ITEM 1. FINANCIAL STATEMENTS
LAKE AREA CORN PROCESSORS, LLC
Consolidated Balance Sheets (Unaudited)
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
December 31, 2010*
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
Cash
|
$
|
354,430
|
|
|
$
|
637,804
|
|
Accounts receivable
|
5,813,983
|
|
|
4,114,940
|
|
Other receivables
|
105,414
|
|
|
188,959
|
|
Inventory
|
12,075,460
|
|
|
10,063,208
|
|
Due from broker
|
1,515,898
|
|
|
3,725,998
|
|
Derivative financial instruments
|
3,409,163
|
|
|
73,800
|
|
Prepaid expenses
|
118,981
|
|
|
126,523
|
|
Total current assets
|
23,393,329
|
|
|
18,931,232
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
Land
|
676,097
|
|
|
676,097
|
|
Land improvements
|
2,665,358
|
|
|
2,665,358
|
|
Buildings
|
8,088,853
|
|
|
8,088,853
|
|
Equipment
|
40,760,255
|
|
|
40,799,589
|
|
|
52,190,563
|
|
|
52,229,897
|
|
Less accumulated depreciation
|
(23,784,896
|
)
|
|
(22,469,329
|
)
|
Net property and equipment
|
28,405,667
|
|
|
29,760,568
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
Goodwill
|
10,395,766
|
|
|
10,395,766
|
|
Investments
|
2,968,536
|
|
|
2,856,445
|
|
Other
|
191,512
|
|
|
234,410
|
|
Total other assets
|
13,555,814
|
|
|
13,486,621
|
|
|
|
|
|
TOTAL ASSETS
|
$
|
65,354,810
|
|
|
$
|
62,178,421
|
|
|
|
|
|
*Derived from audited financial statements.
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
December 31, 2010*
|
LIABILITIES AND MEMBERS’ EQUITY
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
Outstanding checks in excess of bank balance
|
$
|
2,459,584
|
|
|
$
|
584,412
|
|
Accounts payable
|
3,447,446
|
|
|
5,377,598
|
|
Accrued liabilities
|
442,672
|
|
|
672,802
|
|
Derivative financial instruments
|
3,052,880
|
|
|
2,527,175
|
|
Short-term notes payable
|
—
|
|
|
1,872,000
|
|
Current portion of guarantee payable
|
77,129
|
|
|
52,382
|
|
Current portion of notes payable
|
380,913
|
|
|
1,813,494
|
|
Total current liabilities
|
9,860,624
|
|
|
12,899,863
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
Notes payable, net of current maturities
|
697,824
|
|
|
833,655
|
|
Guarantee payable, net of current portion
|
95,411
|
|
|
95,411
|
|
Other
|
258,659
|
|
|
252,344
|
|
Total long-term liabilities
|
1,051,894
|
|
|
1,181,410
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
MEMBERS’ EQUITY
|
|
|
|
Capital units, $0.50 stated value, 29,620,000 units issued and outstanding
|
14,810,000
|
|
|
14,810,000
|
|
Additional paid-in capital
|
96,400
|
|
|
96,400
|
|
Retained earnings
|
39,535,892
|
|
|
33,190,748
|
|
Total members' equity
|
54,442,292
|
|
|
48,097,148
|
|
|
|
|
|
TOTAL LIABILITIES AND MEMBERS' EQUITY
|
$
|
65,354,810
|
|
|
$
|
62,178,421
|
|
|
|
|
|
*Derived from audited financial statements.
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements.
LAKE AREA CORN PROCESSORS, LLC
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
June 30, 2011
|
|
Three Months
Ended
June 30, 2010
|
|
Six Months
Ended
June 30, 2011
|
|
Six Months
Ended
June 30, 2010
|
|
|
|
|
|
|
|
|
REVENUES
|
$
|
36,943,458
|
|
|
$
|
20,245,683
|
|
|
$
|
72,026,567
|
|
|
$
|
43,084,445
|
|
|
|
|
|
|
|
|
|
COSTS OF REVENUES
|
31,352,313
|
|
|
18,542,586
|
|
|
61,196,746
|
|
|
38,024,667
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
5,591,145
|
|
|
1,703,097
|
|
|
10,829,821
|
|
|
5,059,778
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
769,962
|
|
|
708,003
|
|
|
1,586,432
|
|
|
1,468,012
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
4,821,183
|
|
|
995,094
|
|
|
9,243,389
|
|
|
3,591,766
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
Interest and other income
|
43,605
|
|
|
11,471
|
|
|
57,162
|
|
|
16,311
|
|
Equity in net income of investments
|
48,958
|
|
|
68,018
|
|
|
112,091
|
|
|
144,324
|
|
Interest expense
|
(41,096
|
)
|
|
(111,742
|
)
|
|
(105,498
|
)
|
|
(242,874
|
)
|
Total other income (expense)
|
51,467
|
|
|
(32,253
|
)
|
|
63,755
|
|
|
(82,239
|
)
|
|
|
|
|
|
|
|
|
NET INCOME
|
$
|
4,872,650
|
|
|
$
|
962,841
|
|
|
$
|
9,307,144
|
|
|
$
|
3,509,527
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED EARNINGS PER UNIT
|
$
|
0.16
|
|
|
$
|
0.03
|
|
|
$
|
0.31
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING FOR THE CALCULATION OF BASIC & DILUTED EARNINGS PER UNIT
|
29,620,000
|
|
|
29,620,000
|
|
|
29,620,000
|
|
|
29,620,000
|
|
|
|
|
|
|
|
|
|
DISTRIBUTIONS DECLARED PER UNIT
|
$
|
0.10
|
|
|
$
|
—
|
|
|
$
|
0.10
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements.
LAKE AREA CORN PROCESSORS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
Six Months
Ended
June 30, 2011
|
|
Six Months
Ended
June 30, 2010
|
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
Net income
|
$
|
9,307,144
|
|
|
$
|
3,509,527
|
|
Changes to net income not affecting cash
|
|
|
|
Depreciation and amortization
|
1,397,799
|
|
|
1,319,943
|
|
Equity in net (income) loss of investments
|
(112,091
|
)
|
|
(144,324
|
)
|
Unrealized loss on purchase commitments
|
—
|
|
|
511,814
|
|
Lower of cost or market adjustment on inventory
|
—
|
|
|
90,264
|
|
Gain on sale of equipment
|
(9,300
|
)
|
|
—
|
|
Derivative financial instruments and due from broker
|
(599,557
|
)
|
|
(9,522
|
)
|
(Increase) decrease in
|
|
|
|
Receivables
|
(1,615,352
|
)
|
|
1,339,990
|
|
Inventory
|
(2,012,252
|
)
|
|
167,166
|
|
Prepaid expenses
|
7,542
|
|
|
11,104
|
|
Increase (decrease) in
|
|
|
|
|
Accounts payable
|
(1,930,298
|
)
|
|
(3,736,360
|
)
|
Accrued liabilities
|
(223,815
|
)
|
|
(209,153
|
)
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
4,209,820
|
|
|
2,850,449
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
Sale of equipment
|
9,300
|
|
|
—
|
|
NET CASH PROVIDED BY INVESTING ACTIVITIES
|
9,300
|
|
|
—
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
Increase in outstanding checks in excess of bank balance
|
1,875,171
|
|
|
(285,804
|
)
|
Principal payments on short-term notes payable
|
(1,872,000
|
)
|
|
—
|
|
Principal payments on long-term notes payable
|
(1,543,665
|
)
|
|
(1,262,497
|
)
|
Distributions paid to members
|
(2,962,000
|
)
|
|
—
|
|
NET CASH (USED FOR) FINANCING ACTIVITIES
|
(4,502,494
|
)
|
|
(1,548,301
|
)
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
(283,374
|
)
|
|
1,302,148
|
|
|
|
|
|
CASH AT BEGINNING OF PERIOD
|
637,804
|
|
|
365,066
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
$
|
354,430
|
|
|
$
|
1,667,214
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
Cash paid during the period for interest
|
$
|
220,481
|
|
|
$
|
341,250
|
|
See Notes to Unaudited Consolidated Financial Statements
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2011 AND 2010
NOTE 1 . NATURE OF OPERATIONS
Principal Business Activity
Lake Area Corn Processors, LLC and subsidiary (the Company) is a South Dakota limited liability company located in Wentworth, South Dakota. The Company was organized by investors to provide a portion of the corn supply for a 40 million-gallon (annual capacity) ethanol plant, owned by Dakota Ethanol, LLC (Dakota Ethanol). The Company sells ethanol and related products to customers located in North America.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America although the Company believes that the disclosures are adequate to make the information not misleading.
In the opinion of management, all adjustments consisting only of normal recurring adjustments considered necessary for a fair presentation have been included in the accompanying financial statements. The results of operations for the three and six months ended June 30, 2011 and 2010 are not necessarily indicative of the results to be expected for a full year.
These financial statements should be read in conjunction with the financial statements and notes included in the Company's audited financial statements for the year ended December 31, 2010, contained in the annual report on Form 10-K for 2010.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of its wholly owned subsidiary, Dakota Ethanol. All significant inter-company transactions and balances have been eliminated in consolidation.
Revenue Recognition
Revenue from the production of ethanol and related products is recorded when title transfers to customers, net of allowances for estimated returns. Generally, ethanol and related products are shipped FOB shipping point, based on written contract terms between Dakota Ethanol and its customers. Collectability of revenue is reasonably assured based on historical evidence of collectability between Dakota Ethanol and its customers. Interest income is recognized as earned.
Shipping costs incurred by the Company in the sale of ethanol, dried distillers grains and corn oil are not specifically identifiable and as a result, revenue from the sale of these products is recorded based on the net selling price reported to the Company from the marketer.
Cost of Revenues
The primary components of cost of revenues from the production of ethanol and related co-product are corn expense, energy expense (natural gas and electricity), raw materials expense (chemicals and denaturant), and direct labor costs.
Shipping costs incurred in the sale of dried distiller's grains are classified in net revenues. Shipping costs on modified and wet distiller's grains are included in cost of revenues. Shipping costs were approximately $525,000 and $287,000 for the six and three months ended June 30, 2011, respectively. Shipping costs were approximately $319,000 and $146,000 for the six and three months ended June 30, 2010, respectively.
Inventory Valuation
Ethanol inventory, raw materials, work-in-process, and parts inventory are valued using methods which approximate the lower of cost (first-in, first-out) or market. Distillers grains and related products are stated at net realizable value. In the valuation of inventories and purchase and sale commitments, market is based on current replacement values except that it does not exceed net realizable values and is not less than net realizable values reduced by allowances for approximate normal profit margin.
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2011 AND 2010
Investment in commodities contracts, derivative instruments and hedging activities
The Company is exposed to certain risks related to our ongoing business operations. The primary risks that we manage by using forward or derivative instruments are price risk on anticipated purchases of corn, natural gas and the sale of ethanol.
The Company is subject to market risk with respect to the price and availability of corn, the principal raw material we use to produce ethanol and ethanol by-products. In general, rising corn prices result in lower profit margins and, therefore, represent unfavorable market conditions. This is especially true when market conditions do not allow us to pass along increased corn costs to our customers. The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.
Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting 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 the accounting and reporting requirements of derivative accounting. For transactions initiated prior to January 1, 2011, we applied the normal purchase and sales exemption under derivative accounting for forward purchases of corn and sales of distiller's grains. We are choosing not to exempt corn purchase contracts initiated after December 31, 2010 from the derivative accounting and reporting requirements. As of June 30, 2011, we are committed to purchasing 3.7 million bushels of corn on a forward contract basis with an average price of $6.51 per bushel, of which 2.7 million bushels are subject to derivative accounting treatment and 1.0 million bushels are accounted for as normal purchases, and accordingly, are not marked to market and are accounted for using lower of cost or market accounting. Dakota Ethanol has a derivative financial instrument liability of approximately $3.1 million related to the forward contracted purchases of corn. The corn purchase contracts represent 22% of the annual corn usage.
The Company enters into firm-price purchase commitments with some of our natural gas suppliers under which we agree to buy natural gas at a price set in advance of the actual delivery of that natural gas to us. Under these arrangements, we assume the risk of a price decrease in the market price of natural gas between the time this price is fixed and the time the natural gas is delivered. At June 30, 2011, we are committed to purchasing 60,000 MMBtu's of natural gas with an average price of $4.32 per MMBtu. We account for these transactions as normal purchases, and accordingly, do not mark these transactions to market.
The Company enters into short-term forward, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. The Company enters into short-term forward, option and futures contracts for sales of ethanol to manage exposure to changes in energy prices. All of our derivatives are designated as non-hedge derivatives, and accordingly are recorded at fair value with changes in fair value recognized in net income. Although the contracts are considered economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.
As part of our trading activity, The Company uses futures and option contracts offered through regulated commodity exchanges to reduce risk and we are exposed to risk of loss in the market value of inventories. To reduce that risk, we generally take positions using forward and futures contracts and options.
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2011 AND 2010
Derivatives not designated as hedging instruments at June 30, 2011 and December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
June 30, 2011
|
|
December 31, 2010*
|
Futures and options contracts
|
|
Current Assets
|
|
$
|
3,409,163
|
|
|
$
|
—
|
|
Forward contracts
|
|
Current Assets
|
|
$
|
—
|
|
|
$
|
73,800
|
|
Futures and options contracts
|
|
(Current Liabilities)
|
|
$
|
—
|
|
|
$
|
(2,527,175
|
)
|
Forward contracts
|
|
(Current Liabilities)
|
|
$
|
(3,052,880
|
)
|
|
$
|
—
|
|
*Derived from audited financial statements.
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas purchases are included as a component of cost of revenues and derivative contracts related to ethanol sales are included as a component of revenues in the accompanying financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income
|
|
Three Months Ended June 30,
|
|
|
Classification
|
|
2011
|
|
2010
|
Net realized and unrealized gains (losses) related to purchase contracts:
|
|
|
|
|
|
|
Futures and options contracts
|
|
Cost of Revenues
|
|
$
|
4,297,045
|
|
|
$
|
247,692
|
|
Forward contracts
|
|
Cost of Revenues
|
|
$
|
(3,448,197
|
)
|
|
$
|
(255,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income
|
|
Six Months Ended June 30,
|
|
|
Classification
|
|
2011
|
|
2010
|
Net realized and unrealized gains (losses) related to sales contracts:
|
|
|
|
|
|
|
Futures and options contracts
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
252,938
|
|
|
|
|
|
|
|
|
Net realized and unrealized gains (losses) related to purchase contracts:
|
|
|
|
|
|
|
Futures and options contracts
|
|
Cost of Revenues
|
|
$
|
1,881,237
|
|
|
$
|
2,759,608
|
|
Forward contracts
|
|
Cost of Revenues
|
|
$
|
(3,126,680
|
)
|
|
$
|
(567,838
|
)
|
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Environmental Liabilities
Dakota Ethanol's operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdiction in which it operates. These laws require Dakota Ethanol to investigate and remediate the effects of the release or disposal of materials at its locations. Accordingly, Dakota Ethanol has adopted policies, practices and procedures in the areas of pollution control, occupational health and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability which could result from such events. Environmental liabilities
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2011 AND 2010
are recorded when Dakota Ethanol's liability is probable and the costs can be reasonably estimated.
Recent Accounting Pronouncements
In January 2010, the FASB issued ASU 2010.06, Improving Disclosures About Fair Value Measurements, which amends ASC 820.10 to require new disclosures about transfers in and out of Level 1 and Level 2 fair value measurements and the roll forward activity in Level 3 fair value measurements. ASU 2010.06 also clarifies existing disclosure requirements regarding the level of disaggregation of each class of assets and liabilities within a line item in the statement of financial condition and clarifies that a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3 fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the new disclosures about the roll forward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company's adoption of this guidance did not have an impact on its financial condition or results of operations.
NOTE 3. INVENTORY
Inventory consisted of the following as of June 30, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
December 31, 2010*
|
Raw Materials
|
|
$
|
9,119,189
|
|
|
$
|
6,100,759
|
|
Finished Goods
|
|
1,005,221
|
|
|
2,233,676
|
|
Work in process
|
|
988,378
|
|
|
821,897
|
|
Parts inventory
|
|
962,672
|
|
|
906,876
|
|
|
|
$
|
12,075,460
|
|
|
$
|
10,063,208
|
|
*Derived from audited financial statements.
NOTE 4. SHORT-TERM NOTE PAYABLE
On June 6, 2011, Dakota Ethanol renewed a revolving promissory note from First National Bank of Omaha in the amount of $10,000,000. The note expires on May 1, 2012 and the amount available is subject to certain restrictive covenants establishing minimum reporting requirements, ratios, working capital, net worth and borrowing base requirements. Interest on the outstanding principal balances will accrue at 350 basis points above the 1 month LIBOR rate (4.00 percent at June 30, 2011). The rate is subject to a floor of 4.0 percent. There is a commitment fee of 0.4 percent on the unused portion of the $10,000,000 availability. In addition, the bank draws the checking account balance to a minimum balance on a daily basis. The excess cash pays down or the shortfall is drawn upon the note as needed. The note is collateralized by the ethanol plant, its accounts receivable and inventories. On June 30, 2011 Dakota Ethanol had $0 outstanding and $10,000,000 available to be drawn on the revolving promissory note. On December 31, 2010, Dakota Ethanol had $1,872,000 outstanding and $3,128,000 available to be drawn on the revolving promissory note.
NOTE 5. LONG-TERM NOTES PAYABLE
Dakota Ethanol has a note payable to First National Bank of Omaha, Nebraska (the Bank) (Term Note 5).
As part of the note payable agreement, Dakota Ethanol is subject to certain restrictive covenants establishing minimum reporting requirements, ratios, working capital and net worth requirements. The notes are collateralized by the ethanol plant and equipment, its accounts receivable and inventories. We are in compliance with our financial covenants as of June 30, 2011.
On June 6, 2011, Dakota Ethanol restructured Term Note 5. Term Note 5 is a reducing revolving note with an availability of $5,000,000. Interest on outstanding principal balances will accrue at 350 basis points above the 1 month LIBOR rate (4.00 percent at June 30, 2011). The rate is subject to a floor of 4.0 percent. Dakota Ethanol may elect to borrow any principal amount repaid
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2011 AND 2010
on Term Note 5 up to $5,000,000 subject to the terms of the agreement. Should Dakota Ethanol elect not to utilize this feature, the lender will assess an unused commitment fee of 0.4 percent on the unused portion of the note. Term Note 5 has a reducing feature through which the available amount of the note is reduced by $500,000 on the anniversary of the note. The note matures on May 1, 2014. On June 30, 2011, Dakota Ethanol had $0 outstanding and $5,000,000 available to be drawn on Term Note 5. On December 31, 2010, Dakota Ethanol had $0 outstanding and $5,000,000 available to be drawn on Term Note 5.
During December 2008, Dakota Ethanol issued a note payable related to the purchase of land adjacent to the plant site. The note was issued for $450,000. The note matures on December 1, 2012. The note is payable in annual installments of $112,500 plus interest. Interest on outstanding principal balances will accrue at a fixed rate of 7.0 percent.
Dakota Ethanol conducted a private placement offering of subordinated unsecured debt securities which closed on May 30, 2009. The securities mature two years from the date of issuance. Interest on the outstanding balances will accrue at a fixed rate of 9 percent. Interest will be paid annually on January 30
th
of each year beginning on January 30, 2010. We have raised $1,439,000 in subordinated debt through this offering. The outstanding balances were paid off at maturity in 2011.
On May 22, 2009, Dakota Ethanol entered into two loan agreements for alternative financing for our corn oil extraction equipment as we had agreed with FNBO; one loan with Rural Electric Economic Development, Inc (REED) and the other loan with First District Development Company (FDDC).
The note to REED for $1 million has a fixed interest rate of 4.7%. The note requires monthly installments of $18,734 and matures on May 25, 2014. The note is secured by the oil extraction equipment.
The note to FDDC for $200,000 has a fixed interest rate of 5.5%. The note requires monthly installments of $3,820 and matures on May 22, 2014. The note is secured by the oil extraction equipment.
The balances of the notes payable are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
December 31, 2010*
|
Note payable to First National Bank, Omaha
|
|
|
|
|
Term Note 5
|
|
$
|
—
|
|
|
$
|
—
|
|
Note payable - Land
|
|
225,000
|
|
|
225,000
|
|
Note payable - Subordinated notes
|
|
—
|
|
|
1,439,000
|
|
Note payable - REED
|
|
612,193
|
|
|
708,881
|
|
Note payable - FDDC
|
|
123,275
|
|
|
142,497
|
|
Note payable - Other
|
|
118,269
|
|
|
131,771
|
|
|
|
1,078,737
|
|
|
2,647,149
|
|
|
|
|
|
|
Less current portion
|
|
(380,913
|
)
|
|
(1,813,494
|
)
|
|
|
|
|
|
|
|
$
|
697,824
|
|
|
$
|
833,655
|
|
*Derived from audited financial statements
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2011 AND 2010
Minimum principal payments for the next five years are as follows:
|
|
|
|
|
|
Years Ending June 30,
|
|
Amount
|
2012
|
|
$
|
380,913
|
|
2013
|
|
394,227
|
|
2014
|
|
273,811
|
|
2015
|
|
29,786
|
|
2016
|
|
—
|
|
NOTE 6. FAIR VALUE MEASUREMENTS
The Company complies with the fair value measurements and disclosures standard which defines fair value, establishes a framework for measuring fair value, and expands disclosure for those assets and liabilities carried on the balance sheet on a fair value basis.
The Company's balance sheet contains derivative financial instruments that are recorded at fair value on a recurring basis. Fair value measurements and disclosures require that assets and liabilities carried at fair value be classified and disclosed according to the process for determining fair value. There are three levels of determining fair value.
Level 1 uses quoted market prices in active markets for identical assets or liabilities.
Level 2 uses observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3 uses unobservable inputs that are not corroborated by market data.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Derivative financial instruments
. Commodity futures and options contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the CBOT and NYMEX markets. Over-the-counter commodity options contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the over-the-counter markets. Forward purchase contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from local grain terminal bid values. The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based off the CBOT markets.
For the quarter ending June 30, 2011, the Company evaluated the markets that it participates in for the measurement of fair value at the representative market value. The activity that occurred on June 30, 2011 showed a significant decrease in the transaction volume from normal activity, the indexes that were previously highly correlated with the fair values of the assets and liabilities were demonstrably uncorrelated with recent indications of fair value for those assets and liabilities. As a result of these conditions, we concluded that transactions or quoted prices were not representative of fair value and opted to choose a fair value measurement criteria or pricing information that were more representative of the fair value of those items on June 30, 2011 based on the Company’s local market pricing on July 5, 2011. Consequently, corn futures and exchange traded options asset (liability) transferred from Level 1 to Level 2 due to the decrease in market activity for these assets.
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2011 AND 2010
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Derivative financial instruments, forward contracts
|
|
$
|
3,409,163
|
|
|
$
|
—
|
|
|
$
|
3,409,163
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments, futures and options contracts
|
|
$
|
(3,052,880
|
)
|
|
$
|
—
|
|
|
$
|
(3,052,880
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Derivative financial instruments, forward contracts
|
|
$
|
73,800
|
|
|
$
|
—
|
|
|
$
|
73,800
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments, futures and options contracts
|
|
$
|
(2,527,175
|
)
|
|
$
|
(2,527,175
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
*Derived from audited financial statements.
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at June 30, 2011.
Disclosure requirements for fair value of financial instruments require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non recurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below.
The Company believes the carrying amount of cash, cash equivalents, accounts receivable, due from broker, outstanding checks in excess of bank balance, accounts payable and short-term debt approximates fair value due to the short maturity of these instruments.
The carrying amount of long-term obligations at June 30, 2011 of $1,251,277 had an estimated fair value of approximately $1,228,604 based on estimated interest rates for comparable debt. The carrying amount and fair value were $2,794,942 and $2,797,016 respectively at December 31, 2010.
NOTE 7. RELATED PARTY TRANSACTIONS
Dakota Ethanol owns a 8% interest in RPMG, in which Dakota Ethanol has entered into marketing agreements for the exclusive rights to market, sell and distribute the entire ethanol and dried distiller's grains inventories produced by Dakota Ethanol. The marketing fees are included in net revenues.
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2011 AND 2010
Sales and marketing fees related to the agreements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
Sales ethanol
|
|
$
|
30,338,079
|
|
|
$
|
16,781,922
|
|
|
$
|
59,940,385
|
|
|
$
|
35,689,308
|
|
Sales distillers grains
|
|
1,939,033
|
|
|
1,831,953
|
|
|
3,646,751
|
|
|
3,602,775
|
|
|
|
|
|
|
|
|
|
|
Marketing fees ethanol
|
|
57,036
|
|
|
52,621
|
|
|
117,791
|
|
|
106,992
|
|
Marketing fees coproducts
|
|
18,086
|
|
|
21,663
|
|
|
37,313
|
|
|
43,754
|
|
|
|
|
|
|
|
|
|
|
|
|
Jume 30, 2011
|
|
December 31, 2010
|
|
|
|
|
Amounts due included in accounts receivable
|
|
$
|
4,441,670
|
|
|
$
|
3,504,400
|
|
|
|
|
|
NOTE 8. SUBSEQUENT EVENTS
During July 2011, the Company declared and paid a distribution to its members of $2,962,000, or $0.10 per capital unit.
ITEM 2. MANAGEMENT'S 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 periods ended
June 30, 2011
, compared to the same periods of the prior year. This discussion should be read in conjunction with the consolidated financial statements and the Management's Discussion and Analysis section for the fiscal year ended
December 31, 2010
, included in the Company's Annual Report on Form 10-K for 2010.
Disclosure Regarding Forward-Looking Statements
This report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "future," "intend," "could," "hope," "predict," "target," "potential," "continue" or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report and our annual report on Form 10-K for the fiscal year ended
December 31, 2010
.
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 undertake no duty to update these forward-looking statements, even though our situation may change in the future. 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
Lake Area Corn Processors, LLC is a South Dakota limited liability company that owns and manages its wholly-owned subsidiary, Dakota Ethanol, L.L.C. Dakota Ethanol, L.L.C. owns and operates an ethanol plant located near Wentworth, South Dakota that has a nameplate production capacity of 40 million gallons of ethanol per year. Lake Area Corn Processors, LLC is referred to in this report as "LACP," the "company," "we," or "us." Dakota Ethanol, L.L.C. is referred to in this report as "Dakota Ethanol" "we" "us" or the "ethanol plant."
Our revenue is derived from the sale and distribution of our ethanol, distillers grains and corn oil. The ethanol plant currently operates in excess of its nameplate capacity, producing approximately 47 million gallons of ethanol per year. Corn is supplied to us primarily from our members who are local agricultural producers and from purchases of corn on the open market. We have engaged RPMG, Inc. to market all of the ethanol and corn oil that we produce at the plant. Further, RPMG, Inc. markets all of the distillers grains that we produce that we do not market internally to local customers.
On June 6, 2011, we executed amended loan agreements with our primary lender, First National Bank of Omaha. Following the amendments, the face amount of our short-term revolving loan increased from $5 million to $10 million and the maturity date of our short-term revolving loan was extended to May 1, 2012. In addition, we agreed that the principal amount of our long-term revolving loan would decrease by $500,000 each year until maturity. Therefore, on May 1, 2012, the maximum amount of the long-term revolving loan will decrease to $4.5 million and on May 1, 2013 will decrease to $4 million. The maturity date of our long-term revolving loan was extended to May 1, 2014. Our credit facilities are described in greater detail below in the section entitled “
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Indebtedness
.”
In May 2011, our board of directors declared and paid a distribution to our members. The total amount of this distribution was $2,962,000, or $0.10 per capital unit. In July 2011, our board of managers declared and paid an additional distribution to our members. The total amount of the July 2011 distribution was $2,962,000, or $0.10 per capital unit.
Results of Operations
Comparison of the Fiscal Quarters Ended
June 30, 2011
and
2010
The following table shows the results of our operations and the percentage of revenues, cost of revenues, operating expenses and other items to total revenues in our consolidated statements of operations for the fiscal quarters ended
June 30, 2011
and
2010
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
Income Statement Data
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Revenue
|
|
$
|
36,943,458
|
|
|
100.0
|
|
|
$
|
20,245,683
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
31,352,313
|
|
|
84.9
|
|
|
18,542,586
|
|
|
91.6
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
5,591,145
|
|
|
15.1
|
|
|
1,703,097
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
Operating Expense
|
|
769,962
|
|
|
2.1
|
|
|
708,003
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
4,821,183
|
|
|
13.1
|
|
|
995,094
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
51,467
|
|
|
0.1
|
|
|
(32,253
|
)
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
4,872,650
|
|
|
13.2
|
|
|
$
|
962,841
|
|
|
4.8
|
|
Revenues
Revenue from ethanol sales increased by approximately
81%
during our
second quarter of 2011
compared to the same period of 2010. Revenue from distillers grains increased by approximately
85%
during our
second quarter of 2011
compared to the same period of 2010. Revenue from corn oil increased by approximately
150%
during our
second quarter of 2011
compared to the same period of 2010.
Ethanol
Our ethanol revenue was approximately
$13.6 million
greater during our
second quarter of 2011
compared to our second quarter of 2010, an increase of approximately
81%
. This increase in ethanol revenue was due to an increase in the average price we received for our ethanol of approximately
$1.07
per gallon, an increase of approximately
75%
, during our
second quarter of 2011
compared to our second quarter of 2010. Management attributes this increase in ethanol prices with significantly higher corn and energy prices during our
second quarter of 2011
compared to the same period of 2010. Management anticipates that ethanol prices will remain at their current levels during the remaining quarters of our 2011 fiscal year. Management anticipates strong demand for ethanol due to higher gasoline prices. Management anticipates that the strong demand, along with higher corn prices which positively impact ethanol prices, will result in continued high ethanol prices in the near term.
In addition to the higher ethanol prices, we also increased our ethanol sales during our
second quarter of 2011
compared to the same period of 2010. Our total ethanol sales during our
second quarter of 2011
were approximately
4%
greater than during the same period of 2010, an increase of approximately
439,000
gallons. Management attributes this increase in ethanol sales with a carryover of inventory from the prior quarter. Management anticipates that ethanol sales during our remaining quarters of our 2011 fiscal year will be comparable to our 2010 fiscal year as we anticipate comparable ethanol production.
Ethanol demand has increased during our
second quarter of 2011
due to increased ethanol exports to Canada along with ethanol exports to Europe. Canada recently passed legislation requiring the use of more ethanol in Canada. However, Canada does not currently have sufficient ethanol production capacity to satisfy this ethanol requirement. As a result, Canada has been importing the ethanol shortfall from the United States. However, Canada has taken steps to increase domestic ethanol production in order to satisfy its own ethanol use requirements. Therefore, these increased ethanol exports to Canada may not continue indefinitely as Canada's domestic ethanol industry increases production. Management believes that ethanol demand in the United States is affected by what is referred to as the "blend wall." Most gasoline used in the United States is blended at a rate of 10% ethanol and 90% gasoline. The blend wall refers to the maximum amount of ethanol that can be used in the United States, based on the total gasoline demand, when ethanol is blended at a rate of 10%. It is estimated that 135 billion gallons of gasoline are consumed in the United States each year. Therefore, the blend wall is approximately 13.5 billion gallons of ethanol. Because of the blend wall, domestic ethanol demand is not expected to increase significantly without the use of more mid-level blends of
ethanol. Management believes that the recent push to increase ethanol demand in the United States through E15 may not result in a significant increase in ethanol demand. Management believes that gasoline retailers will refuse to carry E15 due to the fact that not all standard vehicles can use E15 and due to potential liability for gasoline retailers if customers use E15 in vehicles that are not approved for E15. In addition, management believes that the labeling requirement for E15 that is being considered by the EPA may discourage the use of higher percentage blends of ethanol. Without increases in domestic ethanol demand, we may experience periods when ethanol supply exceeds ethanol demand which may negatively impact the price we receive for our ethanol.
Distillers Grains
Our total distillers grains sales were the same for our
second quarter of 2011
compared to the same period of 2010. However, we sold less distillers grains in the dried form during our
second quarter of 2011
compared to the same period of 2010. For our
second quarter of 2011
, we sold approximately
19%
of our total distillers grains in the dried form and approximately
81%
of our total distillers grains in the modified/wet form. For our second quarter of 2010, we sold approximately
46%
of our total distillers grains in the dried form and approximately
54%
of our total distillers grains in the modified/wet form. This change in the composition of our distillers grains sales was due to market conditions in the distillers grains market, including increased local demand. The average price we received for our dried distillers grains was approximately
61%
greater during our
second quarter of 2011
compared to the same period of 2010, an increase of approximately
$56
per ton. The average price we received for our modified/wet distillers grains was approximately
98%
greater for our
second quarter of 2011
compared to the same period of 2010, an increase of approximately
$81
per ton. Management attributes this increase in the selling price of our distillers grains with increased corn prices and increased distillers grains demand. Since distillers grains are typically used as a feed substitute for corn, as the price of corn increases, the price of and demand for distillers grains also increase.
Management expects to continue to make decisions as to whether our distillers grains will be marketed as dried distillers grains as opposed to modified/wet distillers grains based on market conditions. These market conditions include supply and demand factors as well as the price difference between dried distillers grains and modified/wet distillers grains along with the higher natural gas costs associated with drying our distillers grains.
Corn Oil
Our total pounds of corn oil sold increased by approximately
42%
during our
second quarter of 2011
compared to the same period of 2010, primarily due to improved operation of the corn oil extraction equipment. Management anticipates that our corn oil sales will be comparable during the remaining quarters of our 2011 fiscal year. In addition to the increase in corn oil sales, the average price we received for our corn oil increased by approximately
80%
for our
second quarter of 2011
compared to the same period of 2010. Management attributes this increase in corn oil prices with higher corn prices and increased corn oil demand. Management anticipates corn oil prices will be comparable during the remaining quarters of our 2011 fiscal year.
Cost of Revenues
The primary raw materials we use to produce ethanol and distillers grains are corn and natural gas. Our cost of revenues was approximately
69%
greater for our
second quarter of 2011
compared to the same period of 2010 due to higher corn costs. Our average cost per bushel of corn increased by approximately
88%
for our
second quarter of 2011
compared to our second quarter of 2010, an increase of approximately
$2.84
per bushel of corn. Management attributes this increase in corn costs with higher market corn prices due to decreased corn carryover from the 2009/2010 crop year. However, the area surrounding our ethanol plant had a good harvest in the fall of 2010 so we have not experienced the same corn price increases that ethanol plants in other areas of the country may have experienced. Management anticipates that the area surrounding the ethanol plant will continue to produce a significant amount of corn and that we will not have any difficulty securing the corn that we need to operate the ethanol plant. We used approximately
1%
less bushels of corn during our
second quarter of 2011
compared to the same period of 2010 due to the fact that the corn we used in the 2011 period was of higher quality than the corn we used in the 2010 period.
Our cost of revenues related to natural gas decreased by approximately
$13,000
, a decrease of approximately
1%
, for our
second quarter of 2011
compared to our second quarter of 2010. This decrease was due to a decrease in market natural gas prices during our
second quarter of 2011
compared to the same period of 2010. Our average cost per MMBtu of natural gas during our
second quarter of 2011
was approximately
2%
lower compared to our second quarter of 2010, a decrease of approximately
$0.07
per MMBtu of natural gas. Management attributes this decrease in natural gas prices to strong natural gas supplies and relatively stable natural gas demand. Management anticipates that natural gas prices will remain steady during our 2011 fiscal year unless natural gas production problems arise, such as from hurricane activity in the Gulf Coast. We anticipate higher natural gas prices during the winter months due to increased natural gas demand for heating needs which typically results in premium natural gas pricing during the winter months.
We used less natural gas during our
second quarter of 2011
compared to the same period of 2010 due to the fact that we were producing less distillers grains in the dried form. We used approximately
3%
less natural gas, a decrease of approximately
8,000
MMBtu of natural gas, during our
second quarter of 2011
compared to the same period of 2010. Management anticipates that our natural gas consumption will be comparable during our 2011 fiscal year to our 2010 fiscal year due to anticipated levels of production at the ethanol plant.
Operating Expense
Our operating expenses were higher for our
second quarter of 2011
compared to the same period of 2010 due primarily to higher bonus expenses. We pay a bonus to our chief executive officer based on the profitability of the ethanol plant which was higher during our
second quarter of 2011
compared to the same period of 2010.
Other Income and Expense
Our interest expense was significantly lower for our
second quarter of 2011
compared to the same period of 2010 because we had significantly less debt outstanding. In addition, we had more interest income during our
second quarter of 2011
compared to the same period of 2010 due to having more cash on hand during the 2011 period.
Comparison of the Six Months Ended
June 30, 2011
and
2010
The following table shows the results of our operations and the percentage of revenues, cost of revenues, operating expenses and other items to total revenues in our consolidated statements of operations for the six months ended
June 30, 2011
and
2010
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
Income Statement Data
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Revenue
|
|
$
|
72,026,567
|
|
|
100.0
|
|
|
$
|
43,084,445
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
61,196,746
|
|
|
85.0
|
|
|
38,024,667
|
|
|
88.3
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
10,829,821
|
|
|
15.0
|
|
|
5,059,778
|
|
|
11.7
|
|
|
|
|
|
|
|
|
|
|
Operating Expense
|
|
1,586,432
|
|
|
2.2
|
|
|
1,468,012
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
9,243,389
|
|
|
12.8
|
|
|
3,591,766
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
63,755
|
|
|
0.1
|
|
|
(82,239
|
)
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
9,307,144
|
|
|
12.9
|
|
|
$
|
3,509,527
|
|
|
8.1
|
|
Revenues
Revenue from ethanol sales increased by approximately
67%
during the
six months ended June 30, 2011
compared to the same period of 2010. Revenue from distillers grains increased by approximately
65%
during the
six months ended June 30, 2011
compared to the same period of 2010. Revenue from corn oil increased by approximately
119%
during the
six months ended June 30, 2011
compared to the same period of 2010.
Ethanol
Our ethanol revenue was approximately
$23,998,000
greater during the
six months ended June 30, 2011
compared to the
six months ended June 30, 2010
, an increase of approximately
67%
. The average price we received for our ethanol increased by approximately
58%
for the
six months ended June 30, 2011
compared to the same period of 2010, an increase of approximately
$0.88
per gallon of ethanol sold. Our total ethanol sales during the
six months ended June 30, 2011
were approximately
5%
greater than during the same period of 2010, an increase of approximately
1,283,000
gallons.
Distillers Grains
Our total distillers grains revenue increased by approximately
$3,986,000
for the
six months ended June 30, 2011
compared to the same period of 2010. We sold a comparable number of tons of distillers grains during both periods, however, the prices we
received for our distillers grains were significantly higher for the
six months ended June 30, 2011
compared to the same period of 2010. The average price we received for our dried distillers grains increased by approximately
$29
per ton, an increase of approximately
31%
, for the
six months ended June 30, 2011
compared to the same period of 2010. The average price we received for our modified/wet distillers grains increased by approximately
$68
per ton, an increase of approximately
79%
, for the
six months ended June 30, 2011
compared to the same period of 2010. For the
six months ended June 30, 2011
, we sold approximately
21%
of our distillers grains in the dried form and approximately
79%
in the modified/wet form. During the
six months ended June 30, 2010
, we sold approximately
43%
of our distillers grains in the dried form and approximately
57%
in the modified/wet form.
Corn Oil
Our total pounds of corn oil sold increased by approximately
28%
during the
six months ended June 30, 2011
compared to the same period of 2010. In addition, the average price we received for our corn oil increased by approximately
72%
for the
six months ended June 30, 2011
compared to the same period of 2010.
Cost of Revenues
Our cost of revenues was approximately
61%
greater for the
six months ended June 30, 2011
compared to the same period of 2010 due to higher corn costs. Our average cost per bushel of corn increased by approximately
81%
for the
six months ended June 30, 2011
compared to the same period of 2010, an increase of approximately
$2.56
per bushel of corn. We used approximately
1%
fewer bushels of corn during the
six months ended June 30, 2011
compared to the same period of 2010.
Our cost of revenues related to natural gas decreased by approximately
$445,000
, a decrease of approximately
12%
, for the
six months ended June 30, 2011
compared to the same period of 2010. Our average cost per MMBtu of natural gas during the
six months ended June 30, 2011
was approximately
12%
lower compared to the
six months ended June 30, 2010
, a decrease of approximately
$0.65
per MMBtu of natural gas. We used approximately the same amount of natural gas during the
six months ended June 30, 2011
compared to the same period of 2010.
Operating Expense
Our operating expenses were higher for the
six months ended June 30, 2011
compared to the same period of 2010, due primarily to higher bonus expenses.
Other Income and Expense
Our interest expense was lower for the
six months ended June 30, 2011
compared to the same period of 2010 because we had significantly less debt outstanding. In addition, we had more interest income during the
six months ended June 30, 2011
compared to the same period of 2010 due to having more cash on hand during the 2011 period.
Changes in Financial Condition for the
Six
Months Ended
June 30, 2011
.
Current Assets
Our current assets were higher at
June 30, 2011
compared to
December 31, 2010
primarily due to increased accounts receivable, inventory and unrealized gains on our risk management positions. The increases in our accounts receivable and inventory are tied to recent increases in corn and ethanol prices. The amount we had due from our commodities broker was lower at
June 30, 2011
compared to
December 31, 2010
because we were required to hold less cash in our margin account with our commodities broker due to fewer unrealized losses on our risk management positions. Further, we had a significant unrealized gain on our risk management positions as of
June 30, 2011
which was a current asset on our balance sheet.
Property and Equipment
Our net property and equipment was lower at
June 30, 2011
compared to
December 31, 2010
as a result of depreciation and because we sold a piece of equipment that we recently replaced. We did not make any significant capital expenditures during the
six months ended June 30, 2011
that increased the value of our property and equipment.
Current Liabilities
We had more checks issued in excess of our bank balances as of
June 30, 2011
compared to
December 31, 2010
related to our ongoing operations. Our accounts payable was lower at
June 30, 2011
compared to
December 31, 2010
because our corn
suppliers typically seek to defer payments for corn that is delivered at the end of the year for tax purposes. These deferred payments were made early in our first quarter of 2011. We did not have any amount outstanding on our short-term revolving line of credit as of
June 30, 2011
compared to approximately $1.9 million outstanding as of
December 31, 2010
. The current portion of our notes payable was significantly lower at
June 30, 2011
compared to
December 31, 2010
because we repaid all of the subordinated unsecured debt securities we issued to certain of our members in 2009 during our first two quarters of 2011.
Long-Term Liabilities
Our long-term liabilities were lower at
June 30, 2011
compared to
December 31, 2010
because of our continuing payments on our various long-term promissory notes.
Liquidity and Capital Resources
Our main sources of liquidity are cash from our continuing operations and amounts we have available to draw on our revolving lines of credit. Management does not anticipate that we will need to raise additional debt or equity financing in the next twelve months and management believes that our current sources of liquidity will be sufficient to continue our operations during that time period. We do not anticipate making any significant capital expenditures in the next 12 months other than ordinary repair and replacement of equipment in our ethanol plant.
Currently, we have two revolving loans which allow us to borrow funds for working capital. These two revolving loans are described in greater detail below in the section entitled “
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Indebtedness
.” As of
June 30, 2011
, we had
$0
outstanding and
$15,000,000
available to be drawn on these revolving loans. Management anticipates that this is sufficient to maintain our liquidity and continue our operations.
The following table shows cash flows for the
six
months ended
June 30, 2011
and
2010
:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2011
|
|
2010
|
Net cash provided by operating activities
|
|
$
|
4,209,820
|
|
|
$
|
2,850,449
|
|
Net cash provided by investing activities
|
|
9,300
|
|
|
—
|
|
Net cash (used for) financing activities
|
|
(4,502,494
|
)
|
|
(1,548,301
|
)
|
Cash Flow From Operations
.
Our operating activities provided more cash during the
six months ended June 30, 2011
compared to the same period of 2010, primarily due to increased net income during the 2011 period.
Cash Flow From Investing Activities
.
We received proceeds from the sale of a piece of equipment during the
six months ended June 30, 2011
which provided cash from our investing activities.
Cash Flow From Financing Activities
.
We used more cash in our financing activities during the
six months ended June 30, 2011
compared to the same period of 2010 due to higher payments on our credit facilities and a distribution we paid during our second quarter of 2011.
Indebtedness
First National Bank of Omaha (FNBO) is our primary lender. We have two loans outstanding with FNBO, a short-term revolving loan and a long-term revolving loan. During our third quarter of 2010, we repaid the entire balance of our term loan with FNBO. In June 2011, we executed amendments to our FNBO revolving loans. The material terms of these loans, as amended, are described below.
We also have two loans that we used to offset the cost of our corn oil extraction equipment which totaled $1,200,000. We have a long-term loan related to a piece of property that we purchased adjacent to our ethanol plant. The specifics of each credit facility are discussed below.
Short-Term Debt Sources
We have a short-term revolving promissory note with FNBO that expires on May 1, 2012. The principal amount of this short-term revolving promissory note is $10 million. However, the maximum amount we can draw on this short-term loan is
limited by a borrowing base calculation, described in the June 2011 amendment, based on a percentage of our inventory and accounts receivable less certain accounts payable and letters of credit that we may have outstanding from time to time. We agreed to pay a variable interest rate on the revolving promissory note at an annual rate 350 basis points above the one month London Interbank Offered Rate (LIBOR), adjusted monthly. The revolving promissory note is subject to a minimum interest rate of 4.0% per year. The interest rate for this loan at
June 30, 2011
was the minimum interest rate of
4.0%
. We are required to pay a fee of 0.4% on the unused portion of the revolving promissory note. The revolving promissory note is collateralized by the ethanol plant, its accounts receivable and inventories. As of
June 30, 2011
, we had
$0
outstanding on our revolving promissory note and
$10,000,000
available to be drawn.
Long-Term Debt Sources
During our third quarter of 2010, we repaid our term note that was used for the permanent financing of the ethanol plant.
We restructured our long-term revolving loan that we refer to as Term Note 5 in June 2011. Term Note 5 was restructured into a $5,000,000 loan with an interest rate that accrues at 350 basis points above the one month LIBOR, adjusted monthly. Term Note 5 is subject to a minimum interest rate of 4.0% per year. The credit limit on Term Note 5 reduces each year by $500,000 until the maturity date on May 1, 2014. Therefore, the funds available for us to draw on Term Note 5 will decrease each year. If in any year we have a principal balance outstanding on Term Note 5 in excess of the new credit limit, we must make a payment to FNBO such that the amount outstanding on Term Note 5 does not exceed the new credit limit. We are required to pay a fee of 0.4% on the unused portion of Term Note 5. On
June 30, 2011
, we had
$0
outstanding and
$5,000,000
available to be drawn on this loan. As of
June 30, 2011
, interest accrued on Term Note 5 at the minimum interest rate of
4.0%
per year.
We also have a long-term debt obligation related to our purchase of an additional 135 acres of land pursuant to a land purchase contract. The total cost of this additional land was $550,000. As of
June 30, 2011
, we had
$225,000
remaining to be paid pursuant to this land purchase contract.
We have a long-term debt obligation on a portion of a tax increment revenue bond series issued by Lake County, South Dakota of which we were the recipient of the proceeds. The portion for which we are obligated is currently estimated at $172,000. Taxes levied on our property are used for paying the debt service on the bonds. We are obligated to pay any shortfall in debt service on the bonds should the property taxes collected not be sufficient to pay the entire debt service. The interest rate on the bonds is 7.75% annually. The bonds require semi-annual payments of interest on December 1 and June 1, in addition to a payment of principal on December 1 of each year. While our obligation under the guarantee is expected to continue until maturity in 2018, such obligation may cease at some point in time if the property on which the plant is located appreciates in value to the extent that Lake County is able to collect a sufficient amount in taxes to cover the principal and interest payments on the taxable bonds. The principal balance outstanding was approximately $1,217,000 as of
June 30, 2011
.
Subordinated Debt
During our 2009 fiscal year, we completed a private placement offering of subordinated unsecured debt securities. The debt securities that we offered were not registered with the Securities and Exchange Commission and were offered pursuant to claimed exemptions from registration under state and federal securities laws. We raised a total of $1,439,000 in subordinated debt through this offering. Interest on the subordinated notes accrued at a fixed interest rate of 9% per year. These subordinated debt securities had a two-year maturity from the date they were issued, with interest being paid on January 30
th
of each year and at maturity. We repaid the final subordinated unsecured debt securities during our second quarter of 2011, so as of
June 30, 2011
, the outstanding principal balance of our subordinated unsecured debt securities was
$0
.
We raised a total of $1,200,000 in subordinated loans to help offset the cost of our corn oil extraction equipment from two different parties. We secured $1,000,000 in financing for the corn oil extraction equipment from the Rural Electric Economic Development, Inc. (REED) and $200,000 from the First District Development Company (FDDC). We closed on these loans on May 22, 2009. We agreed to pay 4.70% interest on the $1,000,000 loan from REED and 5.5% interest on the $200,000 FDDC loan. Both loans are amortized over a period of five years and both loans require monthly payments. The principal balance of the REED loan was approximately
$612,000
as of
June 30, 2011
. The principal balance of the FDDC loan was approximately
$123,000
as of
June 30, 2011
.
Covenants
Our credit facilities with FNBO are subject to various loan covenants. If we fail to comply with these loan covenants, FNBO can declare us to be in default of our loans. The material loan covenants applicable to our credit facilities are our fixed
charge coverage ratio, our minimum net worth and minimum working capital requirements. We are required to maintain a fixed charge coverage ratio of no less than 1.10 to 1.0. This fixed charge coverage ratio compares our EBITDA adjusted earnings, as defined in our credit agreements, with our scheduled principal and interest payments on our outstanding debt obligations, including our subordinated debt. We are also required to maintain at least $4.8 million in working capital and maintain a minimum net worth of $20 million.
As of
June 30, 2011
, we were in compliance with all of our loan covenants. Management's current financial projections indicate that we will be in compliance with our financial covenants for the next 12 months and we expect to remain in compliance thereafter. Management does not believe that it is reasonably likely that we will fall out of compliance with our material loan covenants in the next 12 months. If we fail to comply with the terms of our credit agreements with FNBO, and FNBO refuses to waive the non-compliance, FNBO may require us to immediately repay all amounts outstanding on our loans.
Application of Critical Accounting Policies
Management uses estimates and assumptions in preparing our consolidated 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. Of the significant accounting policies described in the notes to our consolidated financial statements, we believe that the following are the most critical:
Derivative Instruments
We enter into short-term forward grain, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. We enter into short-term forward, option and futures contracts for sales of ethanol to manage exposure to changes in energy prices. All of our derivatives are designated as non-hedge derivatives, and accordingly are recorded at fair value with changes in fair value recognized in net income. Although the contracts are considered economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.
As part of our trading activity, we use futures and option contracts offered through regulated commodity exchanges to reduce our risk and we are exposed to risk of loss in the market value of inventories. To reduce that risk, we generally take positions using cash and futures contracts and options.
Unrealized gains and losses related to derivative contracts for corn and natural gas purchases are included as a component of cost of revenues and derivative contracts related to ethanol sales are included as a component of revenues in the accompanying financial statements. The fair values of derivative contracts are presented on the accompanying balance sheet as derivative financial instruments.
Lower of cost or market accounting for inventory and forward purchase contracts
With the significant change in the prices of our main inputs and outputs, the lower of cost or market analysis of inventories and purchase commitments can have a significant impact on our financial performance.
The impact of market activity related to pricing of corn and ethanol will require us to continuously evaluate the pricing of our inventory and purchase commitments under a lower of cost or market analysis.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.