UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
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For the fiscal year ended September 30, 2014
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
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For the transition period from __________ to ______________
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COMMISSION FILE NUMBER 000-52033
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RED TRAIL ENERGY, LLC
(Exact name of registrant as specified in its charter)
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North Dakota
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76-0742311
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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3682 Highway 8 South, P.O. Box 11, Richardton, ND 58652
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(Address of principal executive offices)
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(701) 974-3308
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(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None.
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Securities registered pursuant to Section 12(g) of the Act: Class A Membership Units
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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Yes
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No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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Yes
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No
Indicate by check mark whether the registrant (1) has 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.
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Yes
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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).
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Yes
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No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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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:
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Large Accelerated Filer
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Accelerated Filer
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Non-Accelerated Filer
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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).
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Yes
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No
The aggregate market value of the membership units held by non-affiliates of the registrant as of March 31, 2014 was $33,734,203. There is no established public trading market for our membership units. The aggregate market value was computed by reference to the most recent offering price of our Class A units which was $1 per unit.
As of
December 15, 2014
, there were 40,148,160 Class A Membership Units outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant has incorporated by reference into Part III of this Annual Report on Form 10-K portions of its definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Annual Report.
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INDEX
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Page Number
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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This annual 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 terminology 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. 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. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:
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The reduction or elimination of the renewable fuels use requirement in the Federal Renewable Fuels Standard;
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Any delays in shipping our products by rail and corresponding decreases in our sales as a result of these shipping delays;
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An unfavorable spread between the market price of our products and our feedstock costs;
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Fluctuations in the price and market for ethanol, distillers grains and corn oil;
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Availability and costs of our raw materials, particularly corn and coal and in the future natural gas;
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Changes in or lack of availability of credit;
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Changes in the environmental regulations that apply to our plant operations and our ability to comply with such regulations;
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Ethanol supply exceeding demand and corresponding ethanol price reductions impacting our ability to operate profitably and maintain a positive spread between the selling price of our products and our raw material costs;
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Our ability to generate and maintain sufficient liquidity to fund our operations, meet debt service requirements and necessary capital expenditures;
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Our ability to continue to meet our loan covenants;
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Limitations and restrictions contained in the instruments and agreements governing our indebtedness;
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Results of our hedging transactions and other risk management strategies;
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Changes in or elimination of governmental laws, tariffs, trade or other controls or enforcement practices that currently benefit the ethanol industry including:
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national, state or local energy policy - examples include legislation already passed such as the
California low-carbon fuel standard as well as potential legislation in the form of carbon cap and trade;
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legislation mandating the use of ethanol or other oxygenate additives; or
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environmental laws and regulations that apply to our plant operations and their enforcement.
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Changes and advances in ethanol production technology; and
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Competition from alternative fuels and alternative fuel additives.
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Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in this report. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, 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.
AVAILABLE INFORMATION
Information about us is also available at our website at
www.redtrailenergyllc.com
, under "SEC Compliance," which includes links to reports we have filed with the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this Annual Report on Form 10-K.
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PART I
ITEM 1.
BUSINESS
Business Development
Red Trail Energy, LLC was formed as a North Dakota limited liability company in July of 2003, for the purpose of constructing, owning and operating a fuel-grade ethanol plant near Richardton, North Dakota in western North Dakota. References to "we," "us," "our" and the "Company" refer to Red Trail Energy, LLC. We have been in production since January 2007.
During our 2014 fiscal year, we executed a loan amendment with our primary lender, First National Bank of Omaha (FNBO). This loan amendment extended the maturity date of our short-term revolving line of credit to February 28, 2015.
During our second quarter of 2014, we commenced a project to convert our ethanol plant from a coal fired plant to a natural gas based ethanol plant. We anticipate that this project will be completed by the end of the first quarter of our 2015 fiscal year. We plan to finance the natural gas conversion project from cash we have on hand as well as funds we have available to borrow on our line of credit. In conjunction with the natural gas conversion project, we entered into a seven year agreement for natural gas transmission which includes minimum required transmission and consumption volumes.
GS CleanTech Corporation, a wholly owned subsidiary of GreenShift Corporation ("GreenShift") has sued more than twenty ethanol producers who operate corn oil extraction equipment claiming that these systems violate GreenShift's patents related to corn oil extraction technology. These lawsuits have been watched closely by the ethanol industry. On October 23, 2014, the Federal Court hearing the GreenShift patent infringement cases granted summary judgment in favor of the defendants and found GreenShift's patents invalid. While GreenShift has announced that it will appeal the decision, we believe it is unlikely that GreenShift will be successful in any such appeal.
Financial Information
Please refer to "
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations"
for information about our revenue, profit and loss measurements and total assets and liabilities and "
ITEM 8. Financial Statements and Supplementary Data
" for our financial statements and supplementary data.
Principal Products
The principal products that we produce are ethanol, distillers grains and corn oil. We did not commence production of corn oil until the end of our second fiscal quarter of 2012. Therefore, our corn oil revenue during our 2012 fiscal year is not indicative of what we would expect for a full year of production. The table below shows the approximate percentage of our total revenue which is attributed to each of our primary products for each of our last three fiscal years.
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Product
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Fiscal Year 2014
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Fiscal Year 2013
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Fiscal Year 2012
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Ethanol
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81
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77
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79
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Distillers Grains
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17
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21
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20
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Corn Oil
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2
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2
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1
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Ethanol
Ethanol is ethyl alcohol, a fuel component made primarily from corn and various other grains, which can be used as: (i) an octane enhancer in fuels; (ii) an oxygenated fuel additive for the purpose of reducing ozone and carbon monoxide vehicle emissions; and (iii) a non-petroleum-based gasoline substitute. Ethanol produced in the United States is primarily used for blending with unleaded gasoline and other fuel products. Ethanol blended fuel is typically designated in the marketplace according to the percentage of the fuel that is ethanol, with the most common fuel blend being E10, which includes 10% ethanol. The United States Environmental Protection Agency ("EPA") has approved the use of gasoline blends that contain 15% ethanol, or E15, for use in all vehicles manufactured in model year 2001 and later. In addition, flexible fuel vehicles can use gasoline blends that contain up to 85% ethanol called E85.
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Distillers Grains
The principal co-product of the ethanol production process is distillers grains, a high protein animal feed supplement primarily marketed to the dairy and beef industry. We produce two forms of distillers grains: distillers dried grains with solubles ("DDGS") and modified distillers grains with solubles ("MDGS"). MDGS is processed corn mash that has been dried to approximately 50% moisture. MDGS has a shelf life of approximately seven days and is often sold to nearby markets. DDGS is processed corn mash that has been dried to approximately 10% moisture. It has a longer shelf life and may be sold and shipped to any market regardless of its vicinity to our ethanol plant.
Corn Oil
In March 2012, we commenced operating our corn oil extraction equipment. The corn oil that we are capable of producing is not food grade corn-oil and it cannot be used for human consumption. The primary uses of the corn oil that we produce are for animal feed, industrial uses and biodiesel production.
Principal Product Markets
We market nearly all of our products through a professional third party marketer, RPMG, Inc. ("RPMG"). The only products we sell which are not marketed by RPMG are certain MDGS which we market internally to local customers. RPMG is a subsidiary of Renewable Products Marketing Group, LLC ("RPMG, LLC"). We are a part owner of RPMG, LLC which allows us to realize favorable marketing fees for our products and allows us to share in the profits generated by RPMG, LLC. Our ownership interest in RPMG, LLC also entitles us to a seat on its board of directors which is filled by Gerald Bachmeier, our Chief Executive Officer. Except for the MDGS we market locally, RPMG makes all decisions with regard to where our products are marketed and sold. Our products are primarily sold in the domestic market; however, as domestic production of ethanol, distillers grains and corn oil continue to expand, we anticipate increased international sales of our products. Currently, the United States exports a significant amount of distillers grains to China, Mexico, Turkey and Canada along with many Pacific Rim countries, however, as discussed below, exports of distillers grains to China were essentially halted in June 2014 due to Chinese trade policies which were implemented during that time. In addition, the United States exports ethanol primarily to Canada, Brazil, the United Arab Emirates and the Philippines.
We expect our product marketers to explore all markets for our products, including export markets. However, due to high transportation costs, and the fact that we are not located near a major international shipping port, we expect a majority of our products to continue to be marketed and sold domestically.
Distribution Methods
Our ethanol plant is located near Richardton, North Dakota in Stark County, in the western half of North Dakota. We selected the Richardton site because of its proximity to existing coal supplies and accessibility to road and rail transportation. Our plant is served by the Burlington Northern and Santa Fe Railway Company.
We sell and market the ethanol, distillers grains and corn oil produced at the plant through normal and established markets, including local, regional and national markets. Our products are primarily shipped by rail and by truck in our local market. We have separate marketing agreements with RPMG for our ethanol, distillers grains and corn oil. Whether or not our products are sold in local markets will depend on decisions made by RPMG, except for the MDGS which we internally market locally. Local markets are evaluated on a case-by-case basis.
Ethanol
We have an exclusive marketing agreement with RPMG for the purposes of marketing and distributing all of the ethanol we produce at the ethanol plant. Because we are an owner of RPMG, LLC, our marketing fees are based on RPMG's actual cost to market our ethanol. Our ethanol marketing agreement provides that we can sell our ethanol either through an index arrangement or at a fixed price agreed to between us and RPMG. The term of our ethanol marketing agreement is perpetual, until it is terminated according to the terms of the agreement. The primary reasons the ethanol marketing agreement would terminate are if we cease to be an owner of RPMG, LLC, if there is a breach of the agreement which is not cured, or if we give advance notice to RPMG that we would like to terminate the agreement. Notwithstanding our right to terminate the ethanol marketing agreement, we may be obligated to continue to market our ethanol through RPMG for a period of time after the termination. Further, following the termination, we agreed to accept an assignment of certain railcar leases which RPMG has secured to service us. If the ethanol marketing agreement is terminated, it would trigger a redemption of our ownership interest in RPMG, LLC.
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Distillers Grains
On August 29, 2013, we executed a distillers grain marketing agreement with RPMG effective starting on October 1, 2013. Pursuant to the marketing agreement, RPMG will market all of the dried distillers grains we produce and we will continue to internally market our modified/wet distillers grains. Due to the fact that we are a part owner of RPMG, LLC, RPMG will only charge us its actual cost of marketing our distillers grains to its customers. The initial term of the marketing agreement was one year and thereafter the agreement renews for additional one year periods unless we elect not to renew the agreement. The agreement may be terminated by either party based on certain events described in the agreement or based on the bankruptcy or insolvency of either party. Prior to October 1, 2013 our distillers grains were marketed by CHS, Inc.
We market and sell our MDGS internally. Substantially all of our sales of MDGS are to local farmers and feed lots.
Corn Oil
In March 2012, we executed a corn oil marketing agreement with RPMG to sell all of the corn oil that we produce. We pay RPMG a commission based on each pound of corn oil that RPMG sells on our behalf. The initial term of the corn oil marketing agreement was one year and the agreement automatically renews for additional one year terms unless either party gives notice that it will not extend the agreement past the current term.
New Products and Services
We did not introduce any new products or services during our 2014 fiscal year.
Sources and Availability of Raw Materials
Corn
Our ethanol plant used approximately 18.5 million bushels of corn during our 2014 fiscal year, or approximately 51,000 bushels per day, as the feedstock for its dry milling process. Our commodity manager is responsible for purchasing corn for our operations, scheduling corn deliveries and establishing hedging positions to protect the price we pay for corn.
During 2014, we were able to secure sufficient corn to operate the plant and do not anticipate any problems securing enough corn during 2015. Almost all of our corn is supplied from farmers and local elevators in North Dakota and South Dakota. During our 2014 fiscal year, the average price we paid per bushel of corn decreased significantly due to a large corn crop which was harvested in the fall of 2013 and favorable growing conditions during 2014 which led to a large corn crop which was harvested in the fall of 2014. As a result of these large corn crops, we have not had difficulty securing the corn we require for our operations and corn prices have been favorable. While we do not anticipate encountering problems sourcing corn, a shortage of corn could develop, particularly if we experience an extended drought or other production problem during our 2015 fiscal year. Poor weather can be a major factor in increasing corn prices. If the United States were to endure an entire growing season with poor weather conditions, it could result in a prolonged period of higher than normal corn prices similar to what we experienced during 2013.
Corn prices are also impacted by world supply and demand, the price of other commodities, current and anticipated stocks, domestic and export prices and supports and the government's current and anticipated agricultural policy. The price of corn was volatile during our 2014 fiscal year and we anticipate that it may be volatile again in the future. We anticipate that increases in the price of corn, which are not offset by corresponding increases in the prices we receive from the sale of our products, could have a negative impact on our financial performance.
Coal
Coal is also an important input to our manufacturing process. During our 2014 fiscal year, we used approximately 82,000 tons of coal. Our plant was originally designed to run on lignite coal, however, we experienced problems running on lignite during start up which caused us to change to sub-bituminous Powder River Basin ("PRB") coal. We are in the process of converting our ethanol plant from a coal fired plant to a natural gas based ethanol plant. We anticipate this project will be completed by the end of the first quarter of our 2015 fiscal year.
We purchase the coal needed to power our ethanol plant from a supplier under a contract which specifies quantity and price. Our coal supply contract expires annually at the end of December and we anticipate continuing to renew the coal supply contract as necessary in the future without a minimum use requirement due to our anticipated conversion to natural gas. We believe
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we could obtain alternative sources of PRB coal if necessary, though we could suffer delays in delivery and higher prices that could hurt our business and reduce our profits. We believe there is a sufficient supply of coal from the PRB coal regions in Wyoming and Montana to meet our demand for PRB coal.
Electricity
The production of ethanol uses significant amounts of electricity. We entered into a contract with Roughrider Electric Cooperative to provide our needed electrical energy. This contract is scheduled for renewal in August 2016. This contract automatically renews unless either party gives notice of its intent not to renew the agreement.
Water
To meet the plant's water requirements, we entered into a ten-year contract with Southwest Water Authority to purchase raw water. Our contract requires us to purchase a minimum of 160 million gallons per year. We anticipate receiving adequate water supplies during our 2015 fiscal year.
Patents, Trademarks, Licenses, Franchises and Concessions
We do not currently hold any patents, trademarks, franchises or concessions. We were granted a perpetual and royalty free license by ICM to use certain ethanol production technology necessary to operate our ethanol plant. The cost of the license granted by ICM was included in the amount we paid to Fagen to design and build the plant.
Seasonality of Sales
We experience some seasonality of demand for our ethanol, distillers grains and corn oil. Since ethanol is predominantly blended with gasoline for use in automobiles, ethanol demand tends to shift in relation to gasoline demand. As a result, we experience some seasonality of demand for ethanol in the summer months related to increased driving and, as a result, increased gasoline demand. In addition, we experience some increased ethanol demand during holiday seasons related to increased gasoline demand. We also experience decreased distillers grains demand during the summer months due to natural depletion in the size of cattle feed lots and during times when cattle are turned out to pasture. Finally, corn oil is used for biodiesel production which typically decreases in the winter months due to decreased biodiesel demand. This decrease in biodiesel demand leads to decreased corn oil demand during the winter months.
Working Capital
We primarily use our working capital for purchases of raw materials necessary to operate our ethanol plant and for capital expenditures to maintain and upgrade the plant. Our primary sources of working capital are cash from our operations as well as our revolving line-of-credit with First National bank of Omaha (FNBO). During our 2014 fiscal year we used a portion of our working capital for capital improvements related to our natural gas conversion project. Management anticipates that we will have sufficient working capital to operate at capacity during our 2015 fiscal year without seeking additional sources of equity or debt financing. However, if we experience unfavorable operating conditions during our 2015 fiscal year, it is possible we may need to secure additional sources of working capital.
Dependence on a Few Major Customers
As discussed above, we rely on RPMG for the sale and distribution of all of our ethanol, DDGS and corn oil. Accordingly, we are highly dependent on RPMG for the successful marketing of most of our products. We anticipate that we would be able to secure alternate marketers should RPMG fail, however, a loss of our relationship with RPMG could significantly harm our financial performance.
Competition
We are in direct competition with numerous ethanol producers, many of which have greater resources than we have. Larger ethanol producers may be able to take advantages of economies of scale due to their larger size and increased bargaining power with both customers and raw material suppliers. Following the significant growth in the ethanol industry during 2005 and 2006, the ethanol industry has grown at a much slower pace. As of
December 11, 2014
, the Renewable Fuels Association estimates that there are
213
ethanol production facilities in the United States with capacity to produce approximately
15.1 billion
gallons of ethanol annually. The RFA also estimates that approximately
3%
of the ethanol production capacity in the United States is currently idled. The ethanol industry is continuing to experience consolidation where a few larger ethanol producers are increasing
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their production capacities and are controlling a larger portion of United States ethanol production. The largest ethanol producers include Archer Daniels Midland, Flint Hills Resources, LP, Green Plains Renewable Energy, POET, and Valero Renewable Fuels, each of which are capable of producing significantly more ethanol than we produce.
The following table identifies the largest ethanol producers in the United States along with their production capacities.
U.S. FUEL ETHANOL PRODUCTION CAPACITY BY TOP PRODUCERS
Producers of Approximately 700
million gallons per year (MMgy) or more
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Company
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Current Capacity
(MMgy)
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Under Construction/Expansions (MMgy)
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Percent of Total Industry Capacity
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Archer Daniels Midland
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1,762
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—
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12
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%
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POET Biorefining
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1,626
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—
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11
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%
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Valero Renewable Fuels
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1,240
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—
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8
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%
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Green Plains Renewable Energy
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1,004
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—
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7
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%
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Flint Hills Resources
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760
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—
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5
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%
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Updated:
December 11, 2014
Ethanol is a commodity product where competition in the industry is predominantly based on price and consistent fuel quality. Larger ethanol producers may be able to realize economies of scale in their operations that we are unable to realize. Further, we have experienced increased competition from oil companies who have purchased ethanol production facilities, including Valero Renewable Fuels and Flint Hills Resources, which are subsidiaries of larger energy companies. These oil companies are required to blend a certain amount of ethanol each year. Therefore, the oil companies may be able to operate their ethanol production facilities at times when it is unprofitable for us to operate our ethanol plant. Further, some ethanol producers own multiple ethanol plants which may allow them to compete more effectively by providing them flexibility to run certain production facilities while they have other facilities shut down. This added flexibility may allow these ethanol producers to compete more effectively, especially during periods when operating margins are unfavorable in the ethanol industry. Finally some ethanol producers who own ethanol plants in geographically diverse areas of the United States may spread the risk they encounter related to feedstock prices. The drought that occurred during 2012 and 2013 led to some areas of the United States with very poor corn crops and other areas with plentiful corn crops. Ethanol producers that own production facilities in different areas of the United States may reduce their risk of experiencing higher feedstock prices due to localized decreased corn crops.
A handful of companies have begun construction or completed commercial scale cellulosic ethanol plants. If this technology can be profitably employed on a commercial scale, it could potentially lead to ethanol that is less expensive to produce than corn based ethanol. Cellulosic ethanol may also capture more government subsidies and assistance than corn based ethanol. This could decrease demand for our product or result in competitive disadvantages for our ethanol production process.
In addition to domestic producers of ethanol, we face competition from ethanol produced in foreign countries, particularly Brazil. Ethanol imports have been lower in recent years and ethanol exports have been higher which was one of the reasons for improved operating margins in the ethanol industry. As of May 1, 2013, Brazil increased its domestic ethanol use requirement from 20% to 25% which decreased the amount of ethanol available in Brazil for export. However, in the future we may experience increased ethanol imports from Brazil which could put negative pressure on domestic ethanol prices and result in excess ethanol supply in the United States.
Research and Development
We are continually working to develop new methods of operating the ethanol plant more efficiently. We continue to conduct research and development activities in order to realize these efficiency improvements.
Governmental Regulation and Federal Ethanol Supports
Federal Ethanol Supports
The ethanol industry is dependent on several economic incentives to produce ethanol, including federal tax incentives and ethanol use mandates. One significant federal ethanol support is the Federal Renewable Fuels Standard (the "RFS"). The RFS
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requires that in each year, a certain amount of renewable fuels must be used in the United States. The RFS is a national program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective. The RFS requirement increases incrementally each year until the United States is required to use 36 billion gallons of renewable fuels by 2022. Starting in 2009, the RFS required that a portion of the RFS must be met by certain "advanced" renewable fuels. These advanced renewable fuels include ethanol that is not made from corn, such as cellulosic ethanol and biomass based biodiesel. The use of these advanced renewable fuels increases each year as a percentage of the total renewable fuels required to be used in the United States.
If the RFS were to be repealed or modified, ethanol demand may be significantly impacted. The RFS for 2014 as set out in the statute was approximately 18.15 billion gallons, of which corn based ethanol could be used to satisfy approximately 14.4 billion gallons. The statutory volume requirement of the RFS for 2015 is approximately 20.5 billion gallons, of which corn based ethanol can be used to satisfy approximately 15.0 billion gallons. However, there have been proposals in Congress to reduce or eliminate the RFS. In addition, on November 15, 2013, the EPA announced a proposal to significantly reduce the RFS levels for 2014 from the statutory volume requirement of 18.15 billion gallons to 15.21 billion gallons and reduce the renewable volume obligations that can be satisfied by corn based ethanol from 14.4 billion gallons to 13 billion gallons. This proposal would also result in a lowering of the 2014 numbers below the 2013 level of 13.8 billion gallons. The 60-day public comment period ended on January 28, 2014 and the rule was submitted by the EPA to the Office of Management and Budget ("OMB") for review on August 22, 2014. On November 21, 2014, the EPA announced that it would delay finalizing the rule on the 2014 RFS standards until after the end of 2014. The EPA indicated that it intends to take action on the 2014 standards in 2015 prior to or in conjunction with action on the 2015 standards. If the EPA's proposal becomes a final rule significantly reducing the RFS or if the RFS were to be otherwise reduced or eliminated by the exercise of the EPA waiver authority or by Congress, the market price and demand for ethanol will likely decrease which will negatively impact our financial performance. Current ethanol production capacity exceeds the EPA's proposed 2014 renewable volume obligation which can be satisfied by corn based ethanol by approximately 1.9 billion gallons.
In February 2010, the EPA issued regulations governing the RFS. These 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. Our ethanol plant was grandfathered into the RFS due to the fact that it was constructed prior to the effective date of the lifecycle greenhouse gas requirement and is not required to prove compliance with the lifecycle greenhouse gas reductions. Many in the ethanol industry are concerned that 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.
Most ethanol that is used in the United States is sold in a blend called E10. E10 is a blend of 10% ethanol and 90% gasoline. E10 is approved for use in all standard vehicles. Estimates indicate that gasoline demand in the United States is approximately 134 billion gallons per year. 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 13.4 billion gallons per year. This is commonly referred to as the "blend wall," which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. This is a theoretical limit because it is believed that it would not be possible to blend ethanol into every gallon of gasoline that is being used in the United States and it discounts the possibility of additional ethanol used in higher percentage blends such as E15 and E85 used in flex fuel vehicles.
Many in the ethanol industry believe that it will be impossible to meet the RFS requirement in future years without an increase in the percentage of ethanol that can be blended with gasoline for use in standard (non-flex fuel) vehicles. The United States Environmental Protection Agency (the "EPA") has approved the use of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model year 2001 and later. However, there were still significant federal and state regulatory hurdles that needed to be addressed. The EPA has made gains towards clearing those federal regulatory hurdles. In February 2012, the EPA approved health effects and emissions testing on E15 which was required by the Clean Air Act before E15 can be sold into the market. In March 2012, the EPA approved a model Misfueling Mitigation Plan and fuel survey which must be submitted by applicants before E15 registrations can be approved. In April 2012, the EPA approved the first E15 registrations
9
approving twenty producers who have successfully registered their product to be used as E15. Finally, in June 2012, the EPA gave the final approval to allow the sale of E15. Although management believes that these developments are significant steps towards introduction of E15 in the marketplace, there are still obstacles to meaningful market penetration by E15. Many states still have regulatory issues that prevent the sale of E15. Sales of E15 may be limited because it is not approved for use in all vehicles, the EPA requires a label that management believes may discourage consumers from using E15, and retailers may choose not to sell E15 due to concerns regarding liability. In addition, different gasoline blendstocks may be required at certain times of the year in order to use E15 due to federal regulations related to fuel evaporative emissions which may limit E15 sales in these markets. As a result, E15 has not had an immediate impact on ethanol demand in the United States.
Effect of Governmental Regulation
The government's regulation of the environment changes constantly. 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 ethanol plant. It is possible that more stringent federal or state environmental rules or regulations could be adopted, which could increase our operating costs and expenses. It also is possible that federal or state environmental rules or regulations could be adopted that could have an adverse effect on the use of ethanol. Plant operations are governed by the Occupational Safety and Health Administration ("OSHA"). OSHA regulations may change such that the costs of operating the ethanol plant may increase. Any of these regulatory factors may result in higher costs or other adverse conditions effecting our operations, cash flows and financial performance.
We have obtained all of the necessary permits to operate the ethanol plant. During our 2014 fiscal year, we incurred costs and expenses of approximately $1,279,000 complying with environmental laws, including the cost of obtaining permits. Although we have been successful in obtaining all of the permits currently required, any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources in complying with such regulations. Management believes converting the plant to use natural gas as the fuel source instead of coal will positively impact our environmental compliance costs.
In late 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 the RFS. On December 29, 2011, a federal district court in California ruled that the California LCFS was unconstitutional which halted implementation of the California LCFS. However, the California Air Resources Board ("CARB") appealed this court ruling and on September 18, 2013, the federal appellate court reversed the federal district court finding the LCFS constitutional and remanding the case back to federal district court to determine whether the LCFS imposes a burden on interstate commerce that is excessive in light of the local benefits. On June 30, 2014, the United States Supreme Court declined to hear the appeal of the federal appellate court ruling. In addition, a state court in California recently required that CARB take certain corrective actions regarding the approval of the LCFS regulations while allowing the LCFS regulations to remain in effect during this process. If federal and state challenges to the LCFS are ultimately unsuccessful, the LCFS could have a negative impact on demand for corn-based ethanol and result in decreased ethanol prices.
The European Union concluded an anti-dumping investigation related to ethanol produced in the United States and exported to Europe. As a result of this investigation, the European Union imposed a tariff on ethanol which is produced in the United States and exported to Europe. This tariff could result in decreased exports of ethanol to Europe which could negatively impact the market price of ethanol in the United States.
Employees
As of
December 15, 2014
, we had 48 full-time employees. We anticipate that we will have approximately 48 full-time employees during the next 12 months.
Financial Information about Geographic Areas
All of our operations are domiciled in the United States. All of the products sold to our customers for our 2014, 2013 and 2012 fiscal years were produced in the United States and all of our long-lived assets are domiciled in the United States. We have engaged a third-party professional marketer which decides where our products are marketed and we have limited control over the marketing decisions made by our marketer. Our marketer may decide to sell our products in countries other than the United States. However, we anticipate that our products will primarily be marketed and sold in the United States.
10
Item 1A. Risk Factors
You should carefully read and consider the risks and uncertainties below and the other information contained in this report. The risks and uncertainties described below are not the only ones we may face. The following risks, together with additional risks and uncertainties not currently known to us or that we currently deem immaterial could impair our financial condition and results of operation.
Risks Relating to Our Business
A decrease in the spread between the price we receive for our products and our raw material costs will negatively impact our profitability
. Practically all of our revenue is derived from the sale of our ethanol, distillers grains and corn oil. Our primary raw material costs are corn costs and energy costs. Our profitability depends on a positive spread between the market price of the ethanol, distillers grains and corn oil we produce and the raw material costs related to these products. While ethanol, distillers grains and corn oil prices typically change in relation to corn prices, this correlation may not always exist. In the event the prices of our products decrease at a time when our raw material costs are increasing, we may not be able to profitably operate the plant. In the event the spread between the price we receive for our products and the raw material costs associated with producing those products is negative for an extended period of time, we may not be able to maintain liquidity and we may fail which could negatively impact the value of our units.
We may violate the terms of our credit agreements and financial covenants which could result in our lender demanding immediate repayment of our loans.
We have a comprehensive credit facility with FNBO, our primary lender. Our credit agreements with FNBO include various financial and non-financial loan covenants. We are currently in compliance with all of our loan covenants and we anticipate that we will be in compliance with our loan covenants for at least the next 12 months. However, unforeseen circumstances may develop which could result in us violating our loan covenants. If we violate the terms of our credit agreements, including our loan covenants, FNBO could deem us to be in default of our loans and require us to immediately repay the entire outstanding balance of our loans. If we do not have the funds available to repay the loans or we cannot find another source of financing, we may fail which could decrease or eliminate the value of our units.
We engage in hedging transactions which involve risks that could harm our business.
We are exposed to market risk from changes in commodity prices, including the prices we pay for our raw materials and the prices we receive for our finished products. We seek to minimize our exposure to fluctuations in the prices of corn, ethanol and distillers grains through the use of hedging instruments. However, our hedging activities may not successfully reduce the risk caused by price fluctuations which may leave us vulnerable to volatility in corn, ethanol and distillers grains prices. Alternatively, we may choose not to engage in hedging transactions in the future and our operations and financial conditions may be adversely affected during periods in which corn prices increase. Further, using cash for margin calls to support our hedge positions can have an impact on the cash we have available for our operations which could negatively impact our liquidity during times when corn prices fall significantly. The effects of our hedging activities may negatively impact our ability to profitably operate which could reduce the value of our units.
Changes and advances in ethanol production technology could require us to incur
costs to update the ethanol plant or could otherwise hinder our ability to
compete in the ethanol industry or operate profitably.
Advances and changes in the technology of ethanol production are expected to occur. Such advances and changes may make the ethanol production technology installed in our ethanol plant less desirable or obsolete. These advances could allow our competitors to produce ethanol at a lower cost than us. If we are unable to adopt or incorporate technological advances, our ethanol production methods and processes could be less efficient than our competitors, which could cause the ethanol plant to become uncompetitive or completely obsolete. If our competitors develop, obtain or license technology that is superior to ours or that makes our technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that our ethanol production remains competitive. Alternatively, we may be required to seek third-party licenses, which could also result in significant expenditures. These third-party licenses may not be available or, once obtained, they may not continue to be available on commercially reasonable terms. These costs could negatively impact our financial performance by increasing our operating costs and reducing our net income which could decrease the value of our units.
We depend on our management and key employees, and the loss of these relationships could negatively impact our ability to operate profitably.
We are highly dependent on our management team to operate our ethanol plant. We may not be able to replace these individuals should they decide to cease their employment with us, or if they become unavailable for any other reason. While we seek to compensate our management and key employees in a manner that will encourage them to continue their employment with us, they may choose to seek other employment. Any loss of these officers and key employees may prevent us from operating the ethanol plant profitably and could decrease the value of our units.
11
Risks Related to the Ethanol Industry
Excess ethanol supply in the market could put negative pressure on the price of ethanol which could lead to tight operating margins and may impact our ability to operate profitably.
In the past the ethanol industry has confronted market conditions where ethanol supply exceeded demand which led to unfavorable operating conditions. Most recently, in 2012, profitability in the ethanol industry was reduced due to increased ethanol imports from Brazil at a time when gasoline demand in the United States was lower and domestic ethanol supplies were higher. This disconnect between ethanol supply and demand resulted in lower ethanol prices at a time when corn prices were higher which led to unfavorable operating conditions. We may experience periods of time when ethanol supply exceeds demand which could negatively impact our profitability. The United States benefited from additional exports of ethanol during our 2014 fiscal year which may not continue to occur during our 2015 fiscal year. We may experience periods of ethanol supply and demand imbalance during our 2015 fiscal year if the corn-based ethanol use requirement in the RFS is reduced as was proposed by the EPA in November 2013. If we experience excess ethanol supply, either due to increased ethanol production or lower gasoline demand, it could negatively impact the price of ethanol which could hurt our ability to profitably operate the ethanol plant.
If exports of ethanol are reduced, including as a result of the imposition by the European Union of a tariff on U.S. ethanol, ethanol prices may be negatively impacted.
The United States ethanol industry was supported during our 2014 fiscal year with exports of ethanol which increased demand for our ethanol. Management believes these additional exports of ethanol were due to lower market ethanol prices in the United States and increased global demand for ethanol. However, these ethanol exports may not continue. In 2012, the European Union concluded an anti-dumping investigation related to ethanol produced in the United States and exported to Europe. As a result of this investigation, the European Union imposed a tariff on ethanol which is produced in the United States and exported to Europe. While we continue to experience some ethanol exports to Europe due to current low ethanol prices, if ethanol prices increase, these exports to the European Union may cease as a result of the tariff. Further, ethanol exports could potentially be higher without the European Union tariff. In addition, other importers of United States ethanol could reduce their imports which could negatively impact ethanol prices in the United States and could result in an imbalance between ethanol supply and ethanol demand. Any decrease in ethanol prices or demand may negatively impact our ability to profitably operate the ethanol plant.
Lack of rail transportation infrastructure and delayed rail shipments could negatively impact our financial performance.
The ethanol industry has recently been experiencing difficulty transporting the ethanol which is produced by rail, the primary manner in which our ethanol is transported to the market. Management anticipates that slower rail transportation will continue to be a problem during our 2015 fiscal year, especially during winter months when rail transportation can be affected by poor weather conditions. If we are unable to transport our ethanol by rail, it may require that we reduce production or cease production altogether if we run out of ethanol storage capacity. Further, our ethanol inventory may increase due to the difficulty we may experience shipping our ethanol which can impact our financial performance. The slower rail shipments have been due to a combination of factors including increased shipments of corn, coal and oil by rail, decreased shipment capacity by the railroads due to fewer railroad crews, and poor weather conditions which have slowed rail travel and loading times. Management anticipates that these slower railcar shipments may continue for some period of time until the rail transportation capacity in the United States increases. These delays in shipping our products may have a negative impact on our financial performance which may negatively impact our ability to operate the ethanol plant profitably.
We operate in an intensely competitive industry and compete with larger, better financed entities which could impact our ability to operate profitably.
There is significant competition among ethanol producers. There are numerous producer-owned and privately-owned ethanol plants operating throughout the Midwest and elsewhere in the United States. We also face competition from outside of the United States. The largest ethanol producers include Archer Daniels Midland, Flint Hills Resources, Green Plains Renewable Energy, POET, and Valero Renewable Fuels, each of which is capable of producing significantly more ethanol than we produce. Further, many believe that there will be further consolidation occurring in the ethanol industry in the future which will likely lead to a few companies which control a significant portion of the United States ethanol production market. We may not be able to compete with these larger entities. These larger ethanol producers may be able to affect the ethanol market in ways that are not beneficial to us which could negatively impact our financial performance.
Demand for ethanol may not continue to grow unless ethanol can be blended into gasoline in higher percentage blends for standard vehicles.
Currently, ethanol is primarily blended with gasoline for use in standard (non-flex fuel) vehicles to create a blend which is 10% ethanol and 90% gasoline. Estimates indicate that approximately 134 billion gallons of gasoline are sold in the United States each year. 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 13.4 billion gallons. This is commonly referred to as the "blend wall," which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. Many in the ethanol industry believe that the ethanol industry has reached and surpassed this blend wall. In order to expand demand for ethanol, higher percentage blends of ethanol must be utilized in standard vehicles. Such higher percentage blends of ethanol are a contentious issue. Automobile
12
manufacturers and environmental groups have fought against higher percentage ethanol blends. The EPA approved the use of E15 for standard vehicles produced in the model year 2001 and later. The fact that E15 has not been approved for use in all vehicles and the labeling requirements associated with E15 may lead to gasoline retailers refusing to carry E15. Without an increase in the allowable percentage blends of ethanol that can be used in all vehicles, demand for ethanol may not continue to increase which could decrease the selling price of ethanol and could result in our inability to operate the ethanol plant profitably. This could reduce or eliminate the value of our units.
Technology advances in the commercialization of cellulosic ethanol may decrease demand for corn-based ethanol which may negatively affect our profitability.
The current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based biomass, such as agricultural waste, forest residue, municipal solid waste, and energy crops. This trend is driven by the fact that cellulose-based biomass is generally cheaper than corn, and producing ethanol from cellulose-based biomass would create opportunities to produce ethanol in areas of the country which are unable to grow corn. The Energy Independence and Security Act of 2007 and the 2008 Farm Bill offer strong incentives to develop commercial scale cellulosic ethanol. The RFS requires that 16 billion gallons per year of advanced bio-fuels must be consumed in the United States by 2022. Additionally, state and federal grants have been awarded to several companies which are seeking to develop commercial-scale cellulosic ethanol plants. This has encouraged innovation and has led to several companies which are either in the process or have completed construction of commercial scale cellulosic ethanol plants. If an efficient method of producing ethanol from cellulose-based biomass is developed, we may not be able to compete effectively. If we are unable to produce ethanol as cost-effectively as cellulose-based producers, our ability to generate revenue and our financial condition will be negatively impacted.
Government incentives for ethanol production may be reduced or eliminated in the future, which could hinder our ability to operate at a profit
. The ethanol industry is assisted by various federal incentives, most importantly the RFS set forth in the Energy Policy Act of 2005. The RFS helps support a market for ethanol that might disappear without this incentive. Recently, there have been proposals in Congress to reduce or eliminate the RFS. In addition, on November 15, 2013, the EPA announced a proposal to significantly reduce the RFS levels for 2014 from the statutory volume requirement of 18.15 billion gallons to 15.21 billion gallons and reduce the renewable volume obligations that can be satisfied by corn based ethanol from 14.4 billion gallons to 13 billion gallons. This proposal would also result in a lowering of the 2014 numbers below the 2013 level of 13.8 billion gallons. According to the RFS, the EPA only has authority to waive the requirements of the RFS, in whole or in part, provided one of two conditions are met. The conditions are: (1) there is inadequate domestic renewable fuel supply; or (2) implementation of the requirement would severely harm the economy or environment of a state, region or the United States. Any challenge to a reduction in the RFS may take time to work through the courts and the waiver may be implemented despite the legal challenges. If the EPA's proposal becomes a final rule which significantly reduces the RFS or if the RFS were to be otherwise reduced or eliminated, it may lead to a significant decrease in ethanol demand which could negatively impact our results of operations.
ITEM 2. PROPERTIES
Our ethanol plant is located just east of the city limits of Richardton, North Dakota, and just north and east of the entrance/exit ramps to Interstate I-94. The plant complex is situated inside a footprint of approximately 25 acres of land which is part of an approximately 135 acre parcel. We acquired ownership of the land in 2004 and 2005. Included in the immediate campus area of the plant are perimeter roads, buildings, tanks and equipment. An administrative building and parking area are located approximately 400 feet from the plant complex. During 2008 we purchased an additional 10 acre parcel of land that is adjacent to our current property. Our coal unloading facility and storage site was built on this property. During our 2012 fiscal year, we purchased an additional approximately 110 acres of land that is adjacent to our current property.
The site also contains improvements such as rail tracks and a rail spur, landscaping, drainage systems and paved access roads. The ethanol plant was placed in service in January 2007 and is in excellent condition and is capable of functioning at 100 percent of its 50 million gallon name-plate production capacity.
All of our tangible and intangible property, real and personal, serves as the collateral for our senior credit facility with FNBO. Our senior credit facility is discussed in more detail under
"
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS - Capital Resources.
"
ITEM 3. LEGAL PROCEEDINGS
From time to time in the ordinary course of business, we 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 involved in any material legal proceedings.
13
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
There is no established trading market for our membership units. We have engaged FNC Ag Stock, LLC to create a Qualified Matching Service ("QMS") in order to facilitate trading of our units. The QMS consists of an electronic bulletin board that provides information to prospective sellers and buyers of our units. Please see the table below for information on the prices of units transferred in transactions completed via the QMS. We do not become involved in any purchase or sale negotiations arising from the QMS and we take no position as to whether the average price or the price of any particular sale is an accurate measure of the value of our units. As a limited liability company, we are required to restrict the transfers of our membership units in order to preserve our partnership tax status. Our membership units may not be traded on any established securities market or readily traded on a secondary market (or the substantial equivalent thereof). All transfers are subject to a determination that the transfer will not cause the Company to be deemed a publicly traded partnership.
We have no role in effecting the transactions beyond approval, as required under our Operating Agreement and the issuance of new certificates. So long as we remain a publicly reporting company, information about us will be publicly available through the SEC's EDGAR filing system. However, if at any time we cease to be a publicly reporting company, we may continue to make information about us publicly available on our website.
As of
December 15, 2014
, there were 920 holders of record of our Class A units.
The following table contains historical information by quarter for the past two years regarding the actual unit transactions that were completed by our unit-holders during the periods specified. The information was compiled by reviewing the completed unit transfers that occurred on the QMS bulletin board or through private transfers during the quarters indicated.
|
Quarter
|
|
Low Price
|
|
High Price
|
|
Average Price
|
|
# of
Units Traded
|
|||||||
|
2013 1
st
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
2013 2
nd
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
100,068
|
|
|
2013 3
rd
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
50,000
|
|
|
2013 4
th
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
30,000
|
|
|
2014 1
st
|
|
$
|
0.50
|
|
|
$
|
0.55
|
|
|
$
|
0.51
|
|
|
70,000
|
|
|
2014 2
nd
|
|
$
|
0.59
|
|
|
$
|
0.90
|
|
|
$
|
0.70
|
|
|
135,000
|
|
|
2014 3
rd
|
|
$
|
0.90
|
|
|
$
|
1.00
|
|
|
$
|
0.99
|
|
|
85,000
|
|
|
2014 4
th
|
|
$
|
0.90
|
|
|
$
|
1.45
|
|
|
$
|
0.98
|
|
|
310,326
|
|
DISTRIBUTIONS
We did not make any distributions to our members during our 2013 fiscal year and made a $0.05 per unit distribution for a total distribution of $2,007,452 during our 2014 fiscal year. Distributions are payable at the discretion of our Board, subject to the provisions of the North Dakota Limited Liability Company Act and our Member Control Agreement. Distributions to our unit holders are also subject to certain loan covenants and restrictions that require us to make additional loan payments based on excess cash flow. These loan covenants and restrictions are described in greater detail under "
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources.
" A unit holder's distribution is determined based on their pro-rata ownership interest in the Company, by dividing the number of units owned by such unit holder by the total number of units outstanding.
PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total member return since September 30, 2009, calculated on a dividend reinvested basis, for the Company, the NASDAQ Composite Index (the "NASDAQ Market Index") and an index of other companies that have the same SIC code as the Company (the "SIC Code Index"). The graph assumes $100 was invested
14
in each of our units, the NASDAQ Market Index, and the SIC Code Index on September 30, 2009. Data points on the graph are annual. Note that historic unit price performance is not necessarily indicative of future unit price performance.
Pursuant to the rules and regulations of the Securities and Exchange Commission, the performance graph and the information set forth therein shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial and operating data as of the dates and for the periods indicated. The selected balance sheet financial data as of September 30, 2012 and 2011 and December 31, 2010 and the selected income statement data and other financial data for the period ended September 30, 2011 and the fiscal year ended December 31, 2010 have been derived from our audited financial statements that are not included in this Form 10-K. The selected balance sheet financial data as of September 30, 2014 and 2013 and the selected statement of operations data and other financial data for the fiscal years ended September 30, 2014, 2013 and 2012 have been derived from the audited Financial Statements included elsewhere in this Form 10-K. You should read the following table in conjunction with "
Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations
" and the financial statements and the accompanying notes included elsewhere in this Form 10-K. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following financial data.
15
|
|
|
Fiscal Year Ended
|
|
Nine-Month Transition Period Ended
|
|
Fiscal Year Ended
|
||||||||||||||
|
Statement of Operations Data:
|
|
September 30, 2014
|
|
September 30, 2013
|
|
September 30, 2012
|
|
September 30, 2011
|
|
December 31, 2010
|
||||||||||
|
Revenues
|
|
$
|
139,122,644
|
|
|
$
|
154,790,603
|
|
|
$
|
131,458,769
|
|
|
$
|
112,290,222
|
|
|
$
|
109,895,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Cost of Goods Sold
|
|
106,047,180
|
|
|
151,588,287
|
|
|
136,013,928
|
|
|
108,137,084
|
|
|
95,946,218
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Gross Profit (Loss)
|
|
33,075,464
|
|
|
3,202,316
|
|
|
(4,555,159
|
)
|
|
4,153,138
|
|
|
13,948,966
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
General and Administrative
|
|
2,200,809
|
|
|
2,145,733
|
|
|
2,224,351
|
|
|
1,972,679
|
|
|
3,116,212
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Operating Income (Loss)
|
|
30,874,655
|
|
|
1,056,583
|
|
|
(6,779,510
|
)
|
|
2,180,459
|
|
|
10,832,754
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Other Income (Expense)
|
|
(284,321
|
)
|
|
(422,420
|
)
|
|
2,081,535
|
|
|
1,671,836
|
|
|
(1,803,982
|
)
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Net Income (Loss)
|
|
$
|
30,590,334
|
|
|
$
|
634,163
|
|
|
$
|
(4,697,975
|
)
|
|
$
|
3,852,295
|
|
|
$
|
9,028,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Weighted Average Units Outstanding - Basic
|
|
40,148,160
|
|
|
40,151,941
|
|
|
40,204,971
|
|
|
40,193,973
|
|
|
40,193,973
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Weighted Average Units Outstanding - Diluted
|
|
40,148,160
|
|
|
40,153,201
|
|
|
40,217,471
|
|
|
40,213,973
|
|
|
40,193,973
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Net Income (Loss) Per Unit - Basic and Diluted
|
|
$
|
0.76
|
|
|
$
|
0.02
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.10
|
|
|
$
|
0.22
|
|
|
Balance Sheet Data:
|
|
September 30, 2014
|
|
September 30, 2013
|
|
September 30, 2012
|
|
September 30, 2011
|
|
December 31, 2010
|
||||||||||
|
Current Assets
|
|
$
|
40,622,512
|
|
|
$
|
16,511,489
|
|
|
$
|
17,716,814
|
|
|
$
|
24,318,071
|
|
|
$
|
22,292,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Net Property and Equipment
|
|
51,479,515
|
|
|
52,193,186
|
|
|
55,372,225
|
|
|
63,363,997
|
|
|
66,544,644
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Total Assets
|
|
95,658,429
|
|
|
71,740,861
|
|
|
75,748,166
|
|
|
89,197,878
|
|
|
89,924,953
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Current Liabilities
|
|
18,756,713
|
|
|
10,958,459
|
|
|
12,184,043
|
|
|
42,060,094
|
|
|
20,451,155
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Long-Term Liabilities
|
|
5,647,712
|
|
|
18,111,281
|
|
|
21,527,164
|
|
|
361,353
|
|
|
26,569,662
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Members' Equity
|
|
71,254,004
|
|
|
42,671,121
|
|
|
42,036,959
|
|
|
46,776,431
|
|
|
42,904,136
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Book Value Per Unit
|
|
$
|
1.77
|
|
|
$
|
1.06
|
|
|
$
|
1.05
|
|
|
$
|
1.17
|
|
|
$
|
1.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Dividends Declared Per Unit
|
|
$
|
0.05
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
* See
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
for further discussion of our financial results.
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations for the Fiscal Year Ended
September 30, 2014
and
2013
The following table shows the results of our operations and the percentages of revenues, cost of goods sold, general and administrative expenses and other items to total revenues in our statements of operations for the fiscal years ended
September 30, 2014
and
2013
:
|
|
Fiscal Year Ended
September 30, 2014
|
|
Fiscal Year Ended
September 30, 2013
|
||||||||||
|
Statement of Operations Data
|
Amount
|
|
%
|
|
Amount
|
|
%
|
||||||
|
Revenues
|
$
|
139,122,644
|
|
|
100.00
|
|
|
$
|
154,790,603
|
|
|
100.00
|
|
|
Cost of Goods Sold
|
106,047,180
|
|
|
76.23
|
|
|
151,588,287
|
|
|
97.93
|
|
||
|
Gross Profit
|
33,075,464
|
|
|
23.77
|
|
|
3,202,316
|
|
|
2.07
|
|
||
|
General and Administrative Expenses
|
2,200,809
|
|
|
1.58
|
|
|
2,145,733
|
|
|
1.39
|
|
||
|
Operating Income
|
30,874,655
|
|
|
22.19
|
|
|
1,056,583
|
|
|
0.68
|
|
||
|
Other Expense
|
(284,321
|
)
|
|
(0.20
|
)
|
|
(422,420
|
)
|
|
(0.27
|
)
|
||
|
Net Income
|
$
|
30,590,334
|
|
|
21.99
|
|
|
$
|
634,163
|
|
|
0.41
|
|
The following table shows additional data regarding production and price levels for our primary inputs and products for the fiscal years ended
September 30, 2014
and
2013
.
|
|
|
Fiscal Year Ended
September 30, 2014
|
|
Fiscal Year Ended
September 30, 2013
|
||||
|
Production:
|
|
|
|
|
||||
|
Ethanol sold (gallons)
|
|
51,533,962
|
|
|
51,528,405
|
|
||
|
Dried distillers grains sold (tons)
|
|
105,896
|
|
|
91,304
|
|
||
|
Modified distillers grains sold (tons)
|
|
54,202
|
|
|
83,052
|
|
||
|
Corn oil sold (pounds)
|
|
10,197,970
|
|
|
7,988,680
|
|
||
|
Revenues:
|
|
|
|
|
||||
|
Ethanol average price per gallon (net of hedging)
|
|
$
|
2.19
|
|
|
$
|
2.31
|
|
|
Dried distillers grains average price per ton
|
|
172.52
|
|
|
240.78
|
|
||
|
Modified distillers grains average price per ton
|
|
81.73
|
|
|
122.08
|
|
||
|
Corn oil average price per pound
|
|
0.27
|
|
|
0.31
|
|
||
|
Primary Inputs:
|
|
|
|
|
||||
|
Corn ground (bushels)
|
|
18,487,062
|
|
|
18,556,113
|
|
||
|
Costs of Primary Inputs:
|
|
|
|
|
||||
|
Corn average price per bushel (net of hedging)
|
|
$
|
4.24
|
|
|
$
|
6.80
|
|
|
Other Costs (per gallon of ethanol sold):
|
|
|
|
|
||||
|
Chemical and additive costs
|
|
$
|
0.113
|
|
|
$
|
0.088
|
|
|
Denaturant cost
|
|
0.054
|
|
|
0.051
|
|
||
|
Electricity cost
|
|
0.051
|
|
|
0.053
|
|
||
|
Direct labor cost
|
|
0.057
|
|
|
0.050
|
|
||
Revenue
For our
2014 fiscal year
, ethanol sales comprised approximately
81%
of our revenues, distillers grains sales comprised approximately
17%
of our revenues and corn oil sales comprised approximately
2%
of our revenues. For our
2013 fiscal year
, ethanol sales comprised approximately
77%
of our revenues, distillers grains sales comprised approximately
21%
of our revenues and corn oil sales comprised approximately
2%
of our revenues.
17
Our total revenue for our
2014 fiscal year
was less compared to our
2013 fiscal year
due to lower average prices for our products, particularly our distillers grains. However, due to the fact that our cost of goods sold decreased even more than our revenues, we experienced favorable operating margins during our
2014 fiscal year
. These favorable operating margins resulted in significantly greater net income during our 2014 fiscal year compared to our 2013 fiscal year.
Ethanol
The average price we received for our ethanol was approximately
5%
less for our
2014 fiscal year
compared to our
2013 fiscal year
. Management attributes this decrease in the average price we received for our ethanol during our
2014 fiscal year
with lower corn and gasoline prices and uncertainty regarding ethanol demand due to the proposed change to the 2014 corn-based ethanol renewable volume obligation (RVO) under the Federal RFS. However, ethanol prices were positively impacted by several factors during our
2014 fiscal year
, mainly shipping logistics issues which constricted the supply of ethanol in the market and increased ethanol prices along with increased ethanol exports during our
2014 fiscal year
compared to our
2013 fiscal year
. Management attributes these increases in ethanol exports with the lower market ethanol prices which made United States ethanol more cost competitive in the global market.
Management anticipates that ethanol prices will remain lower during our 2015 fiscal year, especially if uncertainty continues regarding whether the ethanol use requirements in the RFS will be reduced by the EPA. Any reduction in demand for ethanol as a result of a reduction in the RFS could reduce ethanol prices and impair our ability to operate at a profit. Further, if ethanol exports are lower during our 2015 fiscal year, it could negatively impact market ethanol prices. However, ethanol prices could be supported by rail shipping logistics challenges which management believes will resurface during the winter months of our 2015 fiscal year. Management believes that the railroads do not have sufficient crews, locomotives, track and other infrastructure to meet existing demand. As a result, we may continue to experience slower rail shipping times which can reduce the amount of ethanol which is available in the market and can positively impact average ethanol prices. If these rail shipping delays occur, we may be periodically forced to slow or cease production which could impact our total annual production during our 2015 fiscal year as it did during our 2014 fiscal year.
We sold a comparable number of gallons of ethanol during our
2014 fiscal year
and our
2013 fiscal year
. However, management expects that our ethanol sales may be lower during our 2015 year as we expect rail shipping delays will impact our ability to ship our products which may impact our ability to operate our ethanol plant at full capacity. Many ethanol producers had to slow or cease production during 2014 due to these rail shipping logistics challenges which management expects will continue and may negatively impact our ability to operate at capacity during our 2015 fiscal year.
We experienced a loss of approximately $7.9 million in our ethanol derivative instruments which decreased our revenue and a gain of approximately $3.0 million in soybean oil derivative instruments which increased our revenue during our 2014 fiscal year. We had no gains or losses on derivative instruments during our 2013 fiscal year which impacted our revenue.
Distillers Grains
The average price we received for our distillers grains during our
2014 fiscal year
was significantly less than the average price we received during our
2013 fiscal year
primarily due to significantly lower corn prices and increased corn supplies. Since distillers grains are typically used as an animal feed substitute for corn, when corn prices are lower and corn is more readily available in the market, it leads to a reduction in distillers grains demand and ultimately prices. The average price we received for our dried distillers grains was approximately
28%
less during our
2014 fiscal year
compared to our
2013 fiscal year
. The average price we received for our modified/wet distillers grains was approximately
33%
less during our
2014 fiscal year
compared to our
2013 fiscal year
. Management anticipates that distillers grains prices will continue to track corn prices. Recently, export demand for distillers grains has been impacted by distillers grains shipments which have been rejected by the Chinese. These export disruptions have negatively impacted distillers grains prices and demand. Management anticipates that these trade disruptions could result in further distillers grains price volatility. As a result of China enforcing an effective ban on distillers grains and corn produced in the United States, management anticipates that both corn and distillers grains prices will remain lower as the supply of corn in the United States exceeds demand. Management anticipates that distillers grains prices may remain lower as the industry seeks to open new markets for our products.
We produced less total tons of distillers grains during our
2014 fiscal year
compared to our
2013 fiscal year
primarily because of our increased production of corn oil. Each pound of corn oil we produce has the effect of reducing the tons of distillers grains we produce. Management believes that due to the relative values of the corn oil to the increased tons of distillers grains, it makes sense to continue to separate corn oil from our distillers grains. Management anticipates that distillers grains production
18
will continue to mirror our total ethanol production. However, if we increase or decrease the amount of corn oil we remove from our distillers grains, it will have a corresponding effect on our total distillers grains production.
Corn Oil
The average price we received for our corn oil was approximately
13%
less during our
2014 fiscal year
compared to our
2013 fiscal year
primarily due to lower corn oil demand and lower corn prices. Corn oil demand was lower due to decreased demand from biodiesel producers who were negatively impacted by the expiration of the biodiesel blenders' tax credit and uncertainty regarding biodiesel demand in light of anticipated changes to the 2014 RVO under the Federal RFS. In addition, corn oil prices are typically impacted by corn prices which have been lower during our
2014 fiscal year
compared to our
2013 fiscal year
. Management expects that corn oil prices will remain lower as additional corn oil supply continues to enter the market with relatively weak corn oil demand. Other corn oil users have increased demand due to recent lower prices but this additional demand has not been enough to push up market corn oil prices.
We significantly increased our corn oil sales by approximately
28%
during our
2014 fiscal year
compared to our
2013 fiscal year
due to increased production efficiency in our corn oil extraction process. Management anticipates that corn oil production will level off during our 2015 fiscal year as we believe we are currently operating our corn oil extraction equipment at capacity. However, as other producers have experienced, the amount of corn oil contained in the corn we used in the ethanol production process can greatly impact the amount of corn oil we can extract from our distillers grains which can have an impact on our corn oil production. Management believes it is too early to say how much corn oil we will be able to extract from the corn we are using in the ethanol production process during the beginning of our 2015 fiscal year.
Cost of Goods Sold
Our cost of goods sold is primarily made up of corn and energy expenses. During our 2014 fiscal year we commenced a project to convert our ethanol plant from a coal fired plant to a natural gas based ethanol plant. We anticipate this project will be completed during the first quarter of our 2015 fiscal year. As a result, we do not anticipate that we will be dependent on coal prices moving forward but will instead be impacted by changing natural gas prices. Our total cost of goods sold was approximately
30%
less for our
2014 fiscal year
compared to our
2013 fiscal year
due to significantly lower market corn prices during the 2014 period.
Corn Costs
Our cost of goods sold related to corn was approximately
38%
less during our
2014 fiscal year
compared to our
2013 fiscal year
due to significantly lower market corn prices during our 2014 fiscal year. We used a comparable number of bushels of corn during our
2014 fiscal year
and our
2013 fiscal year
, however the average price we paid per bushel of corn was approximately
38%
less during our
2014 fiscal year
compared to our
2013 fiscal year
. Market corn prices were lower during our
2014 fiscal year
compared to our
2013 fiscal year
due to the record corn crop which was harvested in the fall of 2013 and favorable growing conditions which led to a large corn crop during the fall of 2014. This increase in the supply of corn in the United States was not met by comparable demand which has resulted in a significant reduction in corn prices. Exports of corn to China all but ceased during our 2014 fiscal year when China commenced rejecting loads of corn from the United States which contained a corn hybrid trait which is not approved in China. The reduction in corn exports to China increased the domestic supply of corn and has resulted in lower prices. Further, rail shipping logistics issues have negatively impacted some corn producer's ability to ship corn by rail which has resulted in localized lower corn prices, especially in North Dakota which has favorably impacted the price we paid per bushel of corn. In addition, uncertainty regarding the RFS may continue to negatively impact corn prices. If the RVO under the Federal RFS for corn-based ethanol is reduced, it may decrease demand for corn further and may result in even lower corn prices. Management anticipates that corn prices will remain lower during our 2015 fiscal year and may continue lower unless the supply of corn drops due to a poor crop during 2015 or an increase in corn demand. Management believes that without a significant increase in export demand for corn, corn supply will exceed demand in the near term.
From time to time we enter into forward purchase contracts for our commodity purchases and sales. At
September 30, 2014
, we had forward corn purchase contracts for various delivery periods through July 2015 for a total commitment of approximately $19.3 million for a total of approximately 4.5 million bushels of corn. We also had a commitment to purchase 1 million bushels of corn at
September 30, 2014
which had not yet been priced. The price for these bushels of corn will be set when they are purchased at the July 2015 index price less basis. We had a gain of approximately $8.6 million related to our corn derivative instruments which decreased our cost of goods sold during our 2014 fiscal year. We had a gain of approximately $779,000 related to our corn derivative instruments during our 2013 fiscal year which decreased our cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur. As corn prices fluctuate, the value of our derivative instruments is impacted, which affects our financial performance.
19
Coal Costs
We purchase the coal needed to power our ethanol plant from a supplier under a long-term contract. Our coal costs were higher during our
2014 fiscal year
compared to our
2013 fiscal year
due to higher coal costs per ton during the 2014 period. We used a comparable number of tons of coal during our
2014 fiscal year
and our
2013 fiscal year
. Management anticipates using natural gas as the fuel source for the heat we require to operate the ethanol plant in the future as we implement our natural gas conversion process. Once this project is complete, we will be operating primarily on natural gas.
General and Administrative Expenses
Our general and administrative expense was slightly higher during our
2014 fiscal year
compared to our
2013 fiscal year
due primarily to additional bank fees related to a letter of credit we established during the 2014 period.
Other Income/Expense
We had more interest income during our
2014 fiscal year
compared to our
2013 fiscal year
due to having more cash on hand during the 2014 period. Our interest expense was lower during our
2014 fiscal year
compared to our
2013 fiscal year
due to having lower balances on our loans during the 2014 period. Our other income was significantly lower during our
2014 fiscal year
compared to our
2013 fiscal year
due to a decrease in our grant income related to an alternative fuel tax credit.
Comparison of the Fiscal Year Ended September 30, 2013 to the Fiscal Year Ended September 30, 2012
The following table shows the results of our operations and the approximate percentage of revenues, costs of goods sold, general and administrative expenses and other items to total revenues in our statements of operations for the fiscal years ended September 30, 2013 and 2012:
|
|
Fiscal Year Ended
September 30, 2013
|
|
Fiscal Year Ended
September 30, 2012
|
||||||||||
|
|
|
|
|
|
|
|
|
||||||
|
Statement of Operations Data
|
Amount
|
|
%
|
|
Amount
|
|
%
|
||||||
|
Revenues
|
$
|
154,790,603
|
|
|
100.00
|
|
|
$
|
131,458,769
|
|
|
100.00
|
|
|
Cost of Goods Sold
|
151,588,287
|
|
|
97.93
|
|
|
136,013,928
|
|
|
103.47
|
|
||
|
Gross Profit (Loss)
|
3,202,316
|
|
|
2.07
|
|
|
(4,555,159
|
)
|
|
(3.47
|
)
|
||
|
General and Administrative Expenses
|
2,145,733
|
|
|
1.39
|
|
|
2,224,351
|
|
|
1.69
|
|
||
|
Operating Income (Loss)
|
1,056,583
|
|
|
0.68
|
|
|
(6,779,510
|
)
|
|
(5.16
|
)
|
||
|
Other Income (Expense)
|
(422,420
|
)
|
|
(0.27
|
)
|
|
2,081,535
|
|
|
1.58
|
|
||
|
Net Income (Loss)
|
$
|
634,163
|
|
|
0.41
|
|
|
$
|
(4,697,975
|
)
|
|
(3.58
|
)
|
20
The following table shows additional data regarding production and price levels for our primary inputs and products for the fiscal years ended September 30, 2013 and 2012:
|
|
|
Fiscal Year Ended
September 30, 2013
|
|
Fiscal Year Ended
September 30, 2012
|
||||
|
Production:
|
|
|
|
|
||||
|
Ethanol sold (gallons)
|
|
51,528,405
|
|
|
47,340,485
|
|
||
|
Dried distillers grains sold (tons)
|
|
91,304
|
|
|
95,953
|
|
||
|
Modified distillers grains sold (tons)
|
|
83,052
|
|
|
71,729
|
|
||
|
Corn oil sold (pounds)
|
|
7,988,680
|
|
|
2,180,690
|
|
||
|
Revenues:
|
|
|
|
|
||||
|
Ethanol average price/gallon (net of hedging)
|
|
$
|
2.31
|
|
|
$
|
2.18
|
|
|
Dried distillers grains price/ton
|
|
240.78
|
|
|
205.88
|
|
||
|
Modified distillers grains price/ton
|
|
122.08
|
|
|
99.82
|
|
||
|
Corn oil price/pound
|
|
0.31
|
|
|
0.33
|
|
||
|
Primary Input:
|
|
|
|
|
||||
|
Corn ground (bushels)
|
|
18,556,113
|
|
|
17,672,456
|
|
||
|
Costs of Primary Input:
|
|
|
|
|
||||
|
Corn avg price/bushel (net of hedging)
|
|
$
|
6.80
|
|
|
$
|
6.57
|
|
|
Other Costs (per gallon of ethanol sold):
|
|
|
|
|
||||
|
Chemical and additive costs
|
|
$
|
0.088
|
|
|
$
|
0.087
|
|
|
Denaturant cost
|
|
0.051
|
|
|
0.050
|
|
||
|
Electricity cost
|
|
0.053
|
|
|
0.051
|
|
||
|
Direct labor cost
|
|
0.050
|
|
|
0.048
|
|
||
Revenue
For our 2013 fiscal year, ethanol sales comprised approximately 77% of our revenues, distillers grains sales comprised approximately 21% of our revenues and corn oil sales comprised approximately 2% of our revenues. For our 2012 fiscal year, ethanol sales comprised approximately 79% of our revenues, distillers grains sales comprised approximately 20% of our revenues and corn oil sales comprised approximately 1% of our revenues.
The average ethanol sales price we received for our 2013 fiscal year increased by approximately 6% when compared to the same period in 2012. Management attributed this increase in ethanol prices with higher energy prices generally, particularly during our first three quarters of 2013, along with less ethanol imports from Brazil during our 2013 fiscal year compared to the same period of 2012. Many fuel blenders purchased a significant amount of excess ethanol towards the end of 2011 in order to receive the VEETC blenders' credit before it expired on December 31, 2011, which resulted in excess ethanol supply during our 2012 fiscal year. Further, ethanol demand was lower during our 2012 fiscal year due to lower gasoline demand which negatively impacted ethanol prices during our 2012 fiscal year. Since ethanol is primarily blended with gasoline for sale in the United States, when domestic gasoline demand decreases, so does demand for ethanol. In addition, ethanol prices can be impacted by corn prices, with ethanol prices typically increasing when corn prices increase. However, this correlation is not always proportionate, so changing corn prices are not always offset by proportionate changes in ethanol prices.
The average price we received for our dried distillers grains increased by approximately 17% during our 2013 fiscal year compared to the same period of 2012. The average price we received for our modified distillers grains increased by approximately 22% during our 2013 fiscal year compared to the same period of 2012. The price of distillers grains typically changes in proportion to the market price of corn and is impacted by the relative availability of corn. During times when corn supplies are lower, as was the case during our 2013 fiscal year, distillers grains prices can approach and in some cases exceed the per ton price of corn. As corn prices increased and corn availability was lower during our 2013 fiscal year, we experienced a significant increase in distillers grains demand which positively impacted distillers grains prices.
We had significantly more corn oil revenue during our 2013 fiscal year compared to the same period of 2012 due to increased corn oil production, partially offset by lower average corn oil prices. We produced nearly four times as many pounds of corn oil during our 2013 fiscal year compared to our 2012 fiscal year due to the fact that we operated our corn oil extraction
21
equipment throughout our 2013 fiscal year and our equipment was only operational for a portion of our 2012 fiscal year. In addition, we improved the efficiency with which we extracted corn oil during our 2013 fiscal year which improved our corn oil yield. We also increased our total production of ethanol during our 2013 fiscal year compared to the same period of 2012 which positively impacted the amount of corn oil we produced.
The average price we received for our corn oil was approximately 6% less during our 2013 fiscal year compared to the same period of 2012 due to increased corn oil supplies in the market and relatively flat corn oil demand. As more ethanol producers started producing corn oil, the supply of corn oil in the market increased without corresponding increases in corn demand, which negatively impacted corn oil prices. Further, demand for corn oil from the biodiesel industry was lower than many expected which resulted in lower corn oil prices. Some industrial users of corn oil increased purchases of corn oil during our 2013 fiscal year due to its lower price compared to other vegetable oils, however, this increase in demand was not enough to increase market corn oil prices.
Cost of Good Sold
Our cost of goods sold was higher for our 2013 fiscal year compared to 2012 fiscal year primarily due to an increase in our corn and coal consumption due to our increased production and higher corn prices. The average price we paid per bushel of corn was approximately 4% greater for our 2013 fiscal year compared to our 2012 fiscal year due to higher market corn prices, particularly during our first three quarters of 2013. Management attributed this increase in corn prices during our 2013 fiscal year to drought conditions, both during 2012 and 2013, which resulted in decreased corn carryover and concerns regarding the quality and quantity of corn that would be harvested in the fall of 2013. However, as harvest approached in 2013, corn prices decreased due to higher corn production estimates and more favorable weather conditions.
During our 2013 fiscal year, we included a larger market price adjustment to our corn and ethanol inventory and forward contracts, which increased our cost of goods sold for our 2013 fiscal year compared to the same period of 2012. We had a loss on firm purchase commitments of $1,091,000 during our 2013 fiscal year compared to $132,000 during our 2012 fiscal year which resulted in a larger increase in our cost of goods sold during the 2013 period. We had a loss on our lower of cost or market adjustment for our inventory of $665,300 during our 2013 fiscal year compared to $327,000 during our 2012 fiscal year which resulted in a larger increase in our cost of goods sold during the 2013 period. In addition, we experienced a gain of approximately $779,000 on our corn derivative instruments which decreased our cost of goods sold during our 2013 fiscal year. We experienced a loss of approximately $451,000 on our corn derivative instruments which increased our cost of goods sold during our 2012 fiscal year. In addition to the increase in corn prices, we consumed approximately 5% more bushels of corn during our 2013 fiscal year compared to our 2012 fiscal year due to increased production at the ethanol plant.
Our cost of goods sold related to coal costs increased during our 2013 fiscal year compared to our 2012 fiscal year due to increased coal consumption, partially offset by lower average coal prices. We consumed approximately 18% more tons of coal during our 2013 fiscal year compared to our 2012 fiscal year because of increased production at our ethanol plant. In addition, the average price we paid per ton of coal purchased was approximately 9% lower during our 2013 fiscal year compared to our 2012 fiscal year due to higher shrinkage/physical adjustments made during the 2012 fiscal year.
General and Administrative Expenses
Our general and administrative expenses as a percentage of revenues were lower for our 2013 fiscal year compared to our 2012 fiscal year due to a slight decrease in the total amount of our general and administrative expenses along with an increase in our total revenue during the period 2013. These percentages were approximately 1.4% and approximately 1.7% for our 2013 fiscal year and our 2012 fiscal year, respectively.
Other Income/Expense
Our interest income was higher during our 2013 fiscal year compared to our 2012 fiscal year due to having more accounts receivable from customers during the 2013 period. Our other income was significantly lower during our 2013 fiscal year compared to our 2012 fiscal year primarily due to a significant decrease in our grant income related to an alternative fuel tax credit. We had a comparable amount of interest expense during our 2013 fiscal year compared to our 2012 fiscal year due to the net effect of having lower balances outstanding on our loans offset by higher interest rates.
Changes in Financial Condition for the Fiscal Year Ended
September 30, 2014
and
2013
Current Assets
. We had more cash and equivalents on our balance sheet at
September 30, 2014
compared to
September 30, 2013
due to our improved profitability and increased net income. We had less accounts receivable at
September 30, 2014
compared
22
to
September 30, 2013
due primarily to timing issues related to our fiscal year end and the amount of gallons of ethanol we had sold for which we had not yet received payment. We had a significant amount of unrealized gains on our risk management positions as of
September 30, 2014
which resulted in an asset related to our derivative instruments at
September 30, 2014
. We had more inventory on hand at
September 30, 2014
compared to
September 30, 2013
due to having significantly more bushels of corn inventory, partially offset by lower corn prices.
Property, Plant and Equipment
. The gross value of our property, plant and equipment was higher at
September 30, 2014
compared to
September 30, 2013
due primarily to our natural gas conversion project. However, the net value of our property, plant and equipment was lower at
September 30, 2014
due to depreciation. We had a significant amount of construction in progress at
September 30, 2014
primarily due to our natural gas conversion project.
Other Assets
. Our other assets were comparable at
September 30, 2014
and
September 30, 2013
with increased patronage equity related to our electric provider which is a cooperative.
Current Liabilities
. We had no disbursements in excess of our bank balances as of
September 30, 2014
compared to approximately $3.1 million at
September 30, 2013
due to improved profitability. Checks we have outstanding which are in excess of cash balances are paid from our line of credit. Our accounts payable was lower at
September 30, 2014
compared to
September 30, 2013
due to decreased corn payables primarily because of lower market corn prices. Our accrued expenses were significantly higher at
September 30, 2014
compared to
September 30, 2013
due to increased corn purchases we made which were not yet priced. We had a significant accrued loss on firm purchase commitments as of
September 30, 2014
compared to
September 30, 2013
related to decreasing corn prices which are used to value our firm purchase commitments. We had less current maturities of long-term debt at
September 30, 2014
compared to
September 30, 2013
due to amounts we paid on our long-term revolving loan during our 2014 fiscal year.
Long-term Liabilities
. Our long-term liabilities were lower at
September 30, 2014
compared to
September 30, 2013
, due to scheduled quarterly loan payments we made during our 2014 fiscal year along with payments we made on our long-term revolving loan.
Application of 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. Of the significant accounting policies described in the notes to our financial statements, we believe that the following are the most critical.
Inventory Valuation
The Company values inventory at the lower of cost or market. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management's assumptions which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider future corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our derivative instruments.
Patronage Equity
The Company receives, from certain vendors organized as cooperatives, patronage dividends, which are based on several criteria, including the vendor's overall profitability and the Company's purchases from the vendor. Patronage equity typically represents the Company's share of the vendor's undistributed current earnings which will be paid in either cash or equity interests to the Company at a future date. Investments in cooperatives are stated at cost, plus unredeemed patronage refunds received in the form of capital stock and are included in Other Assets on the Company's balance sheet.
Firm Purchase Commitments
The Company typically enters into fixed price contracts to purchase corn to ensure an adequate supply of corn to operate its plant. The Company will generally seek to use exchange traded futures, options or swaps as an offsetting position. The Company closely monitors the number of bushels hedged using this strategy to avoid an unacceptable level of margin exposure. Contract prices are analyzed by management at each period end and, if necessary, valued at the lower of cost or market in the balance sheets.
23
Long Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment testing for assets requires various estimates and assumptions, including an allocation of cash flows to those assets and, if required, an estimate of the fair value of those assets. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management's assumptions, which do not reflect unanticipated events and circumstances that may occur. Property, plant, and equipment are stated at cost. Depreciation is provided over estimated useful lives by use of the straight line method. Maintenance and repairs are expensed as incurred. Major improvements and betterments are capitalized. The present values of capital lease obligations are classified as long-term debt and the related assets are included in property, plant and equipment. Amortization of equipment under capital leases is included in depreciation expense.
Derivative Instruments
The Company evaluates its contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting and treated as normal purchases or normal sales if documented as such. 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. The Company enters into short-term cash, option and futures contracts as a means of securing corn for the ethanol plant and managing exposure to changes in commodity prices. All of the Company's derivatives are designated as non-hedge derivatives, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.
As part of its trading activity, the Company uses futures and option contracts through regulated commodity exchanges to manage its risk related to pricing of inventories. To reduce that risk, the Company generally takes positions using cash and futures contracts and options. Realized and unrealized gains and losses related to derivative contracts related to corn are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenues in the accompanying financial statements. The fair values of contracts entered through commodity exchanges are presented on the accompanying balance sheet as derivative instruments.
Liquidity and Capital Resources
Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash from our operations to continue to operate the ethanol plant for the next 12 months. Should we experience unfavorable operating conditions in the future, we may have to secure additional debt or equity sources for working capital or other purposes. We primarily expect to use cash from our operations and our revolving line of credit to complete our natural gas conversion project and we do not expect to require additional debt or equity financing to complete these plant upgrades. We declared a distribution on March 20, 2014 of $0.05 per membership unit for a total distribution of $2,007,408. The distribution was paid on April 9, 2014.
The following table shows cash flows for the fiscal years ended
September 30, 2014
and
2013
:
|
|
|
2014
|
|
2013
|
||||
|
Net cash provided by operating activities
|
|
$
|
36,631,968
|
|
|
$
|
2,744,252
|
|
|
Net cash (used in) investing activities
|
|
(3,399,172
|
)
|
|
(838,549
|
)
|
||
|
Net cash (used in) financing activities
|
|
(11,281,537
|
)
|
|
(1,905,703
|
)
|
||
|
Net increase in cash
|
|
$
|
21,951,259
|
|
|
$
|
—
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
21,952,259
|
|
|
$
|
1,000
|
|
Cash Flow from Operations
Our operations provided more cash during our
2014 fiscal year
compared to our
2013 fiscal year
due to improved operating margins which resulted in a significant increase in our net income during the 2014 period. Volatility in the commodities markets also impacted our cash flows for our
2014 fiscal year
more than during our
2013 fiscal year
.
24
Cash Flow from Investing Activities
We used more cash for capital expenditures during our
2014 fiscal year
compared to our
2013 fiscal year
related to ordinary repair and replacement of equipment at the ethanol plant and due to our natural gas conversion project. We also sold a residence adjacent to the ethanol plant during the 2013 period which provided cash from investing activities.
Cash Flow from Financing Activities
We used significantly more cash for financing activities during our our
2014 fiscal year
compared to our
2013 fiscal year
, primarily due to increased debt repayments during the 2014 period compared to the 2013 period. As of the end of our
2014 fiscal year
, we no longer had any disbursements in excess of our bank balances which decreased cash during the 2014 period. We also repaid more of our short-term loan during our
2014 fiscal year
compared to our
2013 fiscal year
which used more cash during the 2014 period. Finally, we paid a distribution during our
2014 fiscal year
and we did not pay a distribution during our
2013 fiscal year
.
Our liquidity, results of operations and financial performance will be impacted by many variables, including the market price for commodities such as, but not limited to, corn, ethanol and other energy commodities, as well as the market price for any co-products generated by the facility and the cost of labor and other operating costs. Assuming future relative price levels for corn, ethanol and distillers grains remain consistent, we expect operations to generate adequate cash flows to maintain operations.
The following table shows cash flows for the fiscal years ended September 30, 2013 and 2012:
|
|
|
2013
|
|
2012
|
||||
|
Net cash provided by (used in) operating activities
|
|
$
|
2,744,252
|
|
|
$
|
(198,828
|
)
|
|
Net cash (used in) investing activities
|
|
(838,549
|
)
|
|
(3,233,449
|
)
|
||
|
Net cash (used in) financing activities
|
|
(1,905,703
|
)
|
|
(1,239,720
|
)
|
||
|
Net decrease in cash
|
|
$
|
—
|
|
|
$
|
(4,671,997
|
)
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Cash Flow from Operations
Our operations provided cash during our 2013 fiscal year, whereas our operations used cash during our 2012 fiscal year. We had a significant net loss during our 2012 fiscal year compared to positive net income during our 2013 fiscal year. We also had a significant decrease in our accounts payable during the 2013 period which decreased the cash generated by our operating activities.
Cash Flow from Investing Activities
We used less cash for investing activities during our 2013 fiscal year compared to our 2012 fiscal year due to having fewer capital expenditures in 2013. We installed our corn oil extraction equipment during our 2012 fiscal year and had only smaller capital projects during our 2013 fiscal year, including our scrubber project and centrifuge improvements. We sold a residence adjacent to the ethanol plant during our 2013 fiscal year which provided cash from our investing activities.
Cash Flow from Financing Activities
We used more cash for financing activities during our 2013 fiscal year compared to our 2012 fiscal year due to an increase in our disbursements in excess of our bank balances which are paid from our line-of-credit. We had a comparable amount of repayments on our credit facilities with FNBO during both our 2013 fiscal year and our 2012 fiscal year.
Capital Expenditures
The Company had approximately $3,327,000 in construction in progress as of
September 30, 2014
related to costs incurred for a project to convert the plant from using coal as the fuel source to natural gas. During the fiscal year ended
September 30, 2014
, the Company placed in service approximately $85,000 in capital projects with the majority of these costs related to related to additional costs for our scrubber and pump projects along with costs associated with our natural gas conversion project.
25
Capital Resources
Short-Term Debt Sources
The Company has a revolving line-of-credit of $10,000,000 with $0 drawn on this line-of-credit as of
September 30, 2014
. This revolving line-of-credit matures on February 28, 2015. The variable interest rate on this line-of-credit is 3.5% over the one-month LIBOR with a rate of 3.66% as of
September 30, 2014
.
Long-Term Debt Sources
As of
September 30, 2014
, our long-term debt consisted of a term loan and a long-term revolving line-of-credit. The following table summarizes our long-term debt instruments with our senior lender.
|
|
|
Outstanding Balance (Millions)
|
|
Interest Rate
|
|
Range of
Estimated
|
|
|
||||||||
|
Term Note
|
|
September 30, 2014
|
|
September 30, 2013
|
|
September 30, 2014
|
|
September 30, 2013
|
|
Quarterly
Principal
Payment Amounts
|
|
Notes
|
||||
|
Term Note
|
|
14.60
|
|
|
17.00
|
|
|
3.74
|
%
|
|
3.77
|
%
|
|
$500,000
|
|
1, 2
|
|
Long-Term Revolving Note
|
|
—
|
|
|
3.71
|
|
|
3.74
|
%
|
|
3.77
|
%
|
|
$125,000
|
|
1, 2, 3
|
Notes
1 - Maturity date of April 2017.
2 - Variable interest rate at 3.5% over the three-month LIBOR, reset quarterly.
3 - Quarterly payments are equal to required quarterly reductions in total available/principal payments of $125,000.
Restrictive Covenants
We are subject to a number of covenants and restrictions in connection with our credit facilities, including:
|
•
|
Providing FNBO with current and accurate financial statements;
|
|
•
|
Maintaining certain financial ratios including minimum working capital and fixed charge coverage ratio;
|
|
•
|
Maintaining adequate insurance;
|
|
•
|
Making, or allowing to be made, any significant change in our business or tax structure;
|
|
•
|
Limiting our ability to make distributions to members; and
|
|
•
|
Maintaining a threshold of capital expenditures.
|
Excess Cash Flow Payments
We are required to make a prepayment on our Term Loan within 120 days of the end of each of our fiscal years in an amount equal to 25% of our excess cash flow. Excess cash flow is defined in our loan agreement as our adjusted EBITDA earnings less scheduled payments which are due on our loans. Our adjusted EBITDA is calculated by reducing our EBITDA by approved capital expenditures and distributions we make during our fiscal year. Due to our increased profitability during our 2014 fiscal year, the excess cash flow payment will be approximately $7.2 million for our 2014 fiscal year which will reduce the amount of our long-term loan.
As of
September 30, 2014
, we were in compliance with our loan covenants.
26
Contractual Obligations and Commercial Commitments
We have the following contractual obligations as of
September 30, 2014
:
|
Contractual Obligations:
|
Total
|
|
Less than 1 Yr
|
|
1-3 Years
|
|
3-5 Years
|
|
More than 5 Yrs
|
||||||||||
|
Long-term debt obligations *
|
$
|
14,579,000
|
|
|
$
|
9,217,000
|
|
|
$
|
5,362,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Corn purchases **
|
27,542,232
|
|
|
27,542,232
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||
|
Water purchases
|
636,000
|
|
|
424,000
|
|
|
212,000
|
|
|
—
|
|
|
—
|
|
|||||
|
Operating lease obligations
|
1,153,701
|
|
|
393,751
|
|
|
625,550
|
|
|
134,400
|
|
|
—
|
|
|||||
|
Capital leases
|
60,056
|
|
|
49,343
|
|
|
7,792
|
|
|
2,921
|
|
|
—
|
|
|||||
|
Total
|
$
|
43,970,989
|
|
|
$
|
37,626,326
|
|
|
$
|
6,207,342
|
|
|
$
|
137,321
|
|
|
$
|
—
|
|
* - We used the variable interest rates in effect as of
September 30, 2014
(see Note 5 to our audited financial statements)
** - Amounts determined assuming prices, including freight costs, at which corn had been contracted for cash corn contracts and current market prices as of
September 30, 2014
for basis contracts that had not yet been fixed.
Industry Support
North Dakota Grant
In 2006, we entered into a contract with the State of North Dakota through the Industrial Commission for a lignite coal grant not to exceed $350,000. We received $275,000 from this grant during 2006 with this amount currently shown in the long-term liability section of our Balance Sheet as Contracts Payable. Because we have not met the minimum lignite usage requirements specified in the grant for any year in which the plant has operated, we expect to have to repay the grant and are awaiting instructions from the Industrial Commission as to the terms of the repayment schedule. This repayment could begin at some point during our 2015 fiscal year, but as of
September 30, 2014
we have not received any instructions from the Industrial Commission.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 7A. 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 and ethanol. 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").
Commodity Price Risk
We expect to be exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on corn in the ethanol production process and the sale of ethanol.
We enter into fixed price contracts for corn purchases on a regular basis. It is our intent that, as we enter into these contracts, we will use various hedging instruments (puts, calls and futures) to maintain a near even market position. For example, if we have 1 million bushels of corn under fixed price contracts we would generally expect to enter into a short hedge position to offset our price risk relative to those bushels we have under fixed price contracts. Because our ethanol marketing company (RPMG) is selling substantially all of the gallons it markets on a spot basis we also include the corn bushel equivalent of the ethanol we have produced that is inventory but not yet priced as bushels that need to be hedged.
Although we believe our hedge positions will accomplish an economic hedge against our future purchases, they are not designated as hedges for accounting purposes, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We use fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of sales. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter and year to year
27
due to the timing of the change in value of derivative instruments relative to the cost of the commodity being hedged. However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.
As of
September 30, 2014
, we had approximately 4.5 million bushels of corn under fixed price contracts. As of
September 30, 2014
some of these contracts were priced above current market prices so an accrual for a loss on firm purchase commitments of $3,270,000 was recorded.
It is the current position of our ethanol marketing company, RPMG, that under current market conditions selling ethanol in the spot market will yield the best price for our ethanol. RPMG will, from time to time, contract a portion of the gallons they market with fixed price contracts.
We estimate that our expected corn usage will be between 18 million and 20 million bushels per calendar year for the production of approximately 50 million to 54 million gallons of ethanol. As corn prices move in reaction to market trends and information, our income statements will be affected depending on the impact such market movements have on the value of our derivative instruments.
To manage our coal price risk, we entered into a coal purchase agreement with our supplier to supply us with coal, fixing the price at which we purchase coal. If we are unable to continue buying coal under this agreement, we may have to buy coal in the open market.
Interest Rate Risk
We are exposed to market risk from changes in interest rates on our Term Note which bears a variable interest rate. We anticipate that a hypothetical 1% change in the interest rate on our Term Note as of
September 30, 2014
, would cause an adverse change to our income in the amount of approximately $146,000 for a 12 month period.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Governors
Red Trail Energy, LLC
Richardton, North Dakota
We have audited the accompanying balance sheets of Red Trail Energy, LLC as of September 30, 2014 and 2013 and the related statements of operations, changes in members' equity, and cash flows for the twelve-month periods ended September 30, 2014 and 2013 and 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Red Trail Energy, LLC as of September 30, 2014 and 2013, and the results of their operations and their cash flows for the twelve-month periods ended September 30, 2014, 2013 and 2012 in conformity with U.S. generally accepted accounting principles.
Fargo North Dakota
December 15, 2014
29
RED TRAIL ENERGY, LLC
Balance Sheets
|
ASSETS
|
|
September 30, 2014
|
|
September 30, 2013
|
||||
|
|
|
|
|
|
||||
|
Current Assets
|
|
|
|
|
||||
|
Cash and equivalents
|
|
$
|
21,952,259
|
|
|
$
|
1,000
|
|
|
Restricted cash
|
|
—
|
|
|
153,210
|
|
||
|
Accounts receivable, primarily related party
|
|
1,011,411
|
|
|
4,048,686
|
|
||
|
Other receivables
|
|
617,955
|
|
|
42,472
|
|
||
|
Commodities derivative instruments, at fair value
|
|
3,615,151
|
|
|
—
|
|
||
|
Inventory
|
|
13,318,724
|
|
|
12,189,693
|
|
||
|
Prepaid expenses
|
|
107,012
|
|
|
76,428
|
|
||
|
Total current assets
|
|
40,622,512
|
|
|
16,511,489
|
|
||
|
|
|
|
|
|
||||
|
Property, Plant and Equipment
|
|
|
|
|
||||
|
Land
|
|
836,428
|
|
|
836,428
|
|
||
|
Land improvements
|
|
4,127,372
|
|
|
4,127,372
|
|
||
|
Buildings
|
|
5,498,862
|
|
|
5,492,612
|
|
||
|
Plant and equipment
|
|
77,739,946
|
|
|
77,660,841
|
|
||
|
Construction in progress
|
|
3,326,725
|
|
|
25,885
|
|
||
|
|
|
91,529,333
|
|
|
88,143,138
|
|
||
|
Less accumulated depreciation
|
|
40,049,818
|
|
|
35,949,952
|
|
||
|
Net property, plant and equipment
|
|
51,479,515
|
|
|
52,193,186
|
|
||
|
|
|
|
|
|
||||
|
Other Assets
|
|
|
|
|
||||
|
Debt issuance costs, net of amortization
|
|
45,962
|
|
|
64,046
|
|
||
|
Investment in RPMG
|
|
605,000
|
|
|
605,000
|
|
||
|
Patronage equity
|
|
2,865,440
|
|
|
2,325,640
|
|
||
|
Deposits
|
|
40,000
|
|
|
41,500
|
|
||
|
Total other assets
|
|
3,556,402
|
|
|
3,036,186
|
|
||
|
|
|
|
|
|
||||
|
Total Assets
|
|
$
|
95,658,429
|
|
|
$
|
71,740,861
|
|
Notes to Financial Statements are an integral part of this Statement.
30
RED TRAIL ENERGY, LLC
Balance Sheets
|
LIABILITIES AND MEMBERS' EQUITY
|
|
September 30, 2014
|
|
September 30, 2013
|
||||
|
|
|
|
|
|
||||
|
Current Liabilities
|
|
|
|
|
||||
|
Disbursements in excess of bank balances
|
|
$
|
—
|
|
|
$
|
3,126,883
|
|
|
Accounts payable
|
|
3,052,375
|
|
|
3,577,647
|
|
||
|
Accrued expenses
|
|
3,167,994
|
|
|
1,052,314
|
|
||
|
Commodities derivative instruments, at fair value
|
|
—
|
|
|
48,638
|
|
||
|
Accrued loss on firm purchase commitments (see note 4)
|
|
3,270,000
|
|
|
203,000
|
|
||
|
Current maturities of long-term debt
|
|
9,266,343
|
|
|
2,949,977
|
|
||
|
Total current liabilities
|
|
18,756,712
|
|
|
10,958,459
|
|
||
|
|
|
|
|
|
||||
|
Long-Term Liabilities
|
|
|
|
|
||||
|
Notes payable
|
|
5,372,713
|
|
|
17,836,281
|
|
||
|
Contracts payable
|
|
275,000
|
|
|
275,000
|
|
||
|
Total long-term liabilities
|
|
5,647,713
|
|
|
18,111,281
|
|
||
|
|
|
|
|
|
||||
|
Members’ Equity (40,148,160 Class A Membership Units issued and outstanding)
|
|
71,254,004
|
|
|
42,671,121
|
|
||
|
|
|
|
|
|
||||
|
Total Liabilities and Members’ Equity
|
|
$
|
95,658,429
|
|
|
$
|
71,740,861
|
|
Notes to Financial Statements are an integral part of this Statement.
31
RED TRAIL ENERGY, LLC
Statements of Operations
|
|
Twelve-Month
|
|
Twelve-Month
|
|
Twelve-Month
|
||||||
|
|
Period Ended
|
|
Period Ended
|
|
Period Ended
|
||||||
|
|
September 30, 2014
|
|
September 30, 2013
|
|
September 30, 2012
|
||||||
|
|
|
|
|
|
|
||||||
|
Revenues, primarily related party
|
$
|
139,122,644
|
|
|
$
|
154,790,603
|
|
|
$
|
131,458,769
|
|
|
|
|
|
|
|
|
||||||
|
Cost of Goods Sold
|
|
|
|
|
|
||||||
|
Cost of goods sold
|
101,578,180
|
|
|
149,831,987
|
|
|
135,554,928
|
|
|||
|
Lower of cost or market inventory adjustment
|
1,199,000
|
|
|
665,300
|
|
|
327,000
|
|
|||
|
Loss on firm purchase commitments
|
3,270,000
|
|
|
1,091,000
|
|
|
132,000
|
|
|||
|
Total Cost of Goods Sold
|
106,047,180
|
|
|
151,588,287
|
|
|
136,013,928
|
|
|||
|
|
|
|
|
|
|
||||||
|
Gross Profit (Loss)
|
33,075,464
|
|
|
3,202,316
|
|
|
(4,555,159
|
)
|
|||
|
|
|
|
|
|
|
||||||
|
General and Administrative Expenses
|
2,200,809
|
|
|
2,145,733
|
|
|
2,224,351
|
|
|||
|
|
|
|
|
|
|
||||||
|
Operating Income (Loss)
|
30,874,655
|
|
|
1,056,583
|
|
|
(6,779,510
|
)
|
|||
|
|
|
|
|
|
|
||||||
|
Other Income (Expense)
|
|
|
|
|
|
||||||
|
Interest income
|
94,770
|
|
|
61,780
|
|
|
55,647
|
|
|||
|
Other income
|
235,255
|
|
|
456,859
|
|
|
2,960,920
|
|
|||
|
Interest expense
|
(614,346
|
)
|
|
(941,059
|
)
|
|
(935,032
|
)
|
|||
|
Total other income (expense), net
|
(284,321
|
)
|
|
(422,420
|
)
|
|
2,081,535
|
|
|||
|
|
|
|
|
|
|
||||||
|
Net Income (Loss)
|
$
|
30,590,334
|
|
|
$
|
634,163
|
|
|
$
|
(4,697,975
|
)
|
|
|
|
|
|
|
|
||||||
|
Weighted Average Units Outstanding
|
|
|
|
|
|
||||||
|
Basic
|
40,148,160
|
|
|
40,151,941
|
|
|
40,204,971
|
|
|||
|
|
|
|
|
|
|
||||||
|
Diluted
|
40,148,160
|
|
|
40,153,201
|
|
|
40,217,471
|
|
|||
|
|
|
|
|
|
|
||||||
|
Net Income (Loss) Per Unit
|
|
|
|
|
|
||||||
|
Basic
|
$
|
0.76
|
|
|
$
|
0.02
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
||||||
|
Diluted
|
$
|
0.76
|
|
|
$
|
0.02
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
||||||
Notes to Financial Statements are an integral part of this Statement.
32
RED TRAIL ENERGY, LLC
Statements of Changes in Members' Equity
Twelve-Month Periods Ended September 30, 2014, 2013 and 2012
|
|
Class A Member Units
|
|
|
|
|
|
Treasury Units
|
|
|
||||||||||||||||
|
|
Units (a)
|
|
Amount
|
|
Additional Paid in Capital
|
|
Accumulated Deficit/Retained Earnings
|
|
Units
|
|
Amount
|
|
Total Member Equity
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Balance - September 30, 2011
|
40,193,973
|
|
|
37,810,408
|
|
|
76,825
|
|
|
9,094,338
|
|
|
180,000
|
|
|
(205,140
|
)
|
|
46,776,431
|
|
|||||
|
Unit-based compensation
|
20,000
|
|
|
—
|
|
|
(12,800
|
)
|
|
—
|
|
|
(20,000
|
)
|
|
22,800
|
|
|
10,000
|
|
|||||
|
Units repurchased
|
(35,813
|
)
|
|
—
|
|
|
(29,800
|
)
|
|
—
|
|
|
35,813
|
|
|
(21,697
|
)
|
|
(51,497
|
)
|
|||||
|
Net Income (Loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,697,975
|
)
|
|
—
|
|
|
—
|
|
|
(4,697,975
|
)
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Balance - September 30, 2012
|
40,178,160
|
|
|
37,810,408
|
|
|
34,225
|
|
|
4,396,363
|
|
|
195,813
|
|
|
(204,037
|
)
|
|
42,036,959
|
|
|||||
|
Unit-based compensation
|
20,000
|
|
|
—
|
|
|
(22,800
|
)
|
|
—
|
|
|
(20,000
|
)
|
|
22,800
|
|
|
—
|
|
|||||
|
Units repurchased
|
(50,000
|
)
|
|
—
|
|
|
29,800
|
|
|
—
|
|
|
50,000
|
|
|
(29,800
|
)
|
|
—
|
|
|||||
|
Net Income (Loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
634,163
|
|
|
—
|
|
|
—
|
|
|
634,163
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Balance - September 30, 2013
|
40,148,160
|
|
37,810,408
|
|
41,225
|
|
5,030,526
|
|
225,813
|
|
(211,037)
|
|
42,671,122
|
||||||||||||
|
Unit-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||
|
Units repurchased
|
—
|
|
|
(85,813
|
)
|
|
34,316
|
|
|
—
|
|
|
(85,813
|
)
|
|
51,497
|
|
|
—
|
|
|||||
|
Distribution
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,007,452
|
)
|
|
—
|
|
|
—
|
|
|
(2,007,452
|
)
|
|||||
|
Net Income (Loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
30,590,334
|
|
|
—
|
|
|
—
|
|
|
30,590,334
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Balance - September 30, 2014
|
40,148,160
|
|
|
$
|
37,724,595
|
|
|
$
|
75,541
|
|
|
$
|
33,613,408
|
|
|
140,000
|
|
|
$
|
(159,540
|
)
|
|
$
|
71,254,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
(a) - Amounts shown represent member units outstanding.
|
|||||||||||||||||||||||||
Notes to Financial Statements are an integral part of this Statement.
33
RED TRAIL ENERGY, LLC
Statements of Cash Flows
|
|
Twelve-Month
|
|
Twelve-Month
|
|
Twelve-Month
|
||||||
|
|
Period Ended
|
|
Period Ended
|
|
Period Ended
|
||||||
|
|
September 30, 2014
|
|
September 30, 2013
|
|
September 30, 2012
|
||||||
|
|
|
|
|
|
|
||||||
|
Cash Flows from Operating Activities
|
|
|
|
|
|
||||||
|
Net income (loss)
|
$
|
30,590,334
|
|
|
$
|
634,163
|
|
|
$
|
(4,697,975
|
)
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
||||||
|
Depreciation and amortization
|
4,130,927
|
|
|
4,057,965
|
|
|
4,304,071
|
|
|||
|
Loss (gain) on disposal of fixed assets
|
—
|
|
|
(22,353
|
)
|
|
490
|
|
|||
|
Change in fair value of derivative instruments
|
(3,663,789
|
)
|
|
228,748
|
|
|
(201,173
|
)
|
|||
|
Equity-based compensation
|
—
|
|
|
—
|
|
|
10,000
|
|
|||
|
Lower of cost or market inventory adjustment
|
1,199,000
|
|
|
665,300
|
|
|
327,000
|
|
|||
|
Loss on firm purchase commitments
|
3,270,000
|
|
|
1,091,000
|
|
|
132,000
|
|
|||
|
Noncash patronage equity
|
(539,799
|
)
|
|
(382,415
|
)
|
|
(1,217,566
|
)
|
|||
|
Change in operating assets and liabilities:
|
|
|
|
|
|
||||||
|
Restricted cash - commodities derivatives account including settlements
|
153,210
|
|
|
(146,306
|
)
|
|
(6,904
|
)
|
|||
|
Accounts receivable
|
2,461,792
|
|
|
(298,385
|
)
|
|
2,554,108
|
|
|||
|
Other receivables
|
—
|
|
|
(2,403
|
)
|
|
1,480,628
|
|
|||
|
Inventory
|
(5,598,031
|
)
|
|
(295,085
|
)
|
|
(2,450,044
|
)
|
|||
|
Prepaid expenses and deposits
|
(30,584
|
)
|
|
11,095
|
|
|
72,582
|
|
|||
|
Other assets
|
1,500
|
|
|
(1,350
|
)
|
|
—
|
|
|||
|
Accounts payable and accrued expenses
|
1,590,408
|
|
|
(2,998,722
|
)
|
|
765,842
|
|
|||
|
Accrued purchase commitment losses
|
3,067,000
|
|
|
203,000
|
|
|
(444,000
|
)
|
|||
|
Cash settlements on interest rate swap
|
—
|
|
|
—
|
|
|
(827,887
|
)
|
|||
|
Net cash provided by (used in) operating activities
|
36,631,968
|
|
|
2,744,252
|
|
|
(198,828
|
)
|
|||
|
|
|
|
|
|
|
||||||
|
Cash Flows from Investing Activities
|
|
|
|
|
|
||||||
|
Proceeds from disposal of fixed assets
|
—
|
|
|
160,950
|
|
|
—
|
|
|||
|
Capital expenditures
|
(3,399,172
|
)
|
|
(999,499
|
)
|
|
(3,233,449
|
)
|
|||
|
Net cash used in investing activities
|
(3,399,172
|
)
|
|
(838,549
|
)
|
|
(3,233,449
|
)
|
|||
|
|
|
|
|
|
|
||||||
|
Cash Flows from Financing Activities
|
|
|
|
|
|
||||||
|
Disbursements in excess of bank balances
|
(3,126,883
|
)
|
|
1,397,952
|
|
|
1,728,931
|
|
|||
|
Dividends paid
|
(2,007,452
|
)
|
|
—
|
|
|
—
|
|
|||
|
Unit repurchases
|
—
|
|
|
—
|
|
|
(51,497
|
)
|
|||
|
Loan fees
|
—
|
|
|
(11,321
|
)
|
|
(77,891
|
)
|
|||
|
Net advances on revolving lines-of-credit
|
(3,708,000
|
)
|
|
(909,000
|
)
|
|
4,992,000
|
|
|||
|
Debt repayments
|
(2,439,202
|
)
|
|
(2,383,334
|
)
|
|
(7,831,263
|
)
|
|||
|
Net cash used in financing activities
|
(11,281,537
|
)
|
|
(1,905,703
|
)
|
|
(1,239,720
|
)
|
|||
|
|
|
|
|
|
|
||||||
|
Net Increase (Decrease) in Cash and Equivalents
|
21,951,259
|
|
|
—
|
|
|
(4,671,997
|
)
|
|||
|
Cash and Equivalents - Beginning of Period
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
$
|
4,672,997
|
|
|
Cash and Equivalents - End of Period
|
21,952,259
|
|
|
1,000
|
|
|
1,000
|
|
|||
|
|
|
|
|
|
|
||||||
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
||||||
|
Interest paid net of swap settlements
|
634,752
|
|
|
954,575
|
|
|
1,493,420
|
|
|||
|
Noncash Investing and Financing Activities
|
|
|
|
|
|
||||||
|
Assets acquired under capital lease
|
$
|
13,247
|
|
|
$
|
81,160
|
|
|
$
|
—
|
|
|
Capital expenditures in accounts payable
|
$
|
724,075
|
|
|
$
|
—
|
|
|
—
|
|
|
Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.
34
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Red Trail Energy, LLC, a North Dakota limited liability company (the “Company”), owns and operates a
50 million
gallon annual name-plate production ethanol plant near Richardton, North Dakota (the “Plant”). The plant commenced production on January 1, 2007. Fuel grade ethanol, distillers grains and corn oil are the Company's primary products. All products are marketed and sold primarily within the continental United States.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. 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. Significant items subject to such estimates and assumptions include the useful lives of property, plant and equipment, valuation of derivatives, inventory, patronage equity and purchase commitments, the analysis of long-lived assets impairment and other contingencies. Actual results could differ from those estimates.
Cash and Equivalents
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The carrying value of cash and equivalents approximates fair value.
Accounts Receivable and Concentration of Credit Risk
The Company generates accounts receivable from sales of ethanol, distillers grains and corn oil. The Company has entered into agreements with RPMG, Inc. (“RPMG”) for the marketing and distribution of the Company's ethanol, corn oil and dried distiller's grains. Under the terms of the marketing agreement, RPMG bears the risk of loss of nonpayment by their customers. The Company markets its modified distiller's grains internally. Prior to the end of the Company's 2013 fiscal year, CHS, Inc. marketed the Company's dried distillers grains.
For sales of modified distiller's grains, credit is extended based on evaluation of a customer's financial condition and collateral is not required. Accounts receivable are due 30 days from the invoice date. Accounts outstanding longer than the contractual payment terms are considered past due. Internal follow up procedures are followed accordingly. Interest is charged on past due accounts.
All receivables are stated at amounts due from customers net of any allowance for doubtful accounts. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's perceived current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. The Company has an allowance for doubtful accounts of approximately
$72,880
and
$106,800
at
September 30, 2014
and 2013, respectively.
Inventory
Corn is the primary raw material and, along with other raw materials and supplies, is stated at the lower of cost or market on a first-in, first-out (FIFO) basis. Work in process and finished goods, which consists of ethanol, distillers grains and corn oil produced, is stated at the lower of average cost or market. Spare parts inventory is valued at lower of cost or market on a FIFO basis.
Patronage Equity
The Company receives, from certain vendors organized as cooperatives, patronage dividends, which are based on several criteria, including the vendor's overall profitability and the Company's purchases from the vendor. Patronage equity typically represents the Company's share of the vendor's undistributed current earnings which will be paid in either cash or equity interests to the Company at a future date. Investments in cooperatives are stated at cost, plus unredeemed patronage refunds received in the form of capital stock and are included in Other Assets on the Company's balance sheet.
35
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 and 2013
Derivative Instruments
The Company enters into derivative transactions to hedge its exposure to commodity and interest rate 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 related to corn are recorded in costs of goods sold within the statements of operations. Changes in the fair value of undesignated derivatives related to ethanol are recorded in revenue within the statements of operations. Changes of fair value of undesignated interest rate swaps are recorded in interest expense within 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. Certain corn, ethanol and distiller's grain contracts that meet the requirement of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements, and therefore, are not marked to market in our financial statements.
Firm Purchase Commitments
The Company typically enters into fixed price contracts to purchase corn to ensure an adequate supply of corn to operate its plant. The Company will generally seek to use exchange traded futures, options or swaps as an offsetting economic hedge position. The Company closely monitors the number of bushels hedged using this strategy to avoid an unacceptable level of margin exposure. Contract prices are analyzed by management at each period end and, if necessary, valued at the lower of cost or market in the balance sheets.
Revenue Recognition
The Company generally sells ethanol and related products pursuant to marketing agreements. Revenues are recognized when the customer has taken title, which occurs when the product is shipped, has assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured.
Revenues are shown net of any fees incurred under the terms of the Company's agreements for the marketing and sale of ethanol and related products.
Long-lived Assets
Property, plant, and equipment are stated at cost. Depreciation is provided over estimated useful lives by use of the straight line method. Maintenance and repairs are expensed as incurred. Major improvements and betterments are capitalized. The present values of capital lease obligations are classified as long-term debt and the related assets are included in property, plant and equipment. Amortization of equipment under capital leases is included in depreciation expense.
Depreciation is computed using the straight-line method over the following estimated useful lives:
36
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 and 2013
Long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including, but not limited to, discounted cash flow models, quoted market values and third-party independent appraisals.
Fair Value of Financial Instruments
The Company has adopted guidance for accounting for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company has adopted guidance for fair value measurement related to nonfinancial items that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are as follows:
·
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
·
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
·
Level 3 inputs are unobservable inputs for the asset or liability.
The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in our balance sheets, the Company has elected not to record any other assets or liabilities at fair value. No events occurred during the fiscal years ended
September 30, 2014
and 2013 that required adjustment to the recognized balances of assets or liabilities, which are recorded at fair value on a nonrecurring basis.
Grants
The Company recognizes grant proceeds as other income for reimbursement of expenses incurred upon complying with the conditions of the grant. For reimbursements of capital expenditures, the grants are recognized as a reduction of the basis of the asset upon complying with the conditions of the grant. In addition, the Company considers production incentive payments received to be economic grants and includes such amounts in other income when received, as this represents the point at which they are fixed and determinable.
Shipping and Handling
The cost of shipping products to customers is included in cost of goods sold. Amounts billed to a customer in a sale transaction related to shipping and handling is classified as revenue.
Income Taxes
The Company is treated as a partnership for federal and state income tax purposes and generally does not incur income taxes. Instead, its earnings and losses are included in the income tax returns of the members. Therefore, no provision or liability for federal or state income taxes has been included in these financial statements.
37
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 and 2013
Differences between financial statement basis of assets and tax basis of assets is primarily related to depreciation, interest rate swaps, derivatives, inventory, compensation and capitalization and amortization of organization and start-up costs for tax purposes, whereas these costs are expensed for financial statement purposes.
The Company has evaluated whether it has any significant tax uncertainties that would require recognition or disclosure. Primarily due to its partnership tax status, the Company does not have any significant tax uncertainties that would require recognition or disclosure.
The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company is no longer subject to income tax examinations by U.S. federal tax authorities or the states where the Company files tax returns for tax years ended on or prior to December 31, 2010.
Net Income (Loss) Per Unit
Net income (loss) per unit is calculated on a basic and fully diluted basis using the weighted average units outstanding during the period. The Company has reviewed all recently issued, but not yet effective accounting pronouncements and does not expect the future adoption of any such pronouncements to have a material impact on the Company's financial condition or results of operations.
Environmental Liabilities
The Company's operations are subject to environmental laws and regulations adopted by various governmental entities in the jurisdiction in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its location. Accordingly, the Company 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, if any, are recorded when the liability is probable and the costs can reasonably be estimated. The Company is not aware of any environmental liabilities identified as of
September 30, 2014
.
2. CONCENTRATIONS
Coal
Coal is an important input to our manufacturing process. During the fiscal year ended
September 30, 2014
, we used approximately
82,000
tons of coal. We have entered into a one year agreement with Westmoreland Coal Sales Company (“Westmoreland”) to supply PRB coal through December 2014 and the Company does not anticipate any problems negotiating a renewal of this contract. The Company's intentions are to renew this supply agreement with its current coal supplier. We believe there is sufficient supply of coal from the PRB coal regions in Wyoming and Montana to meet our demand for PRB coal. In addition to coal, we could use natural gas as a fuel source if our coal supply is significantly interrupted. Because we are already operating on coal, we do not expect to need natural gas unless coal interruptions impact our operations.
Sales
We are substantially dependent upon RPMG for the purchase, marketing and distribution of our ethanol, DDGS and corn oil. RPMG purchases
100%
of the ethanol, DDGS and corn oil produced at our plant, all of which is marketed and distributed to its customers. Therefore, we are highly dependent on RPMG for the successful marketing of our ethanol, DDGS and corn oil. In the event that our relationship with RPMG is interrupted or terminated for any reason, we believe that we could locate another entity to market the ethanol, DDGS and corn oil. However, any interruption or termination of this relationship could temporarily disrupt the sale and production of ethanol, DDGS and corn oil and adversely affect our business and operations and potentially result in a higher cost to the Company. Amounts due from RPMG represent approximately
59%
and
80%
of the Company's outstanding trade receivables balance at
September 30, 2014
and 2013, respectively. Approximately
97%
,
79%
, and
79%
of revenues are comprised of sales to RPMG for the year ended
September 30, 2014
, the year ended September 30, 2013 and the year ended September 30, 2012, respectively.
38
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 and 2013
3. DERIVATIVE INSTRUMENTS
Commodity Contracts
As part of its hedging strategy, the Company may enter into ethanol, soybean oil, and corn commodity-based derivatives in order to protect cash flows from fluctuations caused by volatility in commodity prices in order to protect gross profit margins from potentially adverse effects of market and price volatility on ethanol sales, corn oil sales, and corn purchase commitments where the prices are set at a future date. These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. Ethanol derivative fair market value gains or losses are included in the results of operations and are classified as revenue and corn derivative changes in fair market value are included in cost of goods sold.
|
As of:
|
|
September 30, 2014
|
|
September 30, 2013
|
|||||||||||||||
|
Contract Type
|
|
# of Contracts
|
Notional Amount (Qty)
|
Fair Value
|
|
# of Contracts
|
Notional Amount (Qty)
|
Fair Value
|
|||||||||||
|
Corn futures
|
|
1,377
|
|
6,885,000
|
|
bushels
|
$
|
7,162,638
|
|
|
80
|
|
400,000
|
|
bushels
|
$
|
(48,638
|
)
|
|
|
Corn options
|
|
250
|
|
1,250,000
|
|
bushels
|
$
|
(745,313
|
)
|
|
—
|
|
—
|
|
—
|
|
$
|
—
|
|
|
Soybean oil options
|
|
200
|
|
1,000,000
|
|
gal
|
$
|
2,618,750
|
|
|
—
|
|
—
|
|
—
|
|
$
|
—
|
|
|
Soybean oil futures
|
|
77
|
|
46,200
|
|
gal
|
$
|
370,446
|
|
|
—
|
|
—
|
|
—
|
|
$
|
—
|
|
|
Ethanol futures
|
|
90
|
|
3,780,000
|
|
gal
|
$
|
506,436
|
|
|
—
|
|
—
|
|
—
|
|
$
|
—
|
|
|
Total fair value
|
|
|
|
|
$
|
9,912,957
|
|
|
|
|
|
$
|
(48,638
|
)
|
|||||
Interest Rate Contracts
During the Company's fiscal year ended September 30, 2012, the Company had interest rate swaps that matured in April 2012. Since April 2012, the Company has not engaged in any interest rate swap agreements. These agreements were not designated as effective hedges for accounting purposes and the change in fair market value and associated net settlements were recorded in interest expense.
The Company recorded net settlements of approximately
zero
,
zero
and
$828,000
for the twelve months ended September 30, 2014, 2013 and 2012, respectively.
The following tables provide details regarding the Company's derivative financial instruments at
September 30, 2014
and September 30, 2013:
39
|
Statement of Operations Income/(expense)
|
|
Location of gain (loss) in fair value recognized in income
|
|
Amount of gain (loss) recognized in income during the year ended September 30, 2014
|
|
Amount of gain (loss) recognized in income during the year ended September 30, 2013
|
|
Amount of gain (loss) recognized in income during the year ended September 30, 2012
|
||||||
|
Corn derivative instruments
|
|
Cost of Goods Sold
|
|
$
|
8,642,639
|
|
|
$
|
778,559
|
|
|
$
|
(481,703
|
)
|
|
Ethanol derivative instruments
|
|
Revenue
|
|
(7,938,101
|
)
|
|
—
|
|
|
—
|
|
|||
|
Soybean oil derivative instruments
|
|
Revenue
|
|
2,957,823
|
|
|
—
|
|
|
28,476
|
|
|||
|
Interest rate swaps
|
|
Interest Expense
|
|
—
|
|
|
—
|
|
|
2,126
|
|
|||
|
Total
|
|
|
|
$
|
3,662,361
|
|
|
$
|
778,559
|
|
|
$
|
(451,101
|
)
|
4. INVENTORY
Inventory is valued at lower of cost or market. Inventory values as of
September 30, 2014
and
September 30, 2013
were as follows:
|
As of
|
|
September 30, 2014
|
|
September 30, 2013
|
||||
|
Raw materials, including corn, chemicals and supplies
|
|
$
|
9,962,057
|
|
|
$
|
7,510,059
|
|
|
Work in process
|
|
893,141
|
|
|
1,056,340
|
|
||
|
Finished goods, including ethanol and distillers grains
|
|
661,159
|
|
|
1,951,155
|
|
||
|
Spare parts
|
|
1,802,367
|
|
|
1,672,139
|
|
||
|
Total inventory
|
|
$
|
13,318,724
|
|
|
$
|
12,189,693
|
|
Lower of cost or market adjustments for the three and nine months ended
September 30, 2014
and
2013
were as follows:
|
|
|
For the year ended September 30, 2014
|
|
For the year ended September 30, 2013
|
|
For the year ended September 30, 2012
|
||||||
|
Loss on firm purchase commitments
|
|
$
|
3,270,000
|
|
|
$
|
1,091,000
|
|
|
$
|
132,000
|
|
|
Loss on lower of cost or market adjustment for inventory on hand
|
|
1,199,000
|
|
|
665,300
|
|
|
327,000
|
|
|||
|
Total loss on lower of cost or market adjustments
|
|
$
|
4,469,000
|
|
|
$
|
1,756,300
|
|
|
$
|
459,000
|
|
The Company has entered into forward corn purchase contracts under which it is required to take delivery at the contract price. At the time the contracts were created, the price of the contract approximated market price. Subsequent changes in market conditions could cause the contract prices to become higher or lower than market prices. As of
September 30, 2014
, the average price of corn purchased under certain fixed price contracts, that had not yet been delivered, was greater than approximated market price. Based on this information, the Company has an estimated loss on firm purchase commitments of
$3,270,000
and
$1,091,000
for the fiscal years ended
September 30, 2014
and
2013
, respectively. The loss is recorded in “Loss on firm purchase commitments” on the statements of operations. The amount of the loss was determined by applying a methodology similar to that used in the impairment valuation with respect to inventory. Given the uncertainty of future ethanol prices, this loss may or may not be recovered, and further losses on the outstanding purchase commitments could be recorded in future periods.
40
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 and 2013
The Company recorded inventory valuation impairments of
$1,199,000
and
$665,300
for the fiscal years ended
September 30, 2014
and
2013
, respectively. The impairments, as applicable, were attributable primarily to decreases in market prices of corn and ethanol. The inventory valuation impairment was recorded in “Lower of cost or market adjustment” on the statements of operations.
5. BANK FINANCING
|
As of
|
|
September 30, 2014
|
|
September 30, 2013
|
||||
|
Long-term notes payable under loan agreement to bank
|
|
$
|
14,579,000
|
|
|
$
|
20,708,000
|
|
|
Capital lease obligations (Note 7)
|
|
60,056
|
|
|
78,258
|
|
||
|
Total Long-Term Debt
|
|
14,639,056
|
|
|
20,786,258
|
|
||
|
Less amounts due within one year
|
|
9,266,343
|
|
|
2,949,977
|
|
||
|
Total Long-Term Debt Less Amounts Due Within One Year
|
|
$
|
5,372,713
|
|
|
$
|
17,836,281
|
|
The Company's notes payable consist of a term loan and a long-term revolver (LTR). As of
September 30, 2014
, the variable interest rate on both the term loan and the LTR was
3.74%
. Both of these loans mature on April 16, 2017.
The Company also has a
$10,000,000
operating line-of-credit that matures on February 28, 2015. At
September 30, 2014
, the Company had
$0
drawn on this line-of-credit leaving a balance of
$10,000,000
available. The variable interest rate was
3.66%
for amounts drawn on the operating line of credit.
|
Scheduled debt maturities for the twelve months ending September 30
|
|
Totals
|
||
|
|
|
|
||
|
2015
|
|
$
|
9,266,343
|
|
|
2016
|
|
2,002,578
|
|
|
|
2017
|
|
2,002,597
|
|
|
|
2018
|
|
1,364,617
|
|
|
|
Thereafter
|
|
2,921
|
|
|
|
Total
|
|
$
|
14,639,056
|
|
As of
September 30, 2014
, the Company was in compliance with all of its debt covenants.
|
Interest Expense
|
|
For the year ended September 30, 2014
|
|
For the year ended
September 30, 2013
|
|
For the year ended September 30, 2012
|
||||||
|
Interest expense on long-term debt
|
|
$
|
614,346
|
|
|
$
|
941,059
|
|
|
$
|
934,692
|
|
|
Change in fair value of interest rate swaps
|
|
—
|
|
|
—
|
|
|
(827,547
|
)
|
|||
|
Net settlements on interest rate swaps
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
827,887
|
|
|
Total interest expense
|
|
$
|
614,346
|
|
|
$
|
941,059
|
|
|
$
|
935,032
|
|
41
6. FAIR VALUE MEASUREMENTS
The following table provides information on those assets and liabilities that are measured at fair value on a recurring basis as of
September 30, 2014
and
September 30, 2013
, respectively.
|
|
|
|
|
|
Fair Value Measurement Using
|
||||||||||||||
|
|
Carrying Amount as of September 30, 2014
|
|
Fair Value as of September 30, 2014
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
||||||||||
|
Assets
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Commodities derivative instruments
|
$
|
3,615,151
|
|
|
$
|
3,615,151
|
|
|
$
|
3,615,151
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
Fair Value Measurement Using
|
||||||||||||||
|
|
Carrying Amount as of September 30, 2013
|
|
Fair Value as of September 30, 2013
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
||||||||||
|
Liabilities
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Commodities derivative instruments
|
$
|
48,638
|
|
|
$
|
48,638
|
|
|
$
|
48,638
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total
|
$
|
48,638
|
|
|
$
|
48,638
|
|
|
$
|
48,638
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The fair value of the corn, ethanol and soybean oil derivative instruments is based on quoted market prices in an active market.
Financial Instruments Not Measured at Fair Value
The estimated fair value of the Company's long-term debt, including the short-term portion, at
September 30, 2014
and
September 30, 2013
approximated the carrying value of approximately
$14.6 million
and
$20.8 million
, respectively. Fair value was estimated using estimated variable market interest rates as of
September 30, 2014
. The fair values and carrying values consider the terms of the related debt and exclude the impacts of debt discounts and derivative/hedging activity.
7. LEASES
The Company leases equipment under operating and capital leases through January 2020. The Company is generally responsible for maintenance, taxes, and utilities for leased equipment. Equipment under operating lease includes a locomotive and rail cars. Rent expense for operating leases was approximately
$527,000
for the year ended
September 30, 2014
,
$503,000
for the year ended
September 30, 2013
and
$670,000
for the year ended September 30, 2012. Equipment under capital leases consists of office equipment and plant equipment.
Equipment under capital leases is as follows at:
|
As of
|
September 30, 2014
|
|
September 30, 2013
|
||||
|
Equipment
|
$
|
564,648
|
|
|
$
|
564,377
|
|
|
Less accumulated amortization
|
(73,906
|
)
|
|
(49,894
|
)
|
||
|
Net equipment under capital lease
|
$
|
490,742
|
|
|
$
|
514,483
|
|
42
At September 30, 2014, the Company had the following minimum commitments, which at inception had non-cancelable terms of more than one year. Amounts shown below are for the 12 months period ending September 30:
|
|
|
Operating Leases
|
|
Capital Leases
|
||||
|
2015
|
|
$
|
393,751
|
|
|
$
|
49,343
|
|
|
2016
|
|
279,790
|
|
|
2,578
|
|
||
|
2017
|
|
208,920
|
|
|
2,597
|
|
||
|
2018
|
|
136,840
|
|
|
2,617
|
|
||
|
2019
|
|
100,800
|
|
|
2,921
|
|
||
|
Thereafter
|
|
33,600
|
|
|
—
|
|
||
|
Total minimum lease commitments
|
|
$
|
1,153,701
|
|
|
60,056
|
|
|
|
Less amount representing interest
|
|
|
|
—
|
|
|||
|
Present value of minimum lease commitments included in current maturities of long-term debt on the balance sheet
|
|
|
|
$
|
60,056
|
|
||
8. MEMBERS' EQUITY
The Company has one class of membership units outstanding (Class A) with each unit representing a pro rata ownership interest in the Company's capital, profits, losses and distributions. As of
September 30, 2014
and
2013
there were
40,148,160
and
40,148,160
units issued and outstanding, respectively. The Company held a total of
140,000
and
225,813
treasury units as of
September 30, 2014
and
2013
, respectively.
Total units authorized are
40,373,973
as of
September 30, 2014
and
2013
.
9. GRANTS
In 2006, the Company entered into a contract with the State of North Dakota through the Industrial Commission for a lignite coal grant not to exceed
$350,000
. The Company received
$275,000
from this grant during 2006 with this amount currently shown in the liability section of the Company's Balance Sheet as Contracts Payable. Because the Company has not met the minimum lignite usage requirements specified in the grant for any year in which the plant has operated, it expects to have to repay the grant and is awaiting instructions from the Industrial Commission as to the terms of the repayment schedule. This repayment could begin in fiscal 2015.
The Company has entered into an agreement with Job Service North Dakota for a new jobs training program. This program provides incentives to businesses that are creating new employment opportunities through business expansion and relocation to the state. The program provides no-cost funding to help offset the cost of training. The Company is eligible to receive up to approximately
$270,000
over
ten
years. The Company received and earned approximately
$9,300
,
$39,000
and
$41,000
for the years ended
September 30, 2014
,
2013
, and 2012, respectively.
The Company received a safety grant from North Dakota Workforce Safety and Insurance for
$20,000
. The grant was used to install platforms in the energy building.
10. COMMITMENTS AND CONTINGENCIES
Firm Purchase Commitments for Corn
To ensure an adequate supply of corn to operate the Plant, the Company enters into contracts to purchase corn from local farmers and elevators. At
September 30, 2014
, the Company had various fixed price contracts for the purchase of approximately
4.5 million
bushels of corn. Using the stated contract price for the fixed price contracts, the Company had commitments of approximately
$19.3 million
related to the
4.5 million
bushels under contract. The Company also has a contract with Modern Grain Inc. in Hebron
43
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 and 2013
to purchase
1 million
bushels of corn. The purchase price for these bushels will be set at the time of purchase at the July index price less basis. The deadline for pricing these
1 million
bushels is July 1, 2015. No purchase date has been set at this time.
Natural Gas Conversion
The Company has signed purchase orders to convert the energy source for the Plant from coal to natural gas. The total anticipated cost of this project is approximately
$5,824,000
. The Company has incurred approximately
$2,938,000
in costs to date related to this project leaving approximately
$2,886,000
in remaining costs. The project is expected to be completed by the end of our first quarter of our 2015 fiscal year. In conjunction with the natural gas conversion project, the Company entered into a seven year agreement for natural gas transmission which includes minimum required transmission and consumption volumes.
11. DEFINED CONTRIBUTION RETIREMENT PLAN
The Company established a 401k retirement plan for its employees effective January 1, 2011. The Company matches employee contributions to the plan up to
4%
of employee's gross income. The Company contributed approximately
$86,000
,
$73,000
, and
$75,000
to the 401k plan for the years ended
September 30, 2014
and
2013
, and 2012, respectively.
12. RELATED-PARTY TRANSACTIONS
The Company has balances and transactions in the normal course of business with various related parties for the purchase of corn, sale of distillers grains and sale of ethanol. The related parties include unit holders, members of the board of governors of the Company, and RPMG, Inc. (“RPMG”). Significant related party activity affecting the financial statements is as follows:
|
|
|
|
September 30, 2014
|
|
September 30, 2013
|
||||||
|
Balance Sheet
|
|
|
|
|
|
||||||
|
Accounts receivable
|
|
|
$
|
1,476,130
|
|
|
$
|
3,562,404
|
|
||
|
Accounts payable
|
|
|
482,046
|
|
|
872,827
|
|
||||
|
|
|
|
|
|
|
||||||
|
|
For the twelve months ended September 30, 2014
|
|
For the twelve months ended September 30, 2013
|
|
For the nine months ended September 30, 2012
|
||||||
|
Statement of Operations
|
|
|
|
|
|
||||||
|
Revenues
|
$
|
136,922,512
|
|
|
$
|
128,293,885
|
|
|
$
|
110,252,547
|
|
|
Realized gain on corn hedge
|
827,500
|
|
|
—
|
|
|
—
|
|
|||
|
Cost of goods sold
|
1,470,961
|
|
|
3,058,668
|
|
|
2,432,609
|
|
|||
|
General and administrative
|
78,884
|
|
|
101,506
|
|
|
103,371
|
|
|||
|
|
|
|
|
|
|
||||||
|
Inventory Purchases
|
$
|
11,397,236
|
|
|
$
|
28,905,391
|
|
|
$
|
23,809,605
|
|
13. INCOME TAXES
As of
September 30, 2014
, the book basis of assets exceeded the estimated tax basis of assets by approximately
$48.4 million
and as of
September 30, 2013
, the book basis of assets exceeded the estimated tax basis of assets by approximately
$42.5 million
. As of
September 30, 2014
, there was
no
difference between the book basis of liabilities and the estimated tax basis of liabilities. As of
September 30, 2013
, there was
no
difference between the book basis of liabilities and the estimated tax basis of liabilities.
14. SUBSEQUENT EVENTS
Management evaluated all other activity of the Company and concluded that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the notes to the condensed consolidated financial statements.
44
RED TRAIL ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 and 2013
15. UNCERTAINTIES IMPACTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS
The Company has certain risks and uncertainties that it experiences during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distillers grains to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. The Company's operating and financial performance is largely driven by prices at which the Company sells ethanol and distillers grains and by the cost at which it is able to purchase corn for operations. The price of ethanol is influenced by factors such as prices, supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets, although since 2005 the prices of ethanol and gasoline began a divergence with ethanol selling for less than gasoline at the wholesale level. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.
The Company's financial performance is highly dependent on the Federal Renewable Fuels Standard ("RFS") which requires that a certain amount of renewable fuels must be used each year in the United States. Corn based ethanol, such as the ethanol the Company produces, can be used to meet a portion of the RFS requirement. In November 2013, the EPA issued a proposed rule which would reduce the RFS for 2014, including the RFS requirement related to corn based ethanol. The EPA proposed rule was subject to a comment period which expired in January 2014. The EPA has not yet finalized the proposed rule. If the EPA reduces the ethanol use requirement of the RFS, it may have a significant negative impact on the Company's financial performance.
The Company anticipates that the results of operations during the remainder of fiscal 2015 will continue to be affected by volatility in the commodity markets. The volatility is due to various factors, including uncertainty with respect to the availability and supply of corn, increased demand for grain from global and national markets, speculation in the commodity markets, demand for corn from the ethanol industry and drought conditions currently being experienced by much of the United States.
45
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary quarter results are as follows:
|
Year Ended September 30, 2014
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
||||||||
|
Revenues
|
$
|
33,785,964
|
|
$
|
41,922,206
|
|
$
|
35,011,137
|
|
$
|
28,403,337
|
|
|
Gross profit
|
4,622,659
|
|
4,214,753
|
|
16,607,117
|
|
7,630,935
|
|
||||
|
Operating income
|
4,151,572
|
|
3,648,169
|
|
16,089,431
|
|
6,985,483
|
|
||||
|
Net income
|
4,067,720
|
|
3,538,555
|
|
15,975,873
|
|
7,008,186
|
|
||||
|
Net income per unit-basic and diluted
|
0.10
|
|
0.09
|
|
0.40
|
|
0.17
|
|
||||
|
|
|
|
|
|
||||||||
|
Year Ended September 30, 2013
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
||||||||
|
Revenues
|
$
|
42,258,878
|
|
$
|
37,514,330
|
|
$
|
43,669,509
|
|
$
|
31,365,622
|
|
|
Gross profit (loss)
|
547,252
|
|
2,545,703
|
|
1,461,626
|
|
(1,334,529
|
)
|
||||
|
Operating income (loss)
|
21,005
|
|
2,007,135
|
|
965,239
|
|
(1,919,060
|
)
|
||||
|
Net income (loss)
|
(171,309
|
)
|
1,790,968
|
|
749,392
|
|
(1,734,888
|
)
|
||||
|
Net income (loss) per unit-basic and diluted
|
—
|
|
0.04
|
|
0.02
|
|
(0.04
|
)
|
||||
|
|
|
|
|
|
||||||||
|
Year Ended September 30, 2012
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
||||||||
|
Revenues
|
$
|
37,427,000
|
|
$
|
37,123,717
|
|
$
|
33,908,133
|
|
$
|
22,999,919
|
|
|
Gross profit (loss)
|
955,938
|
|
(405,303
|
)
|
(3,762,009
|
)
|
(1,343,785
|
)
|
||||
|
Operating income (loss)
|
280,631
|
|
(979,526
|
)
|
(4,266,893
|
)
|
(1,813,722
|
)
|
||||
|
Net income (loss)
|
1,620,750
|
|
(908,333
|
)
|
(4,291,284
|
)
|
(1,119,108
|
)
|
||||
|
Net income (loss) per unit-basic and diluted
|
0.04
|
|
(0.02
|
)
|
(0.11
|
)
|
(0.03
|
)
|
||||
The above quarterly financial data is unaudited, but in the opinion of management, all material adjustments necessary for a fair presentation of the selected data for these periods presented have been included.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"), as amended, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
46
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of
September 30, 2014
, have concluded that our disclosure controls and procedures are effective in ensuring that material information required to be disclosed is included in the reports that we file with the SEC.
Changes in Internal Controls
There have been no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended
September 30, 2014
that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Inherent Limitations on the Effectiveness of Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal controls over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected or will be detected.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies and procedures.
Management's Annual Report on Internal Control Over Financial Reporting
.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with U.S. generally accepted accounting purposes.
Management conducted an evaluation of the effectiveness of the Company's internal control over financial reporting based on the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") of 1992. Management's assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and overall control environment. Based on this evaluation, management has concluded that the Company's internal control over financial reporting was effective as of
September 30, 2014
.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. As we are a non-accelerated filer, management's report is not subject to attestation by our registered public accounting firm pursuant to Section 404(c) of the Sarbanes-Oxley Act of 2002 that permits us to provide only management's report in this annual report.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. GOVERNOR, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated by reference in the definitive proxy statement from our 2015 Annual Meeting of Members to be filed with the Securities and Exchange Commission within 120 days of our 2014 fiscal year end. This proxy statement is referred to in this report as the "2015 Proxy Statement."
ITEM 11. EXECUTIVE COMPENSATION.
47
The information required by this Item is incorporated by reference to the 2015 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the 2015 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND GOVERNOR INDEPENDENCE
The information required by this Item is incorporated by reference to the 2015 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item is incorporated by reference to the 2015 Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Exhibits Filed as Part of this Report and Exhibits Incorporated by Reference.
The following exhibits and financial statements are filed as part of, or are incorporated by reference into, this report:
|
(1)
|
Financial Statements
|
The financial statements appear beginning at page 30 of this report.
|
(2)
|
Financial Statement Schedules
|
All supplemental schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
|
(3)
|
Exhibits
|
48
|
Exhibit No.
|
Exhibit
|
|
Filed Herewith
|
|
Incorporated by Reference
|
|
3.1
|
Articles of Organization, as filed with the North Dakota Secretary of State on July 16, 2003.
|
|
|
|
Filed as Exhibit 3.1 to the registrant's registration statement on Form 10-12G (000-52033) and incorporated by reference herein.
|
|
3.2
|
Amended and Restated Operating Agreement of Red Trail Energy, LLC.
|
|
|
|
Filed as exhibit 3.1 to our Current Report on Form 8-K on August 6, 2008. (000-52033) and incorporated by reference herein.
|
|
4.1
|
Membership Unit Certificate Specimen.
|
|
|
|
Filed as Exhibit 4.1 to the registrant's registration statement on Form 10-12G (000-52033) and incorporated by reference herein.
|
|
4.2
|
Member Control Agreement of Red Trail Energy, LLC.
|
|
|
|
Filed as Exhibit 4.2 to our Annual Report on Form 10-K for the year ended December 31, 2006. (000-52033) and incorporated by reference herein.
|
|
10.1
|
The Burlington Northern and Santa Fe Railway Company Lease of Land for Construction/ Rehabilitation of Track made as of May 12, 2003 by and between The Burlington Northern and Santa Fe Railway Company and Red Trail Energy, LLC.
|
|
|
|
Filed as Exhibit 10.1 to the registrant's registration statement on Form 10-12G (000-52033) and incorporated by reference herein.
|
|
10.2
|
Agreement for Electric Service made the dated August 18, 2005, by and between West Plains Electric Cooperative, Inc. and Red Trail Energy, LLC.
|
|
|
|
Filed as Exhibit 10.10 to the registrant's registration statement on Form 10-12G (000-52033) and incorporated by reference herein.
|
|
10.3
|
Security Agreement and Deposit Account Control Agreement made December 16, 2005, by and among First National Bank of Omaha, Red Trail Energy, LLC, and Bank of North Dakota.
|
|
|
|
Filed as Exhibit 10.19 to the registrant's registration statement on Form 10-12G (000-52033) and incorporated by reference herein.
|
|
10.4
|
Security Agreement given as of December 16, 2005, by Red Trail Energy, LLC, to First National Bank of Omaha.
|
|
|
|
Filed as Exhibit 10.20 to the registrant's registration statement on Form 10-12G (000-52033) and incorporated by reference herein.
|
|
10.5
|
Control Agreement Regarding Security Interest in Investment Property, made as of December 16, 2005, by and between First National Bank of Omaha, Red Trail Energy, LLC, and First National Capital Markets, Inc.
|
|
|
|
Filed as Exhibit 10.21 to the registrant's registration statement on Form 10-12G (000-52033) and incorporated by reference herein.
|
|
10.6
|
Southwest Pipeline Project Raw Water Service Contract, executed by Red Trail Energy, LLC, on March 8, 2006, by the Secretary of the North Dakota State Water Commission on March 31, 2006, and by the Chairman of the Southwest Water Authority on April 2, 2006.
|
|
|
|
Filed as Exhibit 10.28 to the registrant's registration statement on Form 10-12G (000-52033) and incorporated by reference herein.
|
|
10.7
|
Contract dated April 26, 2006, by and between the North Dakota Industrial Commission and Red Trail Energy, LLC.
|
|
|
|
Filed as Exhibit 10.29 to the registrant's second amended registration statement on Form 10-12G/A (000-52033) and incorporated by reference herein.
|
|
10.8
|
Subordination Agreement, dated May 16, 2006, among the State of North Dakota, by and through its Industrial Commission, First National Bank and Red Trail Energy, LLC.
|
|
|
|
Filed as Exhibit 10.30 to the registrant's second amended registration statement on Form 10-12G/A (000-52033) and incorporated by reference herein.
|
|
10.9
|
Firm Gas Service Extension Agreement, dated June 7, 2006, by and between Montana-Dakota Utilities Co. and Red Trail Energy, LLC.
|
|
|
|
Filed as Exhibit 10.31 to the registrant's second amended registration statement on Form 10-12G/A (000-52033) and incorporated by reference herein.
|
|
10.10
|
Security Agreement and Deposit Account Control Agreement effective August 16, 2006 by and among First National Bank of Omaha and Red Trail Energy, LLC.
|
|
|
|
Filed as Exhibit 10.34 to our Annual Report on Form 10-K for the year ended December 31, 2006. (000-52033) and incorporated by reference herein.
|
|
10.11
|
Option to Purchase 200,000 Class A Membership Units of Red Trail Energy, LLC by Red Trail Energy, LLC from North Dakota Development Fund and Stark County dated December 11, 2006.
|
|
|
|
Filed as Exhibit 10.36 to our Annual Report on Form 10-K for the year ended December 31, 2006. (000-52033) and incorporated by reference herein.
|
49
|
10.12
|
Audit Committee Charter adopted April 9, 2007.
|
|
|
|
Filed as Exhibit 10.37 to our Annual Report on Form 10-K for the year ended December 31, 2006. (000-52033) and incorporated by reference herein.
|
|
10.13
|
Senior Financial Officer Code of Conduct adopted March 28, 2007.
|
|
|
|
Filed as Exhibit 10.38 to our Annual Report on Form 10-K for the year ended December 31, 2006. (000-52033) and incorporated by reference herein.
|
|
10.14
|
Member Ethanol Fuel Marketing agreement by and between Red Trail Energy, LLC and RPMG, Inc dated January 1, 2008.
|
|
|
|
Filed as Exhibit 10.41 to our Annual Report on Form 10-K for the year ended December 31, 2007 (000-52033) and incorporated by reference herein.
|
|
10.15
|
Contribution Agreement by and between Red Trail Energy, LLC and Renewable Products Marketing Group, LLC dated January 1, 2008.
|
|
|
|
Filed as Exhibit 10.42 to our Annual Report on Form 10-K for the year ended December 31, 2007 (000-52033) and incorporated by reference herein.
|
|
10.16
|
Distillers Grain Marketing Agreement by and between Red Trail Energy, LLC and CHS, Inc dated March 10, 2008.
|
|
|
|
Filed as Exhibit 10.44 to our Annual Report on Form 10-K for the year ended December 31, 2007 (000-52033) and incorporated by reference herein.
|
|
10.17
|
Assignment and Assumption Agreement dated April 1, 2008, by and between Commodity Specialist Company and Red Trail Energy, LLC.
|
|
|
|
Filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (000-52033) and incorporated by reference herein.
|
|
10.18
|
Employment Agreement dated August 8, 2008 by and between Red Trail Energy, LLC and Mark Klimpel.
|
|
|
|
Filed as exhibit 99.1 to our Current Report on Form 8-K filed with the SEC on August 13, 2008 (000-52033) and incorporated by reference herein.
|
|
10.19
|
Amended and Restated Member Control Agreement of Red Trail Energy, LLC.
|
|
|
|
Filed as exhibit 4.2 to our Current Report on Form 8-K filed with the SEC on June 1, 2009 (000-52033) and incorporated by reference herein.
|
|
10.20
|
Amended and Restated Management Agreement made and entered into as of September 10, 2009 by and between Red Trail Energy, LLC, and Greenway Consulting, LLC.
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Filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 (000-52033) and incorporated by reference herein.
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10.21
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Employment Agreement between Red Trail Energy, LLC and Gerald Bachmeier dated July 8, 2010.
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Filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (000-52033) and incorporated by reference herein.
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10.22
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Mediated Settlement Agreement between Red Trail Energy, LLC, Fagen, Inc. and Fagen Engineering, LLC, and ICM, Inc. dated November 8, 2010. +
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Filed as Exhibit 99.1 to our Current Report on Form 8-K filed with the SEC on December 20, 2010 (000-52033) and incorporated by reference herein.
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10.23
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Letter Agreement between Greenway Consulting, LLC and Red Trail Energy, LLC dated January 13, 2011.
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Filed as Exhibit 10.56 to our Current Report on Form 10-K for the fiscal year ended December 31, 2010 (000-52033) and incorporated by reference herein.
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10.24
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First Amended and Restated Revolving Promissory Note dated June 1, 2011 by and between Red Trail Energy, LLC and First National Bank of Omaha.
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Filed as Exhibit 99.2 to our Current Report on Form 8-K dated June 1, 2011 (000-52033) and incorporated by reference herein.
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10.25
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Equity Grant Agreement between Kent Anderson and Red Trail Energy, LLC dated July 1, 2011.
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Filed as Exhibit 10.1 to our Current Report on Form 10-Q for the quarter ended June 30, 2011 (000-52033) and incorporated by reference herein.
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10.26
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Corn Oil Separation System Agreement between Solution Recovery Services, LLC and Red Trail Energy, LLC dated October 6, 2011. +
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Filed as Exhibit 10.60 to our Current Report on Form 10-K for the transition period ended September 30, 2011 (000-52033) and incorporated by reference herein.
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10.27
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First Amended and Restated Construction Loan Agreement between First National Bank of Omaha and Red Trail Energy, LLC dated April 16, 2012.
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Filed as Exhibit 10.1 to our Current Report on Form 10-Q for the quarter ended March 31, 2012 (000-52033) and incorporated by reference herein.
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10.28
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Amended and Restated Ethanol Marketing Agreement between RPMG, Inc. and Red Trail Energy, LLC dated August 27, 2012. +
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Filed as Exhibit 10.62 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 (000-52033) and incorporated by reference herein.
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10.29
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Member Corn Oil Marketing Agreement between RPMG, Inc. and Red Trail Energy, LLC dated March 21, 2012. +
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Filed as Exhibit 10.63 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 (000-52033) and incorporated by reference herein.
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50
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10.30
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First Amendment of First Amended and Restated Construction Loan Agreement between First National Bank of Omaha and Red Trail Energy, LLC dated October 31, 2012.
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Filed as Exhibit 10.64 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 (000-52033) and incorporated by reference herein.
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10.31
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Distillers' Grain Marketing Agreement between RPMG, Inc and Red Trail Energy, LLC dated October 1, 2013.+
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Filed as Exhibit 10.31 to our Annual report on Form 10-K for the fiscal year ended September 30, 2013 (000-52033) and incorporated by reference herein.
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10.32
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Rainbow Gas Asset Managment Agreement, Dated September 3, 2014
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X
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Filed as Exhibit 10.32 to our Annual report on Form 10-K for the fiscal year ended September 30, 2014 (000-52033) and incorporated by reference herein.
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31.1
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Certificate Pursuant to 17 CFR 240.13a-14(a)
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X
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31.2
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Certificate Pursuant to 17 CFR 240.13a-14(a)
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X
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32.1
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Certificate Pursuant to 18 U.S.C. Section 1350
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X
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32.2
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Certificate Pursuant to 18 U.S.C. Section 1350
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X
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101
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The following financial information from Red Trail Energy, LLC's Annual Report on Form 10-K for the fiscal year ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of September 30, 2014 and 2013, (ii) Statements of Operations for the fiscal years ended September 30, 2014, 2013, and 2012, (iii) Statement of Changes in Members' Equity; (iv) Statements of Cash Flows for the fiscal years ended September 30, 2014, 2013, and 2012, and (v) the Notes to Financial Statements.**
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(+) Confidential Treatment Requested.
(X) Filed herewith.
(**) Furnished herewith
51
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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RED TRAIL ENERGY, LLC
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Date:
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December 15, 2014
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/s/ Gerald Bachmeier
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Gerald Bachmeier
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President and Chief Executive Officer
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(Principal Executive Officer)
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Date:
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December 15, 2014
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/s/ Jodi Johnson
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Jodi Johnson
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Chief Financial Officer
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(Principal Financial and Accounting Officer)
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Date:
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December 15, 2014
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/s/ Gerald Bachmeier
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Gerald Bachmeier, Chief Executive Officer and President
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(Principal Executive Officer)
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Date:
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December 15, 2014
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/s/ Jodi Johnson
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Jodi Johnson, Chief Financial Officer and Treasurer
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(Principal Financial Officer)
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Date:
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December 15, 2014
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/s/ Sid Mauch
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Sid Mauch, Chairman and Governor
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Date:
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December 15, 2014
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/s/ Anthony Mock
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Anthony Mock, Governor
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Date:
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December 15, 2014
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/s/ Ambrose Hoff
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Ambrose Hoff, Secretary and Governor
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Date:
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December 15, 2014
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/s/ Ron Aberle
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Ron Aberle, Governor
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Date:
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December 15, 2014
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/s/ Mike Appert
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Mike Appert, Governor
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Date:
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December 15, 2014
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/s/ Frank Kirschenheiter
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Frank Kirschenheiter, Governor
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Date:
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December 15, 2014
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/s/ William A. Price
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William A. Price, Governor
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52