
403,086 |
|
Operating Cash Flows. Cash provided by operating activities was approximately $7,623,000 for the six months ended April 30, 2010, which was an increase from approximately $1,093,000 provided by operating activities for the six months ended April 30, 2009. Contributing to this increase in cash provided by our operating activities is our increased profitability during our six months ended April 30, 2010. Currently, our capital needs are being adequately met through cash flows from our operating activities and our currently available credit facilities.
Investing Cash Flows. Cash used in investing activities was approximately $95,000 for the six months ended April 30, 2010, compared to $182,400 for the six months ended April 30, 2009.
Financing Cash Flows. Cash used in financing activities was approximately $4,703,000 for the six months ended April 30, 2010, compared to $507,000 for six months ended April 30, 2009. In the six month period ended April 30, 2010, cash was used to pay a distribution to our members totaling approximately $4,600,000 and to decrease the principal balance on the Companys EDA loans.
Indebtedness
Short-Term Debt Sources
The Company has a Loan Agreement with Minnwest Bank M.V. of Marshall, MN (the Bank). Under the Loan Agreement, the Company has a revolving line of credit with a maximum of $6,000,000 available which is secured by substantially all of our assets. The Company has outstanding letters of credit in the amount of approximately $415,000. These letters of credit reduce the amount available under the revolving line of credit to approximately $5,585,000. The interest rate on the revolving line of credit is at 0.25 percentage points above the prime rate as reported by the Wall Street Journal, with a minimum rate of 5.0%. At April 30, 2010, the Company had no outstanding balance on this line of credit
Long-Term Debt Sources
We have paid off our term loans with FNBO and received a release of FNBOs security interest in all of our tangible and intangible property, real and personal, which had served as collateral for our term loans.
Below is a summary of our remaining long term loans payable:
Note payable to City of Granite Falls/Minnesota Investment Fund, bearing interest of 1.0% due in quarterly installments of $15,807, payable in full on June 15, 2014, secured by a second mortgage on all assets. The outstanding balance at April 30, 2010 was $262,769.
Our note payable to City of Granite Falls/Western Minnesota Revolving Loan Fund, bearing interest of 5.0%, was paid in full as of March 2010.
Note payable to City of Granite Falls/Chippewa County, bearing interest of 3.0% due in semi-annual installments of $4,030, payable in full on June 15, 2021, secured by a second mortgage on all assets. The outstanding balance at April 30, 2010 was $77,899.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn, ethanol and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes pursuant to the requirements of Generally Accepted Accounting Principles (GAAP).
Interest Rate Risk
We are generally exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from our revolving line of credit and letters of credit with Minnwest Bank. As of April 30, 2010, we did not have an outstanding balance on this revolving line of credit. The specifics of these credit facilities are discussed in
greater detail in Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations Short-Term Debt Sources.
Commodity Price Risk
We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distillers grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.
As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us.
A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the fair value of our corn and natural gas prices and average ethanol price as of April 30, 2010, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from April 30, 2010. The results of this analysis, which may differ from actual results, are as follows:
|
|
Estimated Volume
|
|
Unit of Measure |
|
Hypothetical
|
|
Approximate
|
|
|
Natural Gas |
|
1,130,000 |
|
MMBTU |
|
10 |
% |
$ |
540,000 |
|
Ethanol |
|
51,000,000 |
|
Gallons |
|
10 |
% |
$ |
8,160,000 |
|
Corn |
|
17,857,000 |
|
Bushels |
|
10 |
% |
$ |
6,608,000 |
|
Captive Insurance Program
We participate in a captive reinsurance company (Captive). The Captive reinsures losses related to workmans compensation, commercial property and general liability. Premiums are accrued by a charge to income for the period to which the premium relates and is remitted by our insurer to the captive reinsurer. The Captive reinsures losses in excess of a predetermined amount. The Captive insurer has estimated and collected a premium amount in excess of expected losses but less than the aggregate loss limits reinsured by the Captive. We have contributed limited capital surplus to the Captive that is available to fund losses should the actual losses sustained exceed premium funding. So long as the Captive is fully-funded through premiums and capital contributions to the aggregate loss limits reinsured, and the fronting insurers are financially strong, we can not be assessed over the amount of our current contributions.
Item 4T. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit pursuant to the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
Our management, including our Chief Executive Officer and General Manager (the principal executive officer), Tracey Olson, along with our Chief Financial Officer (the principal financial officer), Stacie Schuler, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of April 30, 2010. Based upon this review and evaluation, these officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission; and to ensure that the information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
Our management, including our principal executive officer and principal financial officer, have reviewed and evaluated any changes in our internal control over financial reporting that occurred during the quarter ended April 30, 2010 and there has been no change that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
None.
The following risk factors are provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K. The risk factors set forth below should be read in conjunction with the risk factors section and the Managements Discussion and Analysis section for the fiscal year ended October 31, 2009, included in our annual report on Form 10-K.
The California Low Carbon Fuel Standard may decrease demand for corn based ethanol which could negatively impact our profitability. Recently, California passed a Low Carbon Fuels Standard (LCFS). The California LCFS requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which are measured using a lifecycle analysis. Management believes that these new regulations could preclude corn based ethanol produced in the Midwest from being used in California. California represents a significant ethanol demand market. If we are unable to supply ethanol to California, it could significantly reduce demand for the ethanol we produce. Any decrease in ethanol demand could negatively impact ethanol prices which could reduce our revenues and negatively impact our ability to profitably operate the ethanol plant.
If the Federal Volumetric Ethanol Excise Tax Credit (VEETC) expires on December 31, 2010, it could negatively impact our profitability . The ethanol industry is benefited by VEETC which is a federal excise tax credit of 4.5 cents per gallon of ethanol blended with gasoline at a rate of at least 10%. This excise tax credit is set to expire on December 31, 2010. We believe that VEETC positively impacts the price of ethanol. On December 31, 2009, the portion of VEETC that benefits the biodiesel industry was allowed to expire. This resulted in the biodiesel industry ceasing to produce biodiesel because the price of biodiesel without the tax credit was uncompetitive with the cost of petroleum based diesel. If the portion of VEETC that benefits ethanol is allowed to expire, it could negatively impact the price we receive for our ethanol and could negatively impact our profitability.
If the Small Ethanol Producer Tax Credit (SEPTC) expires on December 31, 2010, it could negatively impact our profitability. The Small Ethanol Producer Tax Credit (SEPTC) is a tax incentive allowing small ethanol producers a 10 cent per gallon federal income tax credit on up to 15 million gallons of production. Our investor directly benefit from the SEPTC. If the SEPTC is allowed to expire on December 31, 2010, along with the VEETC, it would negatively impact our investors.
If the secondary tariff on imported ethanol is allowed to expire in January 2011, we could see an increase in ethanol produced in foreign countries being marked in the Untied States which could negatively impact our profitability. The secondary tariff on imported ethanol is a 54 cent per gallon tariff on ethanol imports from certain foreign countries. The secondary tariff on imported ethanol is scheduled to expire in January 2011. If this tariff is allowed to expire, an influx of imported ethanol on the domestic ethanol market could have a significant negative impact on ethanol prices and our profitability.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
None.
The following exhibits are included herein:
Exhibit No. |
|
Description |
10.1 |
|
Corn Oil Marketing Agreement between the registrant and Renewable Products Marketing Group, LLC dated April 29, 2010. + |
|
|
|
10.2 |
|
Amendment to Distillers Grain Marketing Agreement between the registrant and CHS, Inc. dated June 7, 2010. |
|
|
|
31.1 |
|
Certificate Pursuant to 17 CFR 240.15d-14(a). |
|
|
|
31.2 |
|
Certificate Pursuant to 17 CFR 240.15d-14(a). |
|
|
|
32.1 |
|
Certificate Pursuant to 18 U.S.C. § 1350. |
|
|
|
32.2 |
|
Certificate Pursuant to 18 U.S.C. § 1350. |
(+) Confidential Treatment Requested.
In accordance with the requirements of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
GRANITE FALLS ENERGY, LLC |
|
|
|
June 14, 2010 |
|
/s/ Tracey L. Olson |
|
|
Tracey L. Olson |
|
|
Chief Executive Officer |
|
|
|
June 14, 2010 |
|
/s/ Stacie Schuler |
|
|
Stacie Schuler |
|
|
Chief Financial Officer |
Exhibit 10.1
*** Confidential material redacted and filed separately with the Commission.
CORN OIL MARKETING AGREEMENT
THIS CORN OIL MARKETING AGREEMENT (the Agreement) is made and entered into as of the 29th day of April, 2010 (the Effective Date ) by and between RPMG, INC., a Minnesota corporation ( RPMG ) and _Granite Falls Energy, a Minnesota Limited Liability company ( Producer ), collectively referred to hereinafter as Parties or individually as a Party.
RECITALS
A. RPMG markets CORN OIL (as hereinafter defined).
B. Producer produces or shall produce CORN OIL at Producers ethanol production facility located or to be located at _14045 Hwy 23 SE, Granite Falls, Minnesota_ (the Ethanol Facility ).
C. The Parties do desire that RPMG shall market CORN OIL produced at the Ethanol Facility.
NOW, THEREFORE, in consideration of the foregoing, the mutual promises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows.
AGREEMENT
1. Marketing of Corn Oil . Producer shall sell to RPMG, and RPMG shall purchase and market, all of Producers production, of corn oil produced at the Ethanol Facility, including any expansion or increase in capacity at the Ethanol Facility. RPMG shall be the exclusive marketer of corn oil and Producer shall not, either itself or through any affiliate or any third party, market any corn oil during the term of this Agreement. RPMG shall provide management resources to market and sell corn oil, including the management of logistics and collection.
2. Payments to Producer; Commissions; Audit Rights
(a) Payments to Producer . Subject to the other terms of this Agreement, RPMG shall make payments for Producers corn oil in accordance with the terms set forth in Exhibit A . RPMG shall use commercially reasonable efforts to make such payments to Producer (which as used throughout this Agreement may include payments to a Designee pursuant to Exhibit A ) on an average net ten (10) days.
(b) RPMG Commission . Producer shall pay RPMG commissions as follows: $*** for each pound of corn oil sold to third party end purchasers (each, an End Customer ). Parties shall from time to time, but no more than once
(c) per year, or upon the reasonable request of RPMG, negotiate in good faith adjustments to the foregoing commissions to reflect prevailing commissions being paid to marketers of corn oil produced by third parties in the United States.
(d) Accessorial Charges . As set forth on Exhibit A , RPMG shall be responsible for payment of Accessorial Charges (as defined in Exhibit A ) to third parties; provided, however, that Producer agrees (i) to promptly reimburse RPMG for such Accessorial Charges upon submission to Producer of an invoice itemizing such Accessorial Charges, and (ii) that RPMG may deduct and setoff the Accessorial Charges from and against payments due to Producer by RPMG.
(e) Late Payments . Overdue amounts not disputed in good faith payable to either Party shall be subject to late payment fees equal to interest accrued on such amounts at the maximum rate permitted by applicable law.
(f) No Warranty as to Prices . RPMG shall market Producers corn oil using commercially reasonable efforts and the same standards it uses to market the corn oil production of third parties for whom RPMG provides corn oil marketing services. RPMG shall endeavor to (i) maximize the corn oil price and minimize freight and other costs relevant to corn oil sales and (ii) achieve the best available return to Producer, subject to relevant market conditions. PRODUCER ACKNOWLEDGES THAT RPMG MAKES NO REPRESENTATIONS, GUARANTEES OR WARRANTIES OF ANY NATURE WHATSOEVER AS TO THE PRICES AT WHICH IT SHALL BE ABLE TO SELL PRODUCERS CORN OIL TO END CUSTOMERS.
(g) Waiver of Certain Claims . Producer acknowledges (i) that RPMG shall use its reasonable judgment in making decisions related to the quantity and price of corn oil marketed under this Agreement, in light of varying freight and other costs, and (ii) that RPMG may sell and market corn oil of third parties into the same markets where RPMG sells Producers corn oil. Producer waives any claim of conflict of interest against RPMG or for failure by RPMG to maximize the economic benefits of this Agreement for Producer in light of the foregoing.
(h) Audit Rights . Within ninety (90) days following the end of RPMGs fiscal year end, Producer shall give written notice to RPMG of its desire to conduct an audit of its corn oil payments to Producer for the preceding fiscal year of RPMG and RPMG shall provide reasonable access to all financial information necessary to complete such audit. The audit shall be conducted by an accounting firm agreeable to both Parties and shall be completed within forty-five (45) days after the completion of RPMGs annual audit, but no later than one hundred and fifty (150) days following
RPMGs fiscal year end. The cost of the audit shall be the responsibility of Producer unless the auditor determines that RPMG underpaid Producer by more than three percent (3%) for the period audited, in which case RPMG shall pay the cost of the audit. If the auditor determines that RPMG underpaid Producer, RPMG shall promptly pay such underpayment to Producer and if the auditor determines that RPMG overpaid Producer, Producer shall promptly pay the overpayment to RPMG. The determination of the auditor shall be final and binding on both Parties. If Producer fails to exercise its right to audit as provided in this Section 2(g) for any year, it shall be deemed to have waived any rights to dispute payments made to Producer for that year.
3. Scheduled Production
(a) Notice of First Delivery . RPMG may begin to market Producers corn oil upon the Effective Date. If Producer is not producing corn oil as of the Effective Date, Producer shall, on the Effective Date, provide RPMG with the projected date on which Producer will first deliver corn oil produced at the Ethanol Facility to RPMG (the Projected Date of First Delivery). Producer shall notify RPMG as soon as possible of any revisions to the Projected Date of First Delivery.
(b) Notices of Scheduled Production . Beginning on the Effective Date, and on the 1st and 15th of each month thereafter, Producer shall provide to RPMG a rolling best estimate of production and inventory by corn oil product for that month and each of the following twelve (12) months. Beginning on the Effective Date and each Wednesday thereafter, Producer shall provide to RPMG a best estimate of production and inventory by corn oil product for that day and the next seven days.
(c) Additional Production Notices . Producer shall notify RPMG of anticipated production downtime or disruption in corn oil availability at least one (1) month in advance of such outage. Producer shall timely inform RPMG of daily inventories, plant shutdowns, daily production projections, and any other information (i) to facilitate RPMGs performance of the Agreement or (ii) that may have a material adverse effect on RPMGs ability to perform the Agreement.
(d) RPMG Entitled to Rely on Producer Estimates and Notices . RPMG, in marketing and selling Producers corn oil, is entitled to rely upon the production estimates and other notices provided by Producer, including without limitation those described in Sections 3(a), (b), and (c). Producers failure to provide accurate information to facilitate RPMGs performance of the Agreement may negatively impact RPMGs ability to market and sell corn oil at prevailing prices. Producers failure to provide accurate information to facilitate RPMGs
performance of the Agreement may be deemed by RPMG, in its sole but reasonable discretion, a material breach of the Agreement by Producer.
(e) Sale Commitments . From time to time during the term of this Agreement and in order to maximize the sales price of corn oil, RPMG may enter sales contracts or other agreements with End Customers for future delivery of corn oil. In the event Producer fails to produce corn oil in accordance with the information provided to RPMG under Sections 3(a), (b), or (c) above for reasons other than Force Majeure (as defined in Section 10 herein), and as a result RPMG is required to purchase corn oil from third parties to meet previous corn oil sale commitments that are based upon such information, RPMG may charge Producer the amount (if any) that the price of such replacement corn oil exceeded the price that RPMG would have paid to Producer for the applicable corn oil under this Agreement.
4. Logistics and Transportation
(a) No Liens, Title and Risk of Loss . Producer warrants that corn oil delivered to RPMG hereunder shall be free and clear of all liens and encumbrances of any nature whatsoever other than liens in favor of RPMG. Title to and risk of loss of each load of corn oil shall pass to RPMG at the time such load passes across the scale into rail cars or trucks at the Ethanol Facility (the Title Transfer Point ). Until such time, Producer shall be deemed to be in control of and in possession of the corn oil.
(b) Loading . RPMG shall schedule the loading and shipping of all outbound corn oil purchased hereunder, but all labor and equipment necessary to load trucks and rail cars and other associated costs shall be supplied and borne by Producer without charge to RPMG. Producer shall handle the corn oil in a good and workmanlike manner in accordance with RPMGs written requirements and normal industry practice. Producer shall maintain the truck and rail loading facilities in safe operating condition in accordance with normal industry standards and shall visually inspect all trucks and rail cars to assure (i) cleanliness so as to avoid contamination, and (ii) that such trucks and railcars are in a condition suitable for transporting the corn oil. RPMG and RPMGs agents shall have adequate access to the Ethanol Facility to load Producers corn oil on an industry standard basis that allows RPMG to economically market Producers corn oil. RPMGs employees shall follow all reasonable safety rules and procedures promulgated by Producer and provided to RPMG reasonably in advance and in writing. Producer shall supply product description tags, certificates of analysis, bills of lading and/or material safety data sheets that are applicable to all shipments. In the event that Producer fails to provide the labor, equipment and facilities necessary to meet RPMGs loading schedule, Producer shall be responsible for all costs and expenses, including without limitation actual demurrage and wait time, incurred by RPMG resulting from or arising in
connection with Producers failure to do so.
(c) Transportation and Certain Transportation Costs . RPMG shall perform certain logistics functions for Producer, including the arranging of rail and truck freight, inventory management, contract management, bills of lading, and scheduling pick-up appointments. RPMG shall determine the method of transporting corn oil to End Customers. Notwithstanding any provision to the contrary herein, Producer shall be solely responsible for any damage to any trucks, railcars, equipment, or vessels caused by acts or omissions of Producer and its consignees. All truck freight charges and rail tariff rate charges shall be billed directly to RPMG and, as set forth in Exhibit A, be recouped by RPMG from the proceeds of RPMGs sales of corn oil to End Customers. Notwithstanding the foregoing, rail cars required to transport the corn oil will be leased directly by Producer. If requested in writing by Producer, RPMG will make lease payments for such rail cars on behalf of Producer, and in such event RPMG shall recoup lease payments from the proceeds of RPMGs sales of corn oil to End Customers.
(d) Weight . The quantity of corn oil delivered to RPMG at the Ethanol Facility shall be established by weight certificates obtained from Producers scales or from such other scales as the Parties shall mutually agree, which are certified as of the time of weighing and which comply with all applicable laws, rules and regulations. Producer shall provide RPMG with a fax/emailed copy of the outbound weight certificates on a daily basis and, except as otherwise expressly agreed upon, such outbound weight certificates shall be determinative of the quantity of corn oil for which RPMG is obligated to pay Producer pursuant to this Agreement.
(e) Corn oil Storage at Ethanol Facility . The estimated storage capacity of the Ethanol Facility, is as follows:
Corn Oil 24,600 gallons
5. Specifications; Quality.
(a) Corn oil Specifications . Producer covenants that it shall produce corn oil that, upon delivery to RPMG at the Ethanol Facility, meets the respective specifications (Specifications) set forth in Exhibit B and such other specifications that may be, from time-to-time, promulgated by the industry for corn oil. RPMG shall have the right to test each shipment of corn oil to ascertain that the Specifications are being met. If the corn oil provided by Producer to RPMG is shown, by independent testing or analysis of a representative sample or samples taken consistent with industry standards, to not meet the Specifications through no fault of RPMG or any third party engaged by RPMG, then RPMG may, in its sole discretion, (i) reject such corn
oil and require Producer to promptly replace such non-conforming corn oil with corn oil that complies with the Specifications, or (ii) accept such corn oil for marketing and, if necessary, adjust the price to reflect the inferior quality, as provided in Exhibit A. Payment and acceptance of delivery by RPMG shall not waive RPMGs rights if corn oil does not comply with the terms of this Agreement, including the Specifications.
(b) Trade Rules . This Agreement shall be governed by the then-current Feed Trade Rules of the National Grain and Feed Association (the Trade Rules), unless otherwise specified. In the event the Trade Rules and the terms and conditions of this Agreement conflict, this Agreement shall control.
(c) Compliance With FDA and Other Standards . Producer warrants that, unless caused by the negligence or intentional misconduct of RPMG or a third party engaged by RPMG, corn oil provided by Producer to RPMG (i) shall not be adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act (the Act), (ii) may lawfully be introduced into interstate commerce under the Act, and (iii) shall comply with all state and federal laws, rules and regulations (including without limitation the Trade Rules) including those governing quality, naming and labeling of bulk product. If Producer knows or reasonably suspects that any corn oil produced at the Ethanol Facility is adulterated or misbranded, or otherwise not in compliance with the terms of the Agreement, Producer shall immediately so notify RPMG in writing.
(d) Regulatory Seizure . Should any corn oil provided by Producer to RPMG hereunder be seized or condemned by any federal or state department or agency as a result of its failure to conform to any applicable law, rule or regulation prior to delivery to an End Customer, such seizure or condemnation shall operate as a rejection by RPMG of the goods seized or condemned and RPMG shall not be obligated to offer any defense in connection with such seizure or condemnation. When such rejection occurs, RPMG shall deliver written notice to Producer within a reasonable time of the rejection and identify the deficiency that resulted in such rejection. In addition to other obligations under this Agreement or at law, Producer shall reimburse RPMG for all out-of-pocket costs reasonably incurred by RPMG in storing, transporting, returning and disposing of the rejected goods in accordance with this Agreement.
(e) Sampling . Producer shall take one representative origin sample (pint size) from each lot of the corn oil before it leaves the Ethanol Facility (each, a Sample). RPMG shall be entitled to witness the taking of Sample. Producer shall label Sample to indicate the applicable corn oil lot numbers, date of shipment, and the truck or railcar number. Producer shall send half of Sample to RPMG promptly upon RPMGs request. Producer may request that RPMG test results be provided to it at any time after the tests are completed. Producer shall retain corn oil Sample for no less than three (3) months or any longer period required
by law. If RPMG knows or reasonably suspects that any corn oil produced by Producer at the Ethanol Facility is not in compliance with the terms of this Agreement, then RPMG may obtain independent laboratory tests of such corn oil, and, if such corn oil is found not to be in compliance with the terms of this Agreement, Producer shall, in addition to its other obligations hereunder, pay all such testing costs.
6. Term and Termination
(a) Term . The initial term of this Agreement shall commence on the date hereof and continue for 12 months from the first day of the month that PRODUCER initially ships corn oil. Thereafter, this Agreement shall remain in effect until terminated by either party at its unqualified option by providing the other party hereto not less than 90 days written notice of its election to terminate this agreement. Either party may terminate this Agreement if the other party breaches this Agreement and fails to cure the breach within 30 days after receipt of notice of such breach or if the other party becomes insolvent, files or has filed against it a petition in bankruptcy that is not dismissed within 30 days, or has a receiver appointed over its assets.
(b) Producer Termination Right . Producer may immediately terminate this Agreement upon written notice to RPMG if RPMG fails on three (3) separate occasions within any 12-month period to purchase corn oil or to market corn oil under circumstances where such breach or failure is not excused by this Agreement.
(c) RPMG Termination Right . RPMG may immediately terminate this Agreement upon written notice to Producer, if, for reasons other than a Force Majeure (as defined in Section 10 herein) event, during any consecutive three (3) months, Producers actual production or inventory of any corn oil product at the Ethanol Facility varies by twenty percent (20%) or more from the monthly production and inventory estimates provided by Producer to RPMG pursuant to Section 3(b) hereunder.
(d) Termination for Insolvency . Either Party may immediately terminate the Agreement upon written notice to the other Party if the other Party files a voluntary petition in bankruptcy, has filed against it an involuntary petition in bankruptcy, makes an assignment for the benefit of creditors, has a trustee or receiver appointed for any or all of its assets, is insolvent or fails or is generally unable to pay its debts when due, in each case where such petition, appointment or insolvency is not dismissed, discharged or remedied, as applicable, within thirty (30) days.
7. Indemnification; Limitation on Liability
(a) Producers Indemnification Obligation . Producer shall indemnify, defend and hold harmless RPMG and its shareholders, directors, officers, employees, agents and representatives, from and against any and all Damage (as defined in Section 7(c) herein) to the extent arising out of (i) any fraud, negligence or willful misconduct of Producer or any of its directors/governors, officers, employees, agents, representatives or contractors or (ii) any breach of this Agreement by Producer. RPMG shall promptly notify Producer of any suit, proceeding, action or claim for which Producer may have liability pursuant to this Section 7(a).
(b) RPMGs Indemnification Obligation . RPMG shall indemnify, defend and hold harmless Producer and its shareholders/members, directors/governors, officers, employees, agents and representatives from and against any and all Damages to the extent arising out of (i) any fraud, negligence or willful misconduct of RPMG or any of its directors, officers, employees, agents, representatives or contractors or (ii) any breach of this Agreement by RPMG. Producer shall promptly notify RPMG of any suit, proceeding, action or claim for which Producer may have liability pursuant to this Section 7(b).
(c) Definition of Damages . As used in this Agreement, the capitalized term Damages means any and all losses, costs, damages, expenses, obligations, injuries, liabilities, insurance deductibles and excesses, claims, proceedings, actions, causes of action, demands, deficiencies, lawsuits, judgments or awards, fines, penalties and interest, including reasonable attorneys fees, but excluding any indirect, incidental, special, exemplary, consequential or punitive damages.
(d) Limitation on Liability . NEITHER PARTY MAKES ANY GUARANTEE, WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO ANY PROFIT, OR OF ANY PARTICULAR ECONOMIC RESULTS FROM TRANSACTIONS HEREUNDER. EXCEPTING FOR A BREACH OF ITS NONDISCLOSURE OBLIGATIONS OR PERFORMANCE OF ITS INDEMNIFICATION OBLIGATIONS HEREUNDER, RPMGS AGGREGATE LIABILITY TO PRODUCER SHALL IN NO EVENT EXCEED THE AMOUNT PAID BY PRODUCER TO RPMG UNDER THIS AGREEMENT.
8. Insurance . During the term of this Agreement, each party shall maintain insurance coverage that is standard for a company of its type and size that is engaged in the production and/or selling of corn oil. At a minimum, each partys insurance coverage shall include: (i) comprehensive general product and public liability insurance, with liability limits of at least $5 million in the aggregate; (ii) property and casualty insurance adequately insuring its facilities and its other assets against theft, damage and destruction on a replacement cost basis; and (iii) workers
compensation insurance to the extent required by law. RPMG, or Producer, as the case may be, shall be added as a loss payee under the comprehensive general product and public liability insurance policy and the property and casualty insurance policy. In relation to insurance requirements on the corn oil leased railcars, (a) the Producer will be responsible for the liability insurance on the corn oil leased railcars in the form and amount as required by the railcar lessors contract, or at a minimum in the amounts required by this Article 8 and (b) RPMG will carry property/physical damage insurance for the corn oil railcars for loss or destruction, but will not be responsible for the insurance deductible, maintenances (scheduled or otherwise), including normal wear and tear related to such corn oil railcars. The Producer will be listed as a Loss Payee on RPMGs Rolling Stock Policy in relation to the corn oil leased railcars. A party shall not change its insurance coverage during the term of this Agreement, except to increase it or enhance it, without the prior written consent of the other Party which consent shall not be unreasonably withheld.
9. Confidentiality
(a) Confidential Information . As used in this Agreement, the capitalized term Confidential Information means (i) the terms and conditions of this Agreement and (ii) any information disclosed by one Party to the other, including, without limitation, trade secrets, strategies, marketing and/or development plans, End Customer lists and other End Customer information, prospective End Customer lists and other prospective End Customer information, vendor lists and other vendor information, pricing information, financial information, production or inventory information, and/or other information with respect to the operation of its business and assets, in whatever form or medium provided.
(b) Nondisclosure . Each Party shall maintain all Confidential Information of the other in trust and confidence and shall not without the prior written consent of the other Party:
(i) disclose, disseminate or publish Confidential Information to any person or entity without the prior written consent of the disclosing Party, except to employees of the receiving Party who have a need to know, who have been informed of the receiving Partys obligations hereunder, and who have agreed not to disclose Confidential Information or to use Confidential Information except as permitted herein, or
(ii) use Confidential Information for any purpose other than the performance of its obligations under the Agreement.
(c) Standard of Care . The receiving Party shall protect the Confidential Information of the disclosing Party from inadvertent disclosure with the same level of care
(but in no event less than reasonable care) with which the receiving Party protects its own Confidential Information from inadvertent disclosure.
(d) Exceptions . The receiving Party shall have no obligation under this Agreement to maintain in confidence any information which it can prove:
(i) is in the public domain at the time of disclosure or subsequently becomes part of the public domain through no act or failure to act on the part of the receiving Party or persons or entities to whom the receiving Party has disclosed such information;
(ii) is in the possession of the receiving Party prior to the time of disclosure by the disclosing Party and is not subject to any duty of confidentiality;
(iii) the receiving Party obtains from any third party not under any obligation to keep such information confidential;
(iv) or the receiving Party is compelled to disclose or deliver in response to a law, regulation, or governmental or court order (to the least extent necessary to comply with such order), provided that the receiving Party notifies the disclosing Party promptly after receiving such order to give the disclosing Party sufficient time to contest such order and/or to seek a protective order
(e) Ownership of Confidential Information . All Confidential Information shall remain the exclusive property of the disclosing Party.
(f) Injunctive Relief for Breach . The receiving Party acknowledges that monetary damages may not be a sufficient remedy for unauthorized disclosure or use of Confidential Information, and that the disclosing Party may be entitled, in addition to all other rights or remedies in law and equity, to obtain injunctive or other equitable relief, without the necessity of posting bond in connection therewith.
10. Force Majeure . In the event either Party is unable by Force Majeure (as defined below) to carry out its obligations under this Agreement, it is agreed that on such Partys giving notice in writing, or by telephone and confirmed in writing, to the other Party as soon as possible after the commencement of such Force Majeure event, the obligations of the Party giving such notice, so far as and to the extent they are affected by such Force Majeure, shall be suspended from the commencement of such Force Majeure and during the remaining period of such Force Majeure, but for no longer period, and such Force Majeure shall so far as possible be remedied with all reasonable dispatch; provided, however, the obligation to make payments then accrued hereunder prior to the occurrence of such Force Majeure shall not be suspended and Producer shall remain obligated for any loss or expense to the extent otherwise provided in this Agreement. The capitalized term
Force Majeure as used in this Agreement shall mean events beyond the reasonable control and without the fault of the Party claiming Force Majeure, including acts of God, war, riots, insurrections, laws, proclamations, regulations, strikes of a regional or national nature, acts of terrorism, sabotage, and acts of any government body.
11. Dispute Resolution . In the event a dispute arises under this Agreement that cannot be resolved by those with direct responsibility for the matter in dispute, such dispute shall be resolved by way of the following process:
(a) Senior management from Producer and from RPMG shall meet to discuss the basis for the dispute and shall use their best efforts to reach a reasonable resolution to the dispute.
(b) If negotiations pursuant to Section 11(a) are unsuccessful, the matter shall promptly be submitted by either Party to arbitration in accordance with NGFA® ARBITRATION OF DISPUTES: The parties to this contract agree that the sole remedy for resolution of any and all disagreements or disputes arising under or related to this contract shall be through arbitration proceedings before the National Grain and Feed Association (NGFA) pursuant to the NGFA® Arbitration Rules. The decision and award determined through such arbitration shall be final and binding upon the Buyer and Seller. Judgment upon the arbitration award may be entered and enforced in any court having jurisdiction thereof. (Copies of the NGFA® Arbitration Rules are available from the National Grain and Feed Association, 1250 Eye Street, N.W., Suite 1003, Washington, D.C. 20005; Telephone: 202-289-0873; Website: http://www.ngfa.org). If the Parties reach agreement pertaining to any dispute pursuant to the procedures set forth in this Section 11, such agreement shall be reduced to writing, signed by authorized representatives of each Party, and shall be final and binding upon the Parties.
12. Miscellaneous.
(a) Successors and Assigns; Assignment . All of the terms, covenants, and conditions of this Agreement shall be binding upon, and inure to the benefit of and be enforceable by the Parties and their respective successors, heirs, executors and permitted assigns. No Party may assign its rights, duties or obligations under this Agreement to any other person or entity without the prior written consent of the other Party, such consent not to be unreasonably withheld or delayed; notwithstanding the foregoing, a Party may, without the consent of the other Party, assign its rights and obligations under this Agreement to (i) its parent, a subsidiary, or affiliate under common control with the Party or (ii) a third party acquiring all or substantially all of the assets or business of such Party.
(b) Notices . Any notice or other communication required or permitted hereunder
shall be in writing and shall be considered delivered in all respects when delivered by hand, mailed by first class mail postage prepaid, or sent by facsimile with delivery confirmed, addressed as follows:
To RPMG: RPMG, Inc.
1157 Valley Park Drive, Suite 100
Shakopee, MN 55379
Fax: 952-465-3222
To Producer: Granite Falls Energy, LLC
14045 Hwy 23 SE
Granite Falls, MN 56241
Fax: 320-564-3190
Either Party may, from time to time, furnish, in writing, to the other Party, notice of a change in the address and/or fax number(s) to which notices are to be given hereunder.
(c) Applicable Law . This Agreement shall be governed in all respects by the laws of the State of Minnesota, except with respect to its choice of law provisions.
(d) Severability . In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, either in whole or in part, this Agreement shall continue in full force and effect without said provision.
(e) No Third Party Beneficiaries . No provision of this Agreement is intended, or shall be construed, to be for the benefit of any third party, including, without limitation, the Designee.
(f) Entire Agreement; Amendment . This Agreement constitutes the entire understanding and agreement between the Parties with respect to the subject matter hereof, and supersedes all prior and contemporaneous understandings and/or agreements, written or oral, regarding the subject matter of this Agreement. No amendment or modification to this Agreement shall be binding unless in writing and signed by a duly authorized officer of both Parties.
(g) Counterparts . This Agreement may be executed in counterparts, including facsimile counterparts, each of which shall be deemed an original but together shall constitute but one and the same instrument.
(h) Waiver . The failure of either Party at any time to require performance of any provision of the Agreement or to exercise any right provided for in the Agreement shall not be deemed a waiver of such provision or right unless made in writing and executed by the Party waiving such performance or right. No waiver by either Party of any breach of any provision of the Agreement or of
any right provided for in the Agreement shall be construed as a waiver of any continuing or succeeding breach of such provision or right or a waiver of the provision or right itself.
(i) Independent Contractors . The Parties to this Agreement are independent contractors. There is no relationship of partnership, joint venture, employment, franchise, or agency between the Parties, and no Party shall make any representation to the contrary.
(j) Additional Rules of Interpretation .
(i) The words include, includes and including as used in this Agreement shall be deemed to be followed by the phrase without limitation and shall not be construed to mean that the examples given are an exclusive list of the topics covered.
(ii) The headings as to contents of particular sections of this Agreement are inserted for convenience and shall not be construed as part of the Agreement or as a limitation on the scope of any terms or provisions of this Agreement.
(k) Survival . The following provisions of this Agreement shall survive its termination: (i) to the extent of outstanding payment obligations, Sections 2(a), 2(b), 2(c), and 2(d) and (ii) Sections 2(e), 2(f), 7, 9, 11, and 12.
IN WITNESS THEREOF, each of the Parties hereto has caused this Agreement to be executed by its respective duly authorized representative as of the day and year first above written.
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RPMG, INC. |
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By: |
/s/ Steve Dietz |
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Name: |
Steve L. Dietz |
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Its (title): |
COO |
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PRODUCER |
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By: |
/s/ Tracey L. Olson |
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Name: |
Tracey L. Olson |
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Its (title): |
CEO/GM |
*** Confidential material redacted and filed separately with the Commission.
EXHIBIT A
Terms Relating to Payment and Commission Calculation
RPMG shall pay Producer for all Standard-Grade and Non-Standard Grade corn oil loaded into railcars and trucks and weighed at the Ethanol Facility for shipment to End Customers an amount equal to *** percent (***%) of the estimated F.O.B. Ethanol Facility Price per pound, with RPMG being entitled to retain its commission, with settlement weights as described in Section 4(d) of the Agreement. After month-end is completed and any differences will be reconciled, RPMG will make the final payment to the Producer for corn oil shipped during the month.
Accessorial Charges shall mean charges imposed by third parties for the off-loading, movement and storage of Producers corn oil, including without limitation taxes, tonnage taxes, hard-to-unload truck or railcar charges/transloading charges, railcar repair charges, fuel surcharges, storage charges, demurrage charges, product shrinkage, detention charges, switching, and weighing charges (but excluding Tariff Freight Costs). Neither Party shall be responsible for demurrage charges caused solely by the negligence or willful misconduct of the other Party.
Delivered Sale Price shall mean sales dollars received by RPMG for Producers corn oil, inclusive of tariff freight, as evidenced by RPMGs invoices to End Customers.
F.O.B. Corn Oil Facility Price shall mean the F.O.B. sale price equivalent net of applicable deductions and costs as described in this Agreement, including without limitation Accessorial Charges and Tariff Freight Costs (or, if applicable, the Delivered Sales Price net of applicable deductions and costs as described in this Agreement, including without limitation Accessorial Charges and Tariff Freight Costs) that RPMG invoices End Customers.
Tariff Freight Costs shall mean freight and related costs incurred by RPMG to transport Producers corn oil.
Standard-Grade shall mean corn oil that meet the Specifications set forth in this Agreement.
Non-Standard-Grade shall mean corn oil that fail to meet the Specifications set forth in this Agreement, but which RPMG nonetheless accepts for marketing under this Agreement.
*** Confidential material redacted and filed separately with the Commission.
EXHIBIT B
Corn Oil Specifications
Producer covenants that all corn oil shall, upon delivery to RPMG at the Ethanol Facility, conform to the following Specification:
Component |
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Maximum % |
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Minimum % |
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Moisture; wt% |
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*** |
% |
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Impurities; wt% |
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*** |
% |
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Unsaponafiables; Wt% |
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*** |
% |
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FFA; wt% |
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*** |
% |
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Iodine Value |
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*** |
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Exhibit 10.2
AMENDMENT
TO
DISTILLERS GRAIN MARKETING AGREEMENT
This AMENDMENT TO DISTILLERS GRAIN MARKETING AGREEMENT (the Amendment) is entered into effective as of June 7, 2010, by and between Grainte Falls Energy, LLC, a Minnesota limited liablity company (the Seller) and CHS Inc., a Minnesota cooperative corporation (the Buyer).
RECITALS
A. Seller and Commodity Specialists Company entered into a certain Distillers Grain Marketing Agreement dated as of December 1, 2004, which was subsequently assigned by Commodity Specialists Company to Buyer (the Agreement); and
B. Subject to the terms and conditions set forth herein, Seller and Buyer desire to amend description of the Products to be sold under the Agreement, as provided herein.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. Purchase and Sale. The first sentence of Section 2 of the Agreement is deleted and replaced in its entirety with the following:
Seller agrees to sell to Buyer and Buyer agrees to purchase from Seller the entire bulk feed grade DDGS output from Sellers plant at Granite Falls Minnesota (hereinafter, the Plant), other than the Montevideo Intermodal facility sales (defined below), subject to all terms and conditions set forth in this Agreement. Notwithstanding the foregoing, the parties agree that Seller may sell DDGS from the Plant to Montevideo Intermodal facility, or its subsidiaries (collectively, Motevideo Intermodal) for delivery to the Montevideo Intermodal container loading facility located in Montevideo, Minnesota, without any fees, commissions or amounts due Buyer, provided that Seller notifies Buyer of the quantity to be sold under this provision prior to any such sale.
2. Reminaing Terms Unchanged. Except as set forth in this Amendment, all terms of the Agreement shall remain unchanged and in full force and effect.
3. Definitions . Any capitalized term not defined in this Amendment shall have the meaning set forth in the Agreement.
4. Counterparts This Amendment may be executed in any number of counterparts, each of which shall be an original, but all of which will constitute on in the same instrument. Any executed counterpart of this Amendment delivered by facsimile or other electronic transmission to a party to the Amendment will constitute an original counterpart of this Amendment.
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment effective as of the date first above written.
Granite Falls Energy, LLC |
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CHS Inc. |
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By: |
/s/ Tracey L. Olson |
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By: |
/s/ Steve Markham |
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Its: |
CEO/GM |
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Its: |
Merchant |
Exhibit 31.1
CERTIFICATION PURSUANT TO 17 CFR 240.15d-14(a)
(SECTION 302 CERTIFICATION)
I, Tracey L. Olson , certify that:
1. I have reviewed this quarterly report on Form 10-Q of Granite Falls Energy, LLC;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report;
4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: |
June 14, 2010 |
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/s/ Tracey L. Olson |
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Tracey L. Olson, Chief Executive
Officer
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Exhibit 31.2
CERTIFICATION PURSUANT TO 17 CFR 240.15d-14(a)
(SECTION 302 CERTIFICATION)
I, Stacie Schuler , certify that:
1. I have reviewed this quarterly report on Form 10-Q of Granite Falls Energy, LLC;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report;
4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: |
June 14, 2010 |
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/s/ Stacie Schuler |
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Stacie Schuler, Chief
Financial Officer
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Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report on Form 10-Q of Granite Falls Energy, LLC (the Company) for the quarter ended April 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Tracey L. Olson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Tracey L. Olson |
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Tracey L. Olson, Chief Executive Officer |
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Dated: June 14, 2010 |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report on Form 10-Q of Granite Falls Energy, LLC (the Company) for the quarter ended April 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Stacie Schuler, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Stacie Schuler |
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Stacie Schuler, Chief Financial Officer |
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Dated: June 14, 2010 |