Attached files
file | filename |
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EX-32.2 - RED TRAIL ENERGY, LLC | v166370_ex32-2.htm |
EX-10.1 - RED TRAIL ENERGY, LLC | v166370_ex10-1.htm |
EX-10.2 - RED TRAIL ENERGY, LLC | v166370_ex10-2.htm |
EX-32.1 - RED TRAIL ENERGY, LLC | v166370_ex32-1.htm |
EX-31.2 - RED TRAIL ENERGY, LLC | v166370_ex31-2.htm |
EX-31.1 - RED TRAIL ENERGY, LLC | v166370_ex31-1.htm |
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, DC
20549
FORM 10-Q
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR
THE TRANSITION PERIOD FROM
TO
COMMISSION
FILE NUMBER: 000-52033
RED TRAIL ENERGY,
LLC
(Exact
name of registrant as specified in its charter)
NORTH
DAKOTA
|
76-0742311
|
|
(State
or other jurisdiction
of
incorporation or organization)
|
(IRS
Employer
Identification
No.)
|
P.O. Box
11
3682
Highway 8 South
Richardton,
ND 58652
(Address
of principal executive offices)
(701) 974-3308
(Registrant’s
telephone number, including area code)
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.
Yes þ No o
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 (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
o Yes o No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filter or a smaller reporting company. See
definition of “large accelerated filer,” accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check
one):
Large
accelerated filer o
Accelerated filer o
Non-accelerated filer þ Smaller
Reporting Company o
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
o Yes þ No
As of
November 13, 2009, the Company has outstanding 40,193,973 Class A
Membership Units.
RED TRAIL
ENERGY, LLC
FORM 10-Q
QUARTERLY REPORT FOR THE QUARTER ENDED
SEPTEMBER
30, 2009
TABLE OF
CONTENTS
Page
|
||||
PART
I – FINANCIAL INFORMATION
|
1
|
|||
Item 1.
Condensed Financial Statements (Unaudited)
|
1
|
|||
Condensed
Balance Sheets
|
1
|
|||
Condensed
Statements of Operations
|
2
|
|||
Condensed
Statements of Cash Flows
|
3
|
|||
Notes
to Unaudited Condensed Financial Statements
|
4
|
|||
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
|
16
|
|||
Disclosure
Regarding Forward-Looking Statements
|
16
|
|||
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
|
30
|
|||
Item 4.
Controls and Procedures
|
31
|
|||
PART
II - OTHER INFORMATION
|
32
|
|||
Item 1.
Legal Proceedings
|
32
|
|||
Item 1A.
Risk Factors
|
32
|
|||
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
|
33
|
|||
Item 3.
Defaults Upon Senior Securities
|
33
|
|||
Item 4.
Submission of Matters to a Vote of Security Holders
|
33
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|||
Item 5.
Other Information
|
33
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|||
Item 6.
Exhibits
|
33
|
|||
SIGNATURES
|
34
|
|||
Exhibit
Index
|
35
|
Item 1.
– Condensed Financial Statements
RED
TRAIL ENERGY, LLC
September
30, 2009
|
||||||||
(Unaudited)
|
December
31, 2008
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and equivalents
|
$ | 11,139,135 | $ | 4,433,839 | ||||
Restricted
cash - collateral
|
750,000 | ― | ||||||
Restricted
cash - margin account
|
1,541,673 | 1,498,791 | ||||||
Accounts
receivable
|
3,208,552 | 2,697,695 | ||||||
Inventory
|
5,414,949 | 3,353,592 | ||||||
Prepayments
of corn purchases
|
― | 4,398,046 | ||||||
Prepaid
expenses
|
298,330 | 41,767 | ||||||
Total
current assets
|
22,352,639 | 16,423,730 | ||||||
Property,
Plant and Equipment
|
||||||||
Land
|
351,280 | 351,280 | ||||||
Plant
and equipment
|
79,194,431 | 79,898,657 | ||||||
Land
improvements
|
3,947,694 | 3,939,294 | ||||||
Buildings
|
5,312,995 | 5,312,995 | ||||||
Construction
in progress
|
― | 33,679 | ||||||
88,806,400 | 89,535,905 | |||||||
Less
accumulated depreciation
|
15,954,170 | 11,525,863 | ||||||
Net
property, plant and equipment
|
72,852,230 | 78,010,042 | ||||||
Other
Assets
|
||||||||
Debt
issuance costs, net of amortization
|
― | 567,385 | ||||||
Investment
in RPMG
|
605,000 | 605,000 | ||||||
Patronage
equity, at fair value
|
192,207 | 116,296 | ||||||
Deposits
|
80,000 | 80,000 | ||||||
Total
other Assets
|
877,207 | 1,368,681 | ||||||
Total
Assets
|
$ | 96,082,076 | $ | 95,802,453 | ||||
LIABILITIES
AND MEMBERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Current
maturities of long-term debt
|
$ | 51,339,702 | $ | 49,063,201 | ||||
Accounts
payable
|
6,005,915 | 5,720,764 | ||||||
Accrued
expenses
|
2,842,838 | 1,845,101 | ||||||
Derivative
instruments, at fair value
|
768,325 | 1,051,052 | ||||||
Accrued
loss on firm purchase commitments
|
218,000 | 1,426,800 | ||||||
Interest
rate swaps, at fair value
|
2,598,900 | 2,861,530 | ||||||
Total
current liabilities
|
63,773,680 | 61,968,448 | ||||||
Other
Liabilities
|
||||||||
Contracts
payable
|
275,000 | 275,000 | ||||||
Commitments
and Contingencies
|
||||||||
Members'
Equity
|
32,033,396 | 33,559,005 | ||||||
Total
Liabilities and Members' Equity
|
|
$ | 96,082,076 | $ | 95,802,453 |
Notes to
Unaudited Condensed Financial Statements are an integral part of this
Statement.
1
RED TRAIL ENERGY,
LLC
Quarter
Ended
September
30, 2009 (Unaudited)
|
Quarter
Ended
September
30, 2008 (Unaudited)
|
Nine
Months Ended
September
30, 2009 (Unaudited)
|
Nine
Months Ended
September
30, 2008 (Unaudited)
|
|||||||||||||
Revenues
|
||||||||||||||||
Ethanol,
net of derivative fair value changes
|
$ | 21,119,497 | $ | 30,314,248 | $ | 57,486,329 | $ | 89,483,214 | ||||||||
Distillers
grains
|
4,127,699 | 5,733,213 | 12,289,311 | 15,676,567 | ||||||||||||
Total
Revenue
|
25,247,196 | 36,047,461 | 69,775,640 | 105,159,781 | ||||||||||||
Cost
of Goods Sold
|
||||||||||||||||
Cost
of goods sold, net of changes
in fair value of derivative
instruments
|
20,932,722 | 33,554,054 | 60,983,797 | 88,849,261 | ||||||||||||
(Gain)/loss
on firm purchase commitments
|
(477,000 | ) | 3,140,000 | 218,000 | 3,140,000 | |||||||||||
Lower
of cost or market adjustment for inventory
on hand
|
221,500 | 512,000 | 1,464,500 | 512,000 | ||||||||||||
Depreciation
|
1,449,900 | 1,438,264 | 4,390,783 | 4,270,804 | ||||||||||||
Total
Cost of Goods Sold
|
22,127,122 | 38,644,318 | 67,057,080 | 96,772,065 | ||||||||||||
Gross
Margin (Deficit)
|
3,120,074 | (2,596,857 | ) | 2,718,560 | 8,387,716 | |||||||||||
General
and Administrative
|
758,489 | 666,866 | 2,240,835 | 2,332,795 | ||||||||||||
Operating
Income (Loss)
|
2,361,585 | (3,263,723 | ) | 477,725 | 6,054,921 | |||||||||||
Interest
Expense
|
1,211,111 | 1,116,343 | 3,082,549 | 3,493,487 | ||||||||||||
Other
Income, net
|
678,845 | 835,179 | 1,123,516 | 1,693,922 | ||||||||||||
Net
Income (Loss)
|
$ | 1,829,319 | $ | (3,544,887 | ) | $ | (1,481,308 | ) | $ | 4,255,356 | ||||||
Wtd
Avg Units Outstanding - Basic
|
40,193,973 | 40,187,995 | 40,190,676 | 40,178,681 | ||||||||||||
Net
Income (Loss) Per Unit - Basic
|
$ | 0.05 | $ | (0.09 | ) | $ | (0.04 | ) | $ | 0.11 | ||||||
Wtd
Avg Units Outstanding - Diluted
|
40,193,973 | 40,187,995 | 40,190,676 | 40,223,681 | ||||||||||||
Net
Income (Loss) Per Unit - Diluted
|
$ | 0.05 | $ | (0.09 | ) | $ | (0.04 | ) | $ | 0.11 |
Notes to
Unaudited Condensed Financial Statements are an integral part of this
Statement.
2
RED TRAIL ENERGY,
LLC
Nine
months ended
September
30, 2009
(Unaudited)
|
Nine
months ended
September
30, 2008
(Unaudited)
|
|||||||
Cash
Flows from Operating Activities
|
||||||||
Net
income (loss)
|
$ | (1,481,308 | ) | $ | 4,255,356 | |||
Adjustment
to reconcile net income (loss) to net cash provided by
|
||||||||
operating
activities:
|
||||||||
Depreciation
|
4,428,307 | 4,311,913 | ||||||
Amortization
and write-off of debt financing costs
|
567,385 | 150,768 | ||||||
Change
in fair value of derivative instruments
|
(282,727 | ) | 188,967 | |||||
Change
in fair value of interest rate swap
|
377,058 | 9,703 | ||||||
Equity-based
compensation
|
3,334 | 15,000 | ||||||
Equity-based
compensation non-cash write-off
|
(52,635 | ) | ― | |||||
Noncash
patronage equity
|
(75,911 | ) | (116,296 | ) | ||||
Grant
income applied to long-term debt
|
― | (59,874 | ) | |||||
Loss
on lower of cost or market adjustment
|
1,464,500 | 512,000 | ||||||
Unrealized
loss on firm purchase commitments
|
(1,208,800 | ) | 3,140,000 | |||||
Changes
in assets and liabilities
|
||||||||
Restricted
cash - margin account
|
(42,882 | ) | 2,954,220 | |||||
Accounts
receivable
|
(510,857 | ) | 3,402,900 | |||||
Inventory
|
(3,525,857 | ) | 1,618,836 | |||||
Prepaid
expenses
|
4,141,483 | (25,722 | ) | |||||
Accounts
payable
|
454,261 | (975,575 | ) | |||||
Accrued
expenses
|
997,737 | (436,732 | ) | |||||
Cash
settlements on interest rate swap
|
(639,688 | ) | 265,845 | |||||
Net
cash provided by operating activities
|
4,613,400 | 19,211,309 | ||||||
Cash
Flows from Investing Activities
|
||||||||
Investment
in RPMG
|
(169,110 | ) | (354,087 | ) | ||||
Refund
of sales tax on fixed assets
|
763,630 | ― | ||||||
Capital
expenditures
|
(34,125 | ) | (1,967,019 | ) | ||||
Net
cash provided by (used in) investing activities
|
560,395 | (2,321,106 | ) | |||||
Cash
Flows from Financing Activities
|
||||||||
Debt
repayments
|
(1,297,007 | ) | (17,873,214 | ) | ||||
Restricted
cash - collateral
|
(750,000 | ) | ― | |||||
Treasury
units issued
|
5,000 | ― | ||||||
Proceeds
from long-term debt
|
3,573,508 | 3,160,500 | ||||||
Net
cash provided by (used in) financing activities
|
1,531,501 | (14,712,714 | ) | |||||
Net
Increase in Cash and Equivalents
|
6,705,296 | 2,177,489 | ||||||
Cash
and Equivalents - Beginning of Period
|
4,433,839 | 8,231,709 | ||||||
Cash
and Equivalents - End of Period
|
$ | 11,139,135 | $ | 10,409,198 | ||||
Supplemental
Disclosure of Cash Flow Information
|
||||||||
Interest
paid
|
$ | 2,216,077 | $ | 3,252,713 | ||||
SUPPLEMENTAL
DISCLOSURE OF NON-CASH
|
||||||||
INVESTING
AND FINANCING ACTIVITIES
|
||||||||
Capital
expenditures included in accounts payable
|
$ | ― | $ | 230,000 | ||||
Write-off
of debt issuance costs
|
$ | 517,823 | $ | ― | ||||
Investment
in RPMG included in accounts payable
|
$ | 169,110 | $ | 250,913 |
Notes to
Unaudited Condensed Financial Statements are an integral part of this
Statement.
3
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
The
accompanying condensed unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”). Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted as permitted by such rules and regulations. These financial statements
and related notes should be read in conjunction with the financial statements
and notes thereto included in the Company’s audited financial statements for the
year ended December 31, 2008, contained in the Company’s Annual Report on
Form 10-K.
In the
opinion of management, the interim condensed financial statements reflect all
adjustments considered necessary for fair presentation. The adjustments made to
these statements consist only of normal recurring
adjustments. Operating results for the periods presented are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2009.
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”).
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; analysis of intangibles
impairment, the analysis of long-lived assets impairment and other
contingencies. Actual results could differ from those
estimates.
Reclassifications
The
presentation of certain items in the financial statements for the three and nine
months ended September 30, 2008 has been changed to conform to the
classifications used in 2009. These reclassifications had no effect
on members’ equity, net income (loss) or operating cash flows as previously
reported.
Restricted
Cash
During
June 2009, the Company was required to restrict cash for use as collateral on
two letters of credit issued in relation to its distilled spirits and grain
warehouse bonds. As of September 30, 2009 and December 31, 2008, the
total amount of restricted cash related to these bonds was $750,000 and $0,
respectively. The Company also had cash restricted to meet its hedge
account requirements. The total amount of cash restricted in its
hedge account was approximately $1.5 million as of both September 30, 2009 and
December 31, 2008.
Debt Issuance
Costs
Debt
issuance costs were amortized over the term of the related debt by use of the
effective interest method. Amortization commenced June 2006 when the
Company began drawing on the related bank loan. Due to the uncertainties with
our loan agreements described in Note 2 and Note 5, the Company wrote off the
remaining balance (approximately $517,000) of its debt issuance costs during the
first quarter of 2009. Amortization and impairment expense totaled $0
and $567,000 (including the write-off of $517,000) for the three and nine months
ended September 30, 2009, respectively, and $50,000 and $151,000 for the three
and nine months ended September 30, 2008, respectively. The
amortization and debt issuance cost impairment expense is included in interest
expense.
Net Income (Loss) Per
Unit
Net
Income (Loss) per unit are calculated on a basic and fully diluted basis using
the weighted average units outstanding during the period. Diluted
units outstanding include 0 and 45,000 units as of September 30, 2009 and 2008,
respectively, for the vested equivalents of restricted member units issued to
management. For the nine months ended September 30, 2009 and the
three months ended September 30, 2008, these equivalent units are not included
in fully diluted earnings per units as their effects would be
anti-dilutive.
4
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
Subsequent
Events
The
Company has evaluated subsequent events through November 13, 2009, the date
which the financial statements were available to be issued.
Fair Value of Financial
Instruments
The fair
value of the Company’s cash and cash equivalents, accounts receivable, accounts
payable, and derivative instruments approximate their carrying value. It is not
currently practicable to estimate the fair value of the Company’s long-term debt
and contracts payable since the terms are uncertain as of September 30,
2009. As such, there are no readily determinable similar instruments
on which to base an estimate of fair value of each item.
Recently Adopted Accounting
Principles
In June
2009, the FASB issued the FASB Accounting Standards Codification
(“Codification”). The Codification became the single source for all
authoritative GAAP recognized by the FASB and has been applied to financial
statements issued for periods ending after September 15, 2009. The
Codification does not change GAAP and will not have an effect on our financial
position, results of operations or liquidity.
Going
Concern and Management’s Plans
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business. The Company has determined that the following factors raise
substantial doubt about its ability to continue as a going concern:
|
1.
|
The
Company was profitable and had positive cash flows during the third
quarter of 2009. Prior to this quarter, however, poor market
conditions in the ethanol industry led the Company to incur operating
losses and negative operating cash flow since August
2008.
|
|
2.
|
The
Company first violated certain of its loan covenants at December 31, 2008
and was granted a waiver of the violations, as of that date, by its senior
lender, First National Bank of Omaha (the “Bank” or
“FNBO”). The Company was also found to be in violation of the
same loan covenants at March 31, 2009, June 30, 2009 and September 30,
2009 and has not been granted a waiver of those violations by the
Bank.
|
|
3.
|
With
the improvement in market conditions, the Company projects that it may
come back in compliance with some, but not all of its loan covenants as
early as December 31, 2009. However, it cannot be certain that
it will regain compliance and has not been granted a waiver of any future
projected covenant violations. Please see the following
paragraphs for a discussion of these
factors.
|
1. Market
Conditions
Prior to
the current quarter, the Company had incurred operating losses and negative
operating cash flow since August 2008. As of September 30, 2009,
market conditions in the ethanol industry, and for the Company, have improved
relative to the market conditions in place earlier this year and during the last
quarter of 2008, to the point where operating cash flows are positive and the
Company recorded a profit for the third quarter of 2009. The Company
projects that, if current market conditions continue through the fourth quarter
of 2009, it will also be profitable in the fourth quarter and will be around
break even for the year. The Company anticipates that some of the
production capacity that was shutdown or slowed down earlier this year, due to
the poor market conditions, will come back on line in order to take advantage of
the improved margins. The Company cannot predict when, or if, this
will happen but the Company believes that the ethanol industry could return to
the oversupply situation that, in part, helped create the poor margin conditions
during late 2008 and early 2009.
While the
cost saving and revenue enhancing measures implemented by the Company earlier
this year have been effective, the financial results of the Company are highly
dependent on the spread between ethanol and corn prices. The spread
between ethanol and corn prices has improved which is largely why the Company
recorded a profit in the third quarter of 2009. In an effort to
better insulate the Company from potential future downturns in the ethanol
industry, the Company is still in the process of developing a corn procurement
program that would essentially allow it to purchase corn in exchange for cash,
equity, a deferred payable and an incentive to be paid in the future based on
the Company’s financial performance. The Company believes that such a
program would have a positive impact on the long-term viability of its
operations.
5
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
2. Long-Term
Debt
The
Company received a waiver for violations of its loan covenants for the period
ended December 31, 2008. The Company has been notified by the Bank
that it is in violation of certain of the covenants in its loan agreements at
March 31, 2009, June 30, 2009 and September 30, 2009. The Company has
not been granted a waiver of those violations. While the Bank has
reserved its rights to declare the Company in default of its loan agreements, as
of November 13, 2009 the Bank has not declared the Company to be in default of
its loan agreements and considers the Company to be in good standing with its
loan agreements. The Company is currently projecting that, with the
current improved margins, it may regain compliance with some, but not all, of
its loan covenants as early as December 31, 2009. Due to the current
and projected covenant violations, the Bank has the ability to call the
Company’s debt due and payable during 2009 which has resulted in the
reclassification of the Company’s long-term debt to a current
liability.
The
Company has maintained a good working relationship with the Bank and continues
to have conversations with the Bank about potentially restructuring its debt
load and recasting its loan covenants to match the current economics in the
ethanol industry. The sixth amendment to the Company’s construction
loan agreement (the “Sixth Amendment”) allowed the Company to forgo its April
16, 2009 and July 16, 2009 principal payments. The Company did make
its regularly scheduled principal and interest payment on October 16,
2009.
The
Company’s line of credit with the Bank (the “Line of Credit”) expired on July
16, 2009 and was not renewed. The Company continues to work with the
Bank to restore this line of credit currently does not have any options for
borrowing short term capital. The Company believes that the potential
restructuring mentioned above would include reinstatement of its Line of
Credit. The Company projects that it will not need any short term
borrowings to meet is obligations through December 31, 2009.
3. Going
Concern
While the
Company was profitable during the third quarter of 2009 and projects that, under
current market conditions, it will also be profitable in the fourth quarter,
there is uncertainty surrounding how long margins will remain
positive. Those uncertainties in market conditions along with the
status of the Company’s long-term debt and weakened balance sheet condition, due
to losses sustained, raise substantial doubt about the Company’s ability to
continue as a going concern. Realization of assets is dependent upon
continued operations of the Company, which in turn is dependent upon
management’s plans to meet its financing requirements and the Bank’s
participation in working through the Company’s difficult economic situation and
the success of its future operations. The ability of the Company to
continue as a going concern is dependent on improving the Company’s
profitability and cash flow, possibly securing additional financing or raising
additional equity, and working with the Bank to structure debt payment terms
that are reasonably achievable given current and applicable operating
conditions. While the Company believes in the viability of its
strategies to maintain a positive cash flow and remain profitable, there can be
no assurances to that effect. These financial statements do not
include any adjustments related to the recoverability and classification of
asset amounts or the amounts and classification of liabilities that might be
necessary if the Company is unable to continue as a going concern.
Please
see Note 2 for further detail on these items along with management’s plans to
mitigate the effect of these items.
2. NATURE
OF CURRENT OPERATIONS
Market
Conditions
During
the third quarter of 2009, corn and ethanol prices continued to trade within a
relatively narrow range compared to the extremes experienced during the year
ended December 31, 2008. For example, the September corn contract
closing prices for the third quarter of 2009 traded within a range that included
a high of approximately $3.60 per bushel and a low of approximately $3.00 per
bushel. In comparison, corn prices during 2008 ranged from a low of
approximately $4.00 per bushel to a high near $8.00 per
bushel. Industry margins improved significantly during the third
quarter relative to margins through June 2009. The Company’s margins
also improved significantly during the third quarter and the Company realized a
net income of approximately $1.8 million. Ethanol prices strengthened
relative to corn prices during the quarter due to an increase in demand for
ethanol related to new blending markets opening up and winter blending
requirements.
6
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
During
the third quarter of 2009, the Company operated with near market corn prices –
the result of decreased volatility in the corn markets and the Company’s efforts
to implement a strategy to limit the number of bushels under fixed price
contracts and in inventory on hand. Having corn under firm purchase
commitments which had a cost very near market prices allowed the Company to
record a recovery of a portion of the previously accrued unrealized loss on firm
purchase commitments related to its fixed price corn contracts of $477,000 as
the contracted prices were much closer to market prices. The Company
did not record any lower of cost or market write downs on its corn inventory
during the third quarter of 2009 as its average cost of corn on hand was lower
than market prices. The Company did record a lower of cost or market
adjustment write down related to its ethanol inventory on hand at September 30,
2009 of $221,500. The Company had approximately 1.4 million bushels
under fixed price contract at September 30, 2009.
While the
Company has worked to limit its exposure to market fluctuations, it cannot
completely eliminate its exposure to those fluctuations. Due to the
location of the Plant along with the logistics of corn movement in its region,
the Company believes it will always have to procure a certain amount of corn
under fixed price contracts to ensure an adequate supply of corn to efficiently
operate the Plant.
Banking
Update
|
·
|
The
Company continues to maintain a good working relationship with its Bank
and also continues to converse with the Bank about possibly restructuring
its current long-term debt and loan covenants to match the current and
projected market conditions in the ethanol
industry.
|
|
·
|
The
Company was notified by the Bank that it was in violation of its loan
covenants at September 30, 2009 and that it had not received a waiver of
those covenant violations. While the Bank has reserved its
rights to declare the Company in default of its loan agreements, as of
November 13, 2009, the Bank has not declared the Company in default of its
loan agreements and considers the Company to be in good
standing.
|
|
·
|
The
Sixth Amendment allowed the Company to forgo its April 16, 2009 and July
16, 2009 principal payments. The Company did make its next
scheduled note payment on October 16,
2009.
|
|
·
|
Based
on current industry margins and a projection of near breakeven for 2009,
the Company projects that it will regain compliance with certain (not all)
of its loan covenants as early as December 31,
2009.
|
Company
Initiatives
|
·
|
In
an effort to mitigate the effect of potential future negative (or very
small positive) cash flow and secure a supply of corn from local farmers,
the Company is in the process of developing a corn purchasing strategy
that would allow it to purchase corn for a combination of cash, equity and
a deferred payable in exchange for repayment of such deferred amounts and
payment of future incentives, to those that participate in the program, if
the Plant is able to operate with positive cash flows sufficient enough to
support the payments along with applicable debt service. The
Company views this strategy as a way of partnering with its corn supply
chain to enhance its prospects to remain a viable company. The
program has taken longer than anticipated to develop and the Company now
anticipates that, if successfully implemented, it will be in place during
the first quarter of 2010.
|
|
·
|
The
Company captured an increased yield during the second quarter of 2009 vs.
the first quarter of 2009 and was able to maintain that higher yield
during the third quarter of 2009. If maintained for a
consecutive twelve month period, this higher yield would result in using
approximately 600,000 fewer bushels of corn over that time which would
result in an approximately $2.4 million savings if corn averaged $4 per
bushel during that time.
|
|
·
|
The
Company maintained its production rate at approximately 110% of nameplate
capacity during the third quarter of 2009 as margins continued to
improve. The Company continues to evaluate, on an on-going
basis, the capacity at which to operate the Plant, including possibly
shutting down. The rate is being monitored in conjunction with
industry margins to determine the best rate at which to operate the
Plant.
|
7
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
|
·
|
The
Company continues to evaluate other cost cutting/revenue enhancing
measures including the installation of corn oil extraction
equipment.
|
|
·
|
The
Company had to extend its normal fall maintenance outage by approximately
13 days during October to repair some previously unnoticed damage in one
area of the Plant. The Plant was back operating at full
capacity as of October 22. While the Company believes this
additional downtime will have a negative impact on its earnings for the
fourth quarter of 2009, the Company anticipates that it will still be
profitable for the quarter.
|
3. DERIVATIVE
INSTRUMENTS
From time
to time the Company enters into derivative transactions to hedge its exposures
to interest rate and commodity price fluctuations. The Company does not enter
into derivative transactions for trading purposes.
The
Company provides qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of gains
and losses from derivative instruments, and disclosures about
credit-risk-related contingent features in derivative
agreements.
As of
September 30, 2009, the Company had entered into interest rate swap agreements
along with corn and ethanol derivative instruments. The Company
records its derivative financial instruments as either assets or
liabilities at fair value in the statement of financial
position. Derivatives qualify for treatment as hedges when there is a
high correlation between the change in fair value of the derivative instrument
and the related change in value of the underlying hedged item. Based upon the
exposure being hedged, the Company designates its hedging instruments as a fair
value hedge, a cash flow hedge or a hedge against foreign currency
exposure. The Company formally documents, designates, and assesses
the effectiveness of transactions that receive hedge accounting initially and on
an on-going basis. The Company does not currently have any derivative
instruments that are designated as effective hedging instruments for accounting
purposes.
Commodity
Contracts
As part
of its hedging strategy, the Company may enter into ethanol 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 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, 2009
|
||||||||||||
Contract
Type
|
#
of Contracts
|
Notional
Amount (Qty)
|
Fair
Value
|
|||||||||
Corn
futures
|
394
|
1,970,000 |
bushels
|
$ | 376,000 | |||||||
Ethanol
swap contracts
|
250
|
3,600,000 |
gallons
|
392,000 | ||||||||
Total
fair value (classified as a liability)
|
$ | 768,000 | ||||||||||
None of
the commodity contracts in place at September 30, 2009 were designated as
effective hedges for accounting purposes. As such, the change in fair
value of the commodity contracts in place at September 30, 2009 has been
recorded in the results of operations and classified as stated
above.
Interest
Rate Contracts
The
Company manages its floating rate debt using interest rate swaps. The Company
has entered into fixed rate swaps to alter its exposure to the impact of
changing interest rates on its results of operations and future cash outflows
for interest. Fixed rate swaps are used to reduce the Company’s risk of the
possibility of increased interest costs. Interest rate swap contracts are
therefore used by the Company to separate interest rate risk management from the
debt funding decision.
8
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
At
September 30, 2009, the Company had approximately $32 million of notional amount
outstanding in swap agreements that exchange variable interest rates (one-month
LIBOR and three-month LIBOR) for fixed interest rates over the terms of the
agreements. At September 30, 2009, the fair value of the interest rate
swaps totaled approximately $2.6 million and is included in current
liabilities. These agreements are not designated as an effective
hedge for accounting purposes and the change in fair market value and associated
net settlements are recorded in interest expense. The swaps mature in
April 2012.
The
Company recorded net settlements of approximately $306,000 and $640,000 for the
three and nine months ended September 30, 2009, respectively, and $192,000 and
$266,000 for the three and nine months ended September 30, 2008,
respectively. See Note 5 for a description of these
agreements.
The
following tables provide details regarding the Company’s derivative financial
instruments at September 30, 2009:
Derivatives
not designated as hedging instruments for accounting
purposes
|
||||||||
Balance
Sheet - as of September 30, 2009
|
Asset
|
Liability
|
||||||
Derivative
instruments, at fair value
|
$ | ― | $ | 768,325 | ||||
Interest
rate swaps, at fair value
|
― | 2,598,900 | ||||||
Total
derivatives not desingated as hedging instruments for accounting
purposes
|
$ | 0 | $ | 3,367,225 |
Statement
of Operations (Income)/expense
|
Location
of change in fair value recognized in income
|
Change
in fair value recognized in income during three months ended September 30,
2009
|
Change
in fair value recognized in income during three months ended September 30,
2008
|
Change
in fair value recognized in income during nine months ended September 30,
2009
|
Change
in fair value recognized in income during nine months ended September 30,
2008
|
||||||||||||
Corn
derivative instruments
|
Cost
of Goods Sold
|
$ | 110,185 | $ | (1,653,852 | ) | $ | (603,934 | ) | $ | (6,783,307 | ) | |||||
Ethanol
derivative instruments
|
Revenues
|
360,325 | (891,661 | ) | 360,325 | 2,340,621 | |||||||||||
Interest
rate swaps
|
Interest
Expense
|
86,895 | 168,636 | (262,630 | ) | 275,548 | |||||||||||
Total
|
$ | 557,405 | $ | (2,376,877 | ) | $ | (506,239 | ) | $ | (4,167,138 | ) |
Inventory
is valued at lower of cost or market. Inventory values and associated
lower of cost or market adjustments as of September 30, 2009 and December 31,
2008 were as follows:
Inventory
values as of:
|
September
30, 2009
|
December
31, 2008
|
||||||
Raw
materials, including corn, chemicals and supplies
|
$ | 3,819,001 | $ | 1,636,631 | ||||
Work
in process
|
596,823 | 681,187 | ||||||
Finished
goods, including ethanol and distillers grains
|
999,125 | 1,035,774 | ||||||
Total
inventory
|
$ | 5,414,949 | $ | 3,353,592 |
Lower
of cost or market adjustments for the periods ended:
|
For
the three months ended September 30, 2009
|
For
the three months ended September 30, 2008
|
For
the nine months ended September 30, 2009
|
For
the nine months ended September 30, 2008
|
||||||||||||
Loss
on firm purchase commitments
|
$ | (477,000 | ) | $ | 3,140,000 | $ | 218,000 | $ | 3,140,000 | |||||||
Lower
of cost or market adjustment for inventory on hand
|
221,500 | 512,000 | 1,464,500 | 512,000 | ||||||||||||
Total
lower of cost or market adjustments
|
$ | (255,500 | ) | $ | 3,652,000 | $ | 1,682,500 | $ | 3,652,000 |
9
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
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 price 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, 2009, the average price of corn purchased under fixed price
contracts, that had not yet been delivered, was above market price but closer to
market prices than at June 30, 2009. Based on this information, the
Company recorded a recovery of $477,000 of the previously accrued estimated loss
during the three months ended September 30, 2009. The Company
recorded losses on these purchase commitments of approximately $218,000 for the
nine months ended September 30, 2009 and the Company also recorded a loss on
these purchase commitments of approximately $3.1 million for both the three and
nine month periods ended September 30, 2008. The loss is recorded in
“Loss on firm purchase commitments” on the statement 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.
The
Company recorded inventory valuation impairments of $221,500 and $1,464,500 for
the three and nine months ended September 30, 2009, respectively and $512,000
for both the three and nine month periods ended September 30, 2008,
respectively. The impairments 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 for
inventory on hand” on the statement of operations.
5.
BANK FINANCING
As
of
|
September
30, 2009
|
December
31, 2008
|
||||||
Notes
under loan agreement payable to bank, see details below
|
$ | 45,746,936 | $ | 43,436,721 | ||||
Subordinated
notes payable, see details below
|
5,525,000 | 5,525,000 | ||||||
Capital
lease obligations (Note 7)
|
67,766 | 101,480 | ||||||
Total
Long-Term Debt
|
51,339,702 | 49,063,201 | ||||||
Less
amounts due within one year*
|
51,339,702 | 49,063,201 | ||||||
Total
Long-Term Debt Less Amounts Due Within One Year
|
$ | 0 | $ | 0 |
* - The
Company is out of compliance with certain of its bank covenants as of September
30, 2009. Based on current market conditions, the Company projects
that it may regain compliance with some (but not all) of its loan covenants as
early as December 2009, but it has not been able to secure a waiver from the
bank for violations as of September 30, 2009 or the projected future
violations. While the Bank has reserved its rights under the
Construction Loan Agreement as of November 13, 2009, the Bank has not declared
the Company in default of the Construction Loan Agreement and considers the
Company in good standing. Due to the current and projected future
covenant violations, however, the Company is required to show all of its debt
subject to those covenant violations as a current liability. The
Company has shown the scheduled debt maturities below, absent any effects of
possibly being declared in default of the Construction Loan Agreement, taking
into account the terms of the Sixth Amendment and under the assumption that it
will resume its scheduled note payments under the original terms of the
Construction Loan Agreement in October 2009. The Company did make its
scheduled note payment in October 2009.
Scheduled
maturities for the twelve months ended September 30,
|
||||
2010
|
$ | 4,930,814 | ||
2011
|
10,776,365 | |||
2012
|
35,596,704 | |||
2013
|
33,655 | |||
2014
|
2,164 | |||
Thereafter
|
― | |||
Total
|
$ | 51,339,702 |
10
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
The
Company is subject to a number of covenants and restrictions in connection with
its credit facilities, including:
•
|
Providing
the Bank with current and accurate financial
statements;
|
||
•
|
Maintaining
certain financial ratios, minimum net worth, and working
capital;
|
||
•
|
Maintaining
adequate insurance;
|
||
•
|
Not
making, or allowing to be made, any significant change in the Company’s
business or tax structure;
|
||
•
|
Needing
Bank approval for capital expenditures in excess of $500,000;
and
|
||
•
|
Limiting
the Company’s ability to make distributions to
members.
|
The
Construction Loan Agreement with the Bank also contains a number of events of
default (including violation of our loan covenants) which, if any of them were
to occur, would give the Bank certain rights, including but not limited
to:
•
|
Declaring
all the debt owed to the Bank immediately due and payable;
and
|
||
•
|
Taking
possession of all of the Company’s assets, including any contract
rights.
|
The Bank
could then sell all of the Company’s assets or business and apply any proceeds
to repay their loans. The Company would continue to be liable to repay any loan
amounts still outstanding.
The
Company has been notified by FNBO that it is in violation of certain of the
covenants at September 30, 2009 and that it has not been granted a waiver of
those violations. These include the covenants requiring a minimum
working capital balance, minimum net worth and a minimum fixed charge coverage
ratio. Please see Note 2 for further discussion of the covenant
violations and future projected waiver requests.
Credit
Agreement
In
December 2005, the Company entered into a credit agreement with the Bank
providing for a total credit facility of approximately $59,712,000 for the
purpose of funding the construction of the Plant. The Construction Loan
Agreement requires the Company to maintain certain financial ratios and meet
certain non-financial covenants. The Construction Loan Agreement is
secured by substantially all of the assets of the Company and includes the terms
as described below. Interest expense as shown on the statement of
operations is composed of the following:
Interest
Expense
|
For
the three months ended September 30, 2009
|
For
the three months ended September 30, 2008
|
For
the nine months ended September 30, 2009
|
For
the nine months ended September 30, 2008
|
||||||||||||
Interest
expense on long-term debt
|
$ | 817,829 | $ | 705,321 | $ | 2,138,105 | $ | 2,801,327 | ||||||||
Amortization/write-off
of deferred financing costs
|
― | 50,256 | 567,386 | 150,768 | ||||||||||||
Change
in fair value of interest rate swaps
|
86,895 | 168,636 | (262,630 | ) | 275,548 | |||||||||||
Net
settlements on interest rate swaps
|
306,387 | 192,130 | 639,688 | 265,844 | ||||||||||||
Total
interest expense
|
$ | 1,211,111 | $ | 1,116,343 | $ | 3,082,549 | $ | 3,493,487 |
11
RED
TRAIL ENERGY, LLC
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
Construction
Loan
The
Company had four long-term notes (collectively the “Term Notes” or each a “Term
Note”) in place as of September 30, 2009. Three of the Term Notes
were established in conjunction with the termination of the original
Construction Loan Agreement on April 16, 2007. The fourth Term Note
was entered into during December 2007 (the “December 2007 Fixed Rate Note”) when
the Company entered into a second interest rate swap agreement which effectively
fixed the interest rate on an additional $10 million of debt. The
Construction Loan Agreement requires the Company to maintain certain financial
ratios and meet certain non-financial covenants. Each Term Note has
specific interest rates and terms as described below. The estimated
principal payments along with the interest rates shown below reflect the terms
of the Sixth Amendment.
Term
Notes - Construction Loan
Outstanding
Balance (Millions)
|
Interest
Rate
|
|||||||||||||||||||||||||||||||
Term
Note
|
September
30, 2009
|
December
31, 2008
|
September
30, 2009
|
December
31, 2008
|
Range
of Estimated Quarterly Principal Payment Amounts
|
Estimated
Final Payment (millions)
|
Notes
|
|||||||||||||||||||||||||
Fixed
Rate Note
|
$ | 24.10 | $ | 24.70 | 6.00 | % | 5.79 | % | $ | 530,000 - | $ | 650,000 | $ | 18.30 |
1,
2, 4
|
|||||||||||||||||
Variable
Rate Note
|
2.50 | 3.00 | 6.00 | % | 6.04 | % | $ | 447,000 - | $ | 475,000 | 0.21 |
1,
2, 3, 5
|
||||||||||||||||||||
Long-Term
Revolving Note
|
10.00 | 6.40 | 6.00 | % | 5.74 | % | $ | 297,000 - | $ | 511,000 | 7.70 |
1,
2, 6, 7
|
||||||||||||||||||||
2007
Fixed Rate Note
|
9.00 | 9.20 | 6.00 | % | 6.19 | % | $ | 196,000 - | $ | 233,000 | 6.80 |
1,
2, 5
|
1
- The scheduled maturity date is April 2012
|
2
- Range of estimated quarterly principal payments is based on
principal balances and interest rates as of September 30,
2009
|
3
- Quarterly payments of $634,700 are applied first to interest
on the Long-Term Revolving Note, next to accrued interest on the
Variable
Rate Note and finally to principal on the Variable Rate
Note. Variable Rate Note is estimated to be paid off in January
2011.
|
4
- Interest rate based on 3.0% over three-month LIBOR with a 6%
minimum, reset quarterly
|
5
- Interest rate based on 3.4% over three-month LIBOR with a 6%
minimum, reset quarterly
|
6
- Interest rate based on 3.4% over one-month LIBOR with a 6%
minimum, reset monthly
|
7
- Principal payments would be made on the Long-Term Revolving
Note once the Variable Rate Note is paid in
full.
|
Revolving Line of Credit
The
Company’s $3.5 million line of credit was not renewed as of July 16,
2009. Interest is payable quarterly and charged on all borrowings at
a rate of 3.4% over the one-month LIBOR rate with a minimum rate of
6%. As of September 30, 2008, the rate charged was 5.73813%. The
Company had no outstanding borrowings on this note at December 31,
2008.
Interest Rate Swap
Agreements
In
December 2005, the Company entered into an interest rate swap transaction
that effectively fixed the interest rate at 8.08% on the outstanding principal
of the Fixed Rate Note. In December 2007, the Company entered into a
second interest rate swap transaction that effectively fixed the interest rate
at 7.695% on the outstanding principal of the December 2007 Fixed Rate
Note.
The
interest rate swaps were not designated as either a cash flow or fair value
hedge. Fair value adjustments and net settlements are recorded in interest
expense.
Letters of
Credit
The
Construction Loan Agreement provides for up to $137,000 in letters of credit
with the Bank to be used for any future line of credit requested by a supplier
to the Plant. The letter of credit expires on December 1, 2009. The
Construction Loan Agreement requires the Company to pay a quarterly commitment
fee of 2.25% of all outstanding letters of credit. The balance outstanding on
this letter of credit was $137,000 as of September 30, 2009 and December 31,
2008, respectively.
The
Company also issued two new letters of credit during the second quarter of 2009
in conjunction with the issuance of its grain warehouse and distilled spirits
bonds. The letters of credit were issued in the amount of $500,000
and $250,000, respectively.
Subordinated
Debt
As part
of the Construction Loan Agreement, the Company entered into three separate
subordinated debt agreements totaling approximately $5,525,000 and received
funds from these debt agreements during 2006. Interest is charged at a rate of
2.0% over the Variable Rate Note interest rate (a total of 8% and 8.04063% at
September 30, 2009 and 2008, respectively) and is due and payable subject to
approval by the senior lender, the Bank. Interest is compounding with any unpaid
interest converted to principal. Amounts will be due and payable in full in
March 2011. The balance outstanding on these loans was $5,525,000 as
of September 30, 2009 and December 31, 2008, respectively.
12
RED
TRAIL ENERGY, LLC
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
6.
FAIR VALUE MEASUREMENTS
Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date in the principal or most advantageous market. The Company
uses a fair value hierarchy that has three levels of inputs, both observable and
unobservable, with use of the lowest possible level of input to determine fair
value. Level 1 inputs include quoted market prices in an active market or the
price of an identical asset or liability. Level 2 inputs are market data, other
than Level 1, that are observable either directly or indirectly. Level 2 inputs
include quoted market prices for similar assets or liabilities, quoted market
prices in an inactive market, and other observable information that can be
corroborated by market data. Level 3 inputs are unobservable and corroborated by
little or no market data. The Company uses valuation techniques in a consistent
manner from year-to-year.
The
following table provides information on those assets and liabilities that are
measured at fair value on a recurring basis.
Fair
Value Measurement Using
|
||||||||||||||||||||
Carrying
Amount as of
September
30, 2009
|
Fair
Value as of September
30, 2009
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||||||
Assets
|
||||||||||||||||||||
Money
market funds
|
$ | 5,001,898 | $ | 5,001,898 | $ | 5,001,898 | $ | ― | $ | ― | ||||||||||
Total
|
$ | 5,001,898 | $ | 5,001,898 | $ | 5,001,898 | $ | ― | $ | ― | ||||||||||
Liabilities
|
||||||||||||||||||||
Interest
rate swaps
|
$ | 2,598,900 | $ | 2,598,900 | $ | ― | $ | 2,598,900 | $ | ― | ||||||||||
Derivative
instruments
|
768,325 | 768,325 | 768,325 | ― | ― | |||||||||||||||
Total
|
$ | 3,367,225 | $ | 3,367,225 | $ | 768,325 | $ | 2,598,900 | $ | ― |
The fair
value of the money market funds and corn and ethanol derivative instruments is
based on quoted market prices in an active market. The fair value of
the interest rate swap instruments are determined by using widely accepted
valuation techniques including discounted cash flow analysis on the expected
cash flows of each instrument. The analysis of the interest rate swap reflects
the contractual terms of the derivatives, including the period to maturity and
uses observable market-based inputs and uses the market standard methodology of
netting the discounted future fixed cash receipts and the discounted expected
variable cash payments. The variable cash payments are based on an expectation
of future interest rates derived from observable market interest rate
curves.
7. LEASES
The
Company leases equipment under operating and capital leases through 2013. 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 $122,000 and $358,000 for the three and nine months ended
September 30, 2009, respectively and $122,000 and $214,000 for the three and
nine months ended September 30, 2008, respectively. Equipment under
capital leases consists of office equipment and plant equipment.
Equipment
under capital leases is as follows at:
September
30, 2009
|
December
31, 2008
|
|||||||
Equipment
|
$ | 219,476 | $ | 216,745 | ||||
Accumulated
amortization
|
57,436 | 45,996 | ||||||
Net
equipment under capital lease
|
$ | 162,040 | $ | 170,749 |
13
RED
TRAIL ENERGY, LLC
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
At
September 30, 2009, 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
|
|||||||
2010
|
$ | 489,660 | $ | 60,305 | ||||
2011
|
489,660 | 3,354 | ||||||
2012
|
415,360 | 3,354 | ||||||
2013
|
138,800 | 3,354 | ||||||
2014
|
― | 2,236 | ||||||
Total
minimum lease commitments
|
$ | 1,533,480 | 72,603 | |||||
Less
amount representing interest
|
4,837 | |||||||
Present
value of minimum lease commitments included in the preceding current
liabilities
|
$ | 67,766 |
8. MEMBERS’
EQUITY
The
Company has one class of membership units, Class A Membership Units (the
“Units”), with each Unit representing a pro rata ownership interest in the
Company’s capital, profits, losses and distributions. There were
40,193,973 and 40,188,973 Units outstanding as of September 30, 2009 and
December 31, 2008, respectively.
9.
EQUITY-BASED COMPENSATION
2006 Equity-Based Incentive
Plan
During
2006, the Company implemented an equity-based incentive plan (the “Plan”) which
provided for the issuance of restricted Units to the Company’s key management
personnel, for the purpose of compensating services rendered. As of June 30,
2009, the personnel covered by the Plan had either left employment or given
notice that they were going to leave employment. Due to these
circumstances, prior recognized equity-based compensation expense related to
these grants was written off through compensation expense during the three
months ended June 30, 2009. 5,000 units were issued under the terms
of the Plan during June 2009. During 2007, the Company exercised an
option to repurchase 200,000 Units in association with this
Plan. 185,000 Units are still held in treasury and will not be issued
under the Plan. While the Company does not have any other
equity-based compensation plans currently in place, these Units could be used
for that purpose in the future. Equity-based compensation expense was
$0 and $-53,334 (approximately $700 of this was shown in interest expense) for
the three and nine months ended September 30, 2009, respectively and $5,000 and
$15,000 for the three and nine months ended September 30, 2008,
respectively. As of September 30, 2009, the total equity-based
compensation expense related to nonvested awards not yet recognized was
$0.
10. COMMITMENTS AND
CONTINGENCIES
Design-Build
Agreement
The
Company signed a design-build agreement (the “Design-Build Agreement”) with
Fagen, Inc. (“Fagen”) in September 2005 to design and build the Plant at a total
contract price of approximately $77 million. The Company has
remaining payments under the Design-Build Agreement of approximately $3.9
million. This payment has been withheld pending satisfactory
resolution of a punch list of items, including a major issue with the coal
combustor experienced during start up. The Plant was originally
designed to be able to run on lignite coal. During the first four
months of operation, however, the Plant experienced numerous shut downs related
to running on lignite coal. In April 2007, the Company switched to
using Powder River Basin (“PRB”) coal as its fuel source and has not experienced
a single shut down related to coal quality. The Company continues to
work with Fagen to find a solution to these issues. An amount
approximately equal to the final payment has been set aside in a separate money
market account. Any amounts remaining in this account after
satisfactory resolution of this issue could be used to pay down the Company’s
long-term debt, make necessary upgrades to its Plant or be used for operations
pending bank approval.
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, 2009, the Company had various fixed and basis contracts for
approximately 1.4 million bushels of corn. Of the 1.4 million bushels
under contract, only approximately 12,000 bushels were under basis contract and
did not have a fixed price. Using the stated contract price for the
fixed contracts and using market prices, as of September 30, 2009, to price the
basis contracts the Company had commitments of approximately $5.2 million
related to all 1.4 million bushels under contract.
14
RED
TRAIL ENERGY, LLC
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
11. 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, Greenway Consulting, LLC (“Greenway”) and
RPMG, Inc. (“RPMG”). RPMG has been considered a related party since
January 1, 2008 when the Company became a partial owner in RPMG. The
Company also has a note payable to Greenway, and pays Greenway for plant
management and other consulting fees (recorded in general and administrative
expense). The Chief Manager of Greenway is the Company’s interim CEO
and also a member of the Company. Significant related party activity
affecting the financial statements are as follows:
September
30, 2009
|
December
31, 2008
|
||||||||||||
Balance
Sheet
|
|||||||||||||
Accounts
receivable
|
$ | 2,595,055 | $ | 2,198,277 | |||||||||
Accounts
payable
|
812,820 | 788,149 | |||||||||||
Notes
payable
|
1,525,000 | 1,525,000 | |||||||||||
For
the three months ended September 30, 2009
|
For
the three months ended September 30, 2008
|
For
the nine months ended September 30, 2009
|
For
the nine months ended September 30, 2008
|
||||||||||
Statement
of Operations
|
|||||||||||||
Revenues
|
$ | 22,037,498 | $ | 28,310,003 | $ | 59,737,463 | $ | 93,056,622 | |||||
Cost
of goods sold
|
706,369 | 708,659 | 2,060,175 | 2,057,626 | |||||||||
General
and administrative
|
139,973 | 170,988 | 423,656 | 948,728 | |||||||||
Inventory
Purchases
|
$ | 1,481,245 | $ | 5,958,496 | $ | 4,173,738 | $ | 8,652,958 |
15
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We
prepared the following discussion and analysis to help you better understand our
financial condition, changes in our financial condition, and results of
operations for the three and nine months ended September 30, 2009, compared to
the same period of the prior fiscal year. This discussion should be read in
conjunction with our interim condensed financial statements and notes included
in Item 1 of Part 1 of this Quarterly Report, and the audited
condensed financial statements and notes thereto contained in Item 8 and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” contained in Item 7 of our Annual Report on Form 10-K for the fiscal
year ended December 31, 2008.
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
This
Quarterly Report contains forward-looking statements within the meaning of
Section 21E of the Exchange Act. Forward-looking statements are all statements
other than statements of historical fact, including without limitation those
statements that are identified by the words “anticipates,” “believes,”
“continue,” “could,” “estimates,” “expects,” “future,” “hope,”
“intends,” “may,” “plans,” “potential,” “predicts,” “should,”
“target,” and similar expressions, and include statements concerning plans,
objectives, goals, strategies, future events or performance, and underlying
assumptions (many of which are based, in turn, upon further assumptions) and
other statements that are other than statements of historical facts. From time
to time, the Company may publish or otherwise make available forward-looking
statements of this nature, including statements contained within this
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Forward-looking
statements involve risks and uncertainties, which could cause actual results or
outcomes to differ materially from those expressed. Forward-looking statements
in this Quarterly Report include, but are not limited to, our expectations
regarding future revenues and expenses, the effect of state and federal low
carbon fuel or ethanol blending regulations on our operations and revenues,
Plant downtime, capital expenditures, our compliance with loan covenants,
reinstatement of our line of credit, interest costs, interest income, receipt of
grant income, receipt of state incentive plan payments, linkage of ethanol and
corn prices in the future, ethanol and distillers grain prices, corn
costs, increased yields from production, the implementation of our corn
procurement program, the possible installation of corn oil extraction equipment,
hedging strategies, corn usage and ethanol production, general and
administrative costs, chemical and denaturant costs, expected savings from our
coal unloading facility, our profit projections for the rest of
2009, and our ability to fund our operations and capital expenditures
from our existing cash flows. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, including without limitation, management's examination of
historical operating trends, data contained in the Company's records and other
data available from third parties. Nonetheless, the Company's expectations,
beliefs or projections may not be achieved or accomplished. Forward-looking
statements are subject to known and unknown risks and uncertainties, including
those risks described in “Item 1A - Risk Factors” of our Annual Report on
Form 10-K as updated in Part II, Item 1A of this Quarterly
Report.
Any
forward-looking statement contained in this document speaks only as of the date
on which the statement is made, and the Company undertakes no obligation to
update any forward-looking statement or statements to reflect events or
circumstances that occur after the date on which the statement is made or to
reflect the occurrence of unanticipated events. New factors emerge from time to
time, and it is not possible for management to predict all of the factors, nor
can it assess the effect of each factor on the Company's business or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statement. All
forward-looking statements, whether written or oral and whether made by or on
behalf of the Company, are expressly qualified by the risk factors and
cautionary statements in this Quarterly Report, including statements contained
within “Part II, Item 1A – Risk Factors,” and in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008, and include:
•
|
Our
ability to secure a waiver for future possible violations of our loan
covenants or other events of default or renegotiate the terms of our loan
agreements with our lenders;
|
|
•
|
Our
possible future violations of loan covenants under existing loan
agreements with our lenders;
|
|
•
|
Our
ability to successfully implement our proposed corn procurement
program;
|
|
•
|
Our
ability to raise additional capital whether through debt financing, an
equity raise or other means of raising
capital;
|
16
•
|
Our
ability to secure replacement debt financing in the event our Bank calls
our loan amounts and requires payment in full.
|
|
•
|
Projected
growth, overcapacity or contraction in the ethanol market in which we
operate;
|
•
|
Fluctuations
in the price and market for ethanol and distillers
grains;
|
•
|
Changes
in Plant production capacity, variations in actual ethanol and distillers
grains production from expectations or technical difficulties in operating
the Plant;
|
•
|
Availability
and costs of products and raw materials, particularly corn and
coal;
|
•
|
Changes
in our business strategy, capital improvements or development plans for
expanding, maintaining or contracting our presence in the market in which
we operate;
|
•
|
Costs
of equipment;
|
•
|
Changes
in interest rates and the availability of credit to support capital
improvements, development, expansion and
operations;
|
•
|
Our
ability to market and our reliance on third parties to market our
products;
|
•
|
Our
ability to distinguish ourselves from our current and future
competition;
|
•
|
Changes
to infrastructure, including:
|
-
|
expansion
of rail capacity;
|
||
-
|
possible
future use of ethanol dedicated pipelines for
transportation;
|
||
-
|
increases
in truck fleets capable of transporting ethanol within localized
markets;
|
||
-
|
additional
storage facilities for ethanol, expansion of refining and blending
facilities to handle ethanol;
|
||
-
|
growth
in service stations equipped to handle ethanol fuels;
and
|
||
-
|
growth
in the fleet of flexible fuel vehicles capable of using E85
fuel;
|
•
|
Changes
in or elimination of governmental laws, tariffs, trade or other controls
or enforcement practices such as:
|
-
|
national,
state or local energy policy;
|
||
-
|
federal
ethanol tax incentives;
|
||
-
|
legislation
mandating the use of ethanol or other oxygenate
additives;
|
||
-
|
state
and federal regulation restricting or banning the use of
MTBE;
|
||
-
|
environmental
laws and regulations, specifically carbon regulation, that apply to our
plant operations and their enforcement; or
|
||
-
|
reduction
or elimination of tariffs on foreign
ethanol.
|
•
|
Increased
competition in the ethanol and oil
industries;
|
•
|
Fluctuations
in U.S. oil consumption and petroleum
prices;
|
•
|
Changes
in general economic conditions or the occurrence of certain events causing
an economic impact in the agriculture, oil or automobile
industries;
|
•
|
Anticipated
trends in our financial condition and results of
operations;
|
17
•
|
The
availability and adequacy of our cash flow to meet our requirements,
including the repayment of debt and the observance of our loan
covenants;
|
•
|
Our
liability resulting from
litigation;
|
•
|
Our
ability to retain key employees and maintain labor
relations;
|
•
|
Changes
and advances in ethanol production
technology;
|
•
|
Gains
or losses from derivative activities, including hedging corn, ethanol and
other commodities;
|
|
•
|
Possible
conflicts of interest involving our governors and/or officers;
and
|
|
•
|
Competition
from alternative fuels and alternative fuel
additives.
|
Red Trail
Energy, LLC, a North Dakota limited liability company (the “Company,” “Red
Trail,” or “we,” “our,” or “us”), owns and operates a 50 million gallon
annual name-plate production ethanol plant near Richardton, North Dakota (the
“Plant”).
Results of
Operations
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 sales and revenues in our statements of operations for the three
and nine months ended September 30, 2009 and 2008.
Three
months ended
September
30, 2009
(Unaudited)
|
Three
months ended
September
30, 2008
(Unaudited)
|
Nine
months ended
September
30, 2009
(Unaudited)
|
Nine
months ended
September
30, 2008
(Unaudited)
|
|||||||||||||||||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||||||||
Revenues
|
||||||||||||||||||||||||||||||||
Ethanol,
net of derivative fair value changes
|
$ | 21,119,497 | 83.65 | % | $ | 30,314,248 | 84.10 | % | $ | 57,486,329 | 82.39 | % | $ | 89,483,214 | 85.09 | % | ||||||||||||||||
Distillers
grains
|
4,127,699 | 16.35 | % | 5,733,213 | 15.90 | % | 12,289,311 | 17.61 | % | 15,676,567 | 14.91 | % | ||||||||||||||||||||
Total
Revenue
|
25,247,196 | 100.00 | % | 36,047,461 | 100.00 | % | 69,775,640 | 100.00 | % | 105,159,781 | 100.00 | % | ||||||||||||||||||||
Cost
of Goods Sold
|
||||||||||||||||||||||||||||||||
Cost
of goods sold, net of derivative fair value changes
|
20,932,722 | 82.91 | % | 33,554,054 | 93.08 | % | 60,983,797 | 87.40 | % | 88,849,261 | 84.49 | % | ||||||||||||||||||||
(Gain)
loss on firm purchase commitments
|
(477,000 | ) | -1.89 | % | 3,140,000 | 0.00 | % | 218,000 | 0.31 | % | 3,140,000 | 2.99 | % | |||||||||||||||||||
Lower
of cost or market adjustment for inventory on hand
|
221,500 | 0.88 | % | 512,000 | 0.00 | % | 1,464,500 | 2.10 | % | 512,000 | 0.49 | % | ||||||||||||||||||||
Depreciation
|
1,449,900 | 5.74 | % | 1,438,264 | 3.99 | % | 4,390,783 | 6.29 | % | 4,270,804 | 4.06 | % | ||||||||||||||||||||
Total
Cost of Goods Sold
|
22,127,122 | 87.64 | % | 38,644,318 | 97.07 | % | 67,057,080 | 96.10 | % | 96,772,065 | 92.02 | % | ||||||||||||||||||||
Gross
Margin (Deficit)
|
3,120,074 | 12.36 | % | (2,596,857 | ) | 2.93 | % | 2,718,560 | 3.90 | % | 8,387,716 | 7.98 | % | |||||||||||||||||||
General
and Administrative
|
758,489 | 3.00 | % | 666,866 | 1.85 | % | 2,240,835 | 3.21 | % | 2,332,795 | 2.22 | % | ||||||||||||||||||||
Operating
Income (Loss)
|
2,361,585 | 9.35 | % | (3,263,723 | ) | 1.08 | % | 477,725 | 0.68 | % | 6,054,921 | 5.76 | % | |||||||||||||||||||
Interest
Expense
|
1,211,111 | 4.80 | % | 1,116,343 | 3.10 | % | 3,082,549 | 4.42 | % | 3,493,487 | 3.32 | % | ||||||||||||||||||||
Other
Income, net
|
678,845 | 2.69 | % | 835,179 | 2.32 | % | 1,123,516 | 1.61 | % | 1,693,922 | 1.61 | % | ||||||||||||||||||||
Net
Income (Loss)
|
$ | 1,829,319 | 7.25 | % | $ | (3,544,887 | ) | 0.30 | % | $ | (1,481,308 | ) | -2.12 | % | $ | 4,255,356 | 4.05 | % |
18
Additional
Data
|
Three
Months ended
September
30, 2009
|
Three
Months ended
September
30, 2008
|
Nine
Months ended September 30, 2009
|
Nine
Months ended September 30, 2008
|
||||||||||||
Ethanol
sold (thousands of gallons)
|
14,086 | 13,392 | 38,567 | 41,515 | ||||||||||||
Dried
distillers grains sold (tons)
|
39,305 | 29,706 | 78,813 | 77,934 | ||||||||||||
Modified
distillers grains sold (tons)
|
8,439 | 23,067 | 65,127 | 87,330 | ||||||||||||
Ethanol
avg price/gallon (net of hedging activity)
|
$ | 1.50 | $ | 2.26 | $ | 1.49 | $ | 2.16 | ||||||||
Dried
distillers grains avg price/ton
|
$ | 93.93 | $ | 139.25 | $ | 112.20 | $ | 136.65 | ||||||||
Modified
distillers grains avg price/ton
|
$ | 51.59 | $ | 68.90 | $ | 52.84 | $ | 57.29 | ||||||||
Corn
costs per bushel (net of hedging activity)
|
$ | 3.40 | $ | 5.89 | $ | 3.77 | $ | 4.93 |
Results of Operations for the Three and Nine Months Ended September 30, 2009 as Compared to the Three and Nine Months Ended September 30, 2008
Summary
Our main
revenue sources (ethanol and distillers grains) and our main cost component
(corn) are commodities that are subject to a high degree of price volatility but
also have, historically, maintained a high degree of
correlation. Because of this volatility, we may experience large
variances in our revenue and cost of goods sold from period to period and year
to year. While we do monitor increases and decreases in the price of
ethanol and corn and we also monitor our other costs of goods sold very closely,
we tend to focus our attention on the spread between ethanol and corn prices as
that has the biggest impact on our profitability. While we have seen
a decrease in our ethanol and corn prices compared to the three and nine months
ended September 2008, the spread between ethanol and corn prices remained fairly
constant until the third quarter of 2009 when the spread increased due to
relative strengthening of ethanol prices in comparison to corn
prices.
Our
operations were profitable during the third quarter of 2009 with a net income of
approximately $1.8 million compared to a net loss of approximately $3.5 million
during the third quarter of 2008. For the nine months ended September
30, 2009, we recognized a loss of approximately $1.5 million compared to a net
income of approximately $4.3 million for the nine months ended September 30,
2008.
Margins
improved significantly during the third quarter of 2009 as ethanol prices
strengthened relative to corn prices and our corn costs reflected corn purchases
at or below market levels. This positive trend in the spread between
ethanol and corn prices has continued into the fourth quarter and we believe
that, if current margins hold throughout the fourth quarter of 2009, the Company
should also be profitable in the fourth quarter of 2009 and come very close to
breaking even for fiscal year 2009.
Ethanol
prices strengthened during the third quarter of 2009 mainly due a more balanced
supply and demand in the ethanol markets. Many plants that had been
idle earlier in the year have started producing again as margins have
increased. Current estimates are that approximately 1 billion gallons
of production capacity is either shutdown or operating at less than 100%
capacity compared to over 2 billion gallons earlier this year. It
remains to be seen whether this will again create an oversupply situation that
causes prices to decrease and plants to shut down.
Operationally
we had a very strong third quarter, producing approximately 14.2 million gallons
of ethanol. We continue to monitor our plant efficiency and have seen
continued improvement in our yield (gallons of ethanol produced per bushel of
corn). While our operations are highly dependent on the spread
between ethanol and corn prices, the cost cutting measures that we implemented
earlier this year have also had a positive impact on our net
income.
We
continue to evaluate various corn oil extraction systems in an effort to add
another revenue stream to our operation but have not yet signed a definitive
agreement for the installation of the equipment or sale of
product. If we continue to pursue this option, we believe it may be
possible to have a system implemented during the second quarter of
2010.
19
As
previously reported in our Quarterly Report on Form 10-Q for the Period ended
June 30, 2009, we executed the Sixth Amendment which allowed us to forgo to two
principal payments (April 16, 2009 and July 16, 2009) under the Construction
Loan Agreement with our Bank. We did make our regularly scheduled
principal and interest payment on October 16, 2009 and continue to have
conversations with our Bank regarding a possible restructuring of our loan
agreements.
Revenues
Three
Months Ended September 30, 2009 and 2008
Revenues
decreased approximately $10.8 million during the quarter ended September 30,
2009 as compared to the quarter ended September 30, 2008. Ethanol
revenue decreased approximately $9.2 million and distillers grains revenue
decreased approximately $1.6 million. The decrease was primarily due
to lower prices received for ethanol and distillers grains during the third
quarter of 2009.
Ethanol
revenue
We
operated the Plant at normal production rates (approximately 110% of name plate
capacity) during the third quarter of 2009 and produced just over 14 million
gallons of ethanol. We sold approximately 700,000 more gallons of
ethanol during the third quarter of 2009 compared to the third quarter of
2008. The price we received during the third quarter of 2009,
including the effects of our hedging activity, was an average of $0.76 per
gallon lower than the price received during the third quarter of 2008 ($1.50 per
gallon vs. $2.26 per gallon). Ethanol prices traded within a fairly
narrow range during the third quarter of 2009 with forward month Chicago Ethanol
Swap closing prices trading between a low of approximately $1.54 and a high of
approximately $1.79. Gains and losses related to our ethanol hedging
activities are recorded in revenue. We recorded a loss of
approximately $360,000 and a gain of approximately $892,000 related to our
ethanol hedging activities for the three months ended September 30, 2009 and
September 30, 2008, respectively. Ethanol is a commodity that has
maintained a fairly high correlation to corn futures prices. Corn
futures prices were much lower during the third quarter of 2009 as compared to
the third quarter of 2008 and ethanol prices were correspondingly lower as
well.
Distillers
grains revenue
Our
overall distillers grain revenue decreased primarily due to lower prices
received during the third quarter of 2009 as compared to the third quarter of
2008. The price of distillers grains typically increases or decreases
with the price of corn which is reflected in the prices we received during the
third quarter of 2009 vs. the third quarter of 2008. The average
price we received for our dried distillers grains with solubles (“DDGS”) product
during the third quarter of 2009 was approximately $45.00 per ton lower than the
price we received during the third quarter of 2008 ($93.93 per ton vs. $139.25
per ton). The average price we received for modified distillers
grains (“DMWG”) during the third quarter of 2009 was approximately $17.00 per
ton lower than the average price we received during the third quarter of 2008
($51.59 per ton vs. $68.90 per ton).
We sold
approximately 14,600 fewer tons of DMWG and we sold approximately 9,600 tons
more of DDGS during the three months ended September 30, 2009 as compared to the
three months ended September 30, 2008. The change in product mix is
primarily related to a new price index we implemented for the sale of our
DMWG. Our DMWG price is indexed to the price of corn and we adjusted
the index for our new contract period (June 2009 – May 2010) in an effort to
price our DMWG product at a level more comparable to our DDGS product (when
adjusted for moisture content). The downturn in the cattle market and
availability of other cheaper feed sources, in conjunction with the change in
our price index, caused our customers to contract fewer tons of DMWG over the
summer months (third quarter of 2009) than the comparable period of
2008.
Nine
Months Ended September 30, 2009 and 2008
Revenues
decreased approximately $35.4 million during the nine months ended September 30,
2009 as compared to the nine months ended September 30, 2008. Ethanol
revenue decreased approximately $32.0 million and distillers grains revenue
decreased approximately $3.4 million. The decrease was primarily due
to lower prices received for ethanol and distillers grains during 2009 along
with lower volumes of ethanol and distillers grains produced and sold as we
operated the Plant at a lower capacity at various times for different reasons,
including weather related corn supply disruptions and the current economic
environment in the industry.
Ethanol
revenue
As
mentioned above, at various times we operated the Plant at a reduced rate during
the nine months ended September 30, 2009 as compared to the nine months ended
September 30, 2008. We sold approximately 2.9 million fewer gallons
of ethanol during this period in 2009 as compared to the same period for 2008
and we received an average net price (including the effects of changes in
ethanol related derivative instruments) that was $0.67 per gallon lower ($1.49
per gallon vs. $2.16 per gallon). Gains and losses related to our
ethanol hedging activities are recorded in revenue. We recorded
losses related to our ethanol hedging activities of approximately $360,000 and
$2.3 million during the nine month period ended September 30, 2009 and September
30, 2008, respectively. Ethanol is a commodity that has maintained a
fairly high correlation to corn futures prices. Corn futures prices
were much lower during the nine months ended September 30, 2009 as compared to
same period in 2008 and ethanol prices were correspondingly lower as
well.
20
Distillers
grains revenue
We sold
approximately 22,200 fewer tons of DMWG and approximately the same number of
tons of DDGS during the nine months ended September 30, 2009 as compared to the
nine months ended September 30, 2008. The overall decrease in sales
of distillers grains is due to the decrease in production rates during 2009 vs.
2008. The change in product mix is primarily related to a new
price index we implemented for the sale of our DMWG. Our DMWG price
is indexed to the price of corn and we adjusted the index for our new contract
period (June 2009 – May 2010) in an effort to price our DMWG product at a level
more comparable to our DDGS product (when adjusted for moisture
content). The downturn in the cattle market and availability of other
cheaper feed sources, in conjunction with the change in our price index, caused
our customers to contract fewer tons of DMWG over the summer months (third
quarter of 2009) than the comparable period of 2008.
The price
of distillers grains typically increases or decreases with the price of corn
which is reflected in the prices we received during the nine months ended
September 30, 2009 vs. the same period in 2008. The price we received
for our DDGS product was, on average, approximately $24.00 per ton lower during
the nine months ended September 30, 2009 vs. the nine months ended September 30,
2008 ($112.20 per ton vs. $136.65 per ton). The average price we
received for DMWG was, on average approximately $4.00 per ton lower during the
nine months ended September 30, 2009 vs. the nine months ended September 30,
2008 ($52.84 per ton vs. $57.29 per ton).
Revenues
– Prospective Information
Ethanol
revenue – because ethanol is a market driven commodity, ethanol prices are very
hard to predict. Based on recent trends, we anticipate the price of
ethanol to generally follow the price of corn but we also expect that there will
be periods when the price of these two commodities diverge. However,
this is only a prediction on our part based on the knowledge and resources we
have available today. During the third quarter of 2009 and through
October 2009, ethanol prices strengthened relative to the price of corn and the
spread between ethanol and corn prices increased. Ethanol prices have
increased primarily due to more balanced supply and demand in the ethanol
markets along with lower than expected imports. Imports are lower
because less ethanol is being produced in Brazil, as an increase in sugar prices
has diverted some sugar previously used in ethanol production to other
markets. We cannot predict how long the market will maintain these
higher prices.
There is
a great amount of uncertainty in the marketplace regarding whether any of the
production capacity that is currently shut down will come back on-line, the
impact of negative public perception of the ethanol industry, the possible
repeal and/or reduction of federal ethanol supports and the possible enactment
at the state or federal level of low carbon fuel standards that may negatively
impact ethanol. We could face additional negative impacts from low
carbon fuel standards since our Plant uses coal as its main fuel
source. Based on the low carbon fuel standard regulation proposed and
approved by the California Air Resources Board, we believe that ethanol produced
at our Plant would not be allowed to be sold in that state. The
regulation approved in California is not mandated to go into effect until
2011. We cannot predict whether other states, or the federal
government, may try to enact legislation similar to the regulation approved by
the California Air Resources Board. One potential government action
that we believe could have a positive impact on ethanol prices is a request
being considered by the United States Environmental Protection Agency to allow
blends of up to 15% ethanol in gasoline. We believe this would help
balance the supply and demand in the industry as a whole more quickly and
potentially have a positive impact on ethanol prices. Please see
“Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2008 for more information on risk factors that may affect our
ethanol revenues.
Distillers
grains revenue – distillers grains are also a market driven commodity which
makes the price very hard to predict. The price of distillers grains,
both DDGS and DMWG, tends to follow the price of corn. We expect the
average price we receive for our DDGS product to increase by approximately $15 -
$20 per ton (from our third quarter 2009 average price of approximately $94 per
ton) during the fourth quarter of 2009 based on anticipated increased demand for
this product as cattle move out of pastures and into feedlots. We
expect the average price we receive during the fourth quarter of 2009 for our
DMWG product to increase approximately $3 - $5 per ton compared to our third
quarter 2009 average price of approximately $52.00 assuming corn prices stay
comparable to the third quarter of 2009.
21
Cost
of Sales
The price
we paid for our main input, corn, was significantly lower during the nine months
ended September 30, 2009 compared to the nine months ended September 30, 2008,
which led to an improvement in the margin between our revenue and corn cost of
approximately $0.04 per gallon ($0.59 per gallon vs. $0.55 per
gallon). Margins have improved across the industry due to a more
balanced supply and demand of product in the market place. This
margin improvement has caused some of the production capacity that was
previously slowed down or shut down to increase production or come back on
line. Some of the other key components of our costs of goods sold
(chemicals, denaturant and coal) also decreased during the first nine months of
2009 vs. the same period in 2008. These decreases were due, in part
to lower prices as well as the successful implementation of our coal unloading
facility along with cost cutting measures put in place earlier this
year.
Three
Months Ended September 30, 2009 and 2008
Our
overall cost of goods sold decreased by approximately $16.5 million during the
three months ended September 30, 2009 as compared to the three months ended
September 30, 2008.
|
·
|
Corn
costs - our corn costs were lower in the third quarter of 2009 compared to
the third quarter of 2008 as market prices for corn were
lower. Our average cost per bushel, net of hedging activities,
was approximately $3.40 per bushel and $5.89 per bushel for the three
months ended September 30, 2009 and 2008, respectively. Similar
to ethanol prices, corn prices during the third quarter of 2009 remained
relatively constant when compared to the volatility experienced during
2008.
|
|
·
|
Loss
on firm purchase commitments - the corn that we had under contract at
September 30, 2009, while very near market prices, was still approximately
$0.17 per bushel higher than market, on average. Because the
average cost of the corn under contract was nearer to market prices than
at June 30, 2009, this resulted in a recovery of some of our previously
accrued unrealized loss on firm purchase commitments of
$477,000. During the third quarter of 2008, the average price
of corn we had under firm purchase commitments became significantly higher
than market as commodity prices dropped in response to the global economic
crisis and we accrued a loss on firm purchase commitments of approximately
$3.1 million.
|
|
·
|
Lower
of cost or market adjustments related to inventory on hand - we recorded
lower of cost or market adjustments related to inventory on hand of
$221,500 and $512,000 for the three months ended September 30, 2009 and
2008, respectively.
|
|
·
|
Denaturant
costs – while we did use approximately 19,000 more gallons due to our
slightly higher production, we also experienced a price decrease of
approximately $1.36 per gallon during the third quarter of 2009 as
compared to 2008 ($1.72 per gallon vs. $3.08 per gallon). Most
of the decrease was related to lower gasoline prices but a portion of the
decrease is also related to negotiating a price index that resulted in a
lower price to our Plant. The decrease in denaturant prices and
usage resulted in an approximate savings of $378,000 during the third
quarter of 2009 as compared to the third quarter of
2008.
|
|
·
|
Coal
costs - the successful start up of our coal unloading facility in October
2008 has improved our cost structure as we experienced a decrease in our
coal costs of approximately $13.00 per ton in the third quarter of 2009
compared to the third quarter of 2008 ($39.20 per ton vs. $52.14 per
ton). We used approximately 25,000 tons of coal during the
second quarter of 2009 which amounts to a savings of approximately
$325,000.
|
|
·
|
Chemical
costs – our chemical costs were approximately $549,000 lower during the
third quarter of 2009 vs. the comparable period in 2008. The
lower costs were primarily due to lower chemical prices as many of the
items we buy are commodities and have decreased in price with most other
commodities. Decreased usage of some of the chemicals has also
contributed to the lower costs as we have been able procure coal with a
chemical composition that has the effect of lowering certain of the
emissions from our process which, in turn, decreases the amount of
chemicals needed to control those emissions and we have also lowered the
usage of some chemicals through monitoring our process and trying to
optimize our usage.
|
|
·
|
Repair
and maintenance costs – our repair and maintenance costs were
approximately $188,000 lower during the third quarter of 2009 vs. the
comparable period in 2008. The decrease is primarily the result
the timing of our normal fall maintenance outage – the outage took place
during September of 2008 while the 2009 outage took place in October
2009.
|
22
Our other
cost of goods sold items remained fairly constant between the third quarter of
2009 and the third quarter of 2008.
Nine
Months Ended September 30, 2009 and 2008
Our
overall cost of goods sold decreased by approximately $29.7 million during the
nine months ended September 30, 2009 as compared to the nine months ended
September 30, 2008.
|
·
|
Corn
costs - our corn costs were lower in the nine months ended September 30,
2009 compared to the nine months ended September 30, 2008 as market prices
for corn were lower. Our average cost per bushel, net of
hedging activities, was approximately $3.77 per bushel and $4.93 per
bushel for the nine months ended September 30, 2009 and 2008,
respectively. Similar to ethanol prices, corn prices during the
first nine months of 2009 remained relatively constant when compared to
the volatility experienced during
2008.
|
|
·
|
Loss
on firm purchase commitments - we recorded a lower of cost or market
adjustment related to the corn we had under firm purchase commitments of
$218,000 and approximately $3.1 million for the nine months ended
September 30, 2009 and 2008, respectively. The average price of
corn we have under firm purchase commitments has remained much closer to
market prices during 2009 due, in part, to the decrease in volatility in
the commodity markets and also due to our efforts to limit the number of
bushels we have purchased under firm purchase
commitments. During the third quarter of 2008, commodity prices
collapsed in response to the global economic crisis and caused the corn we
had under firm purchase commitments to become priced significantly higher
than market prices. We had approximately 1.4 million bushels
under firm purchase commitments as of September 30, 2009 compared to
approximately 3.5 million bushels at September 30,
2008.
|
|
·
|
Lower
of cost or market adjustments related to inventory on hand - we recorded a
lower of cost or market adjustment related to inventory on hand of
approximately $1.5 million and $512,000 for the nine months ended
September 30, 2009 and 2008,
respectively.
|
|
·
|
Denaturant
costs - while we did use approximately 84,000 fewer gallons due to our
reduced production rates and new regulations that limit the amount of
denaturant we can blend with ethanol, we also experienced a price decrease
of approximately $1.37 per gallon during the nine months ended September
30, 2009 as compared to 2008 ($1.52 per gallon vs. $2.89 per
gallon). Most of the decrease is related to falling gasoline
prices but a portion of the decrease is also related to negotiating a
price index that resulted in a lower price to our Plant. The
decrease in denaturant prices and usage resulted in an approximate savings
of $1.4 million during the nine months ended September 30, 2009 as
compared to the nine months ended September 30,
2008.
|
|
·
|
Coal
costs - the successful start up of our coal unloading facility in October
2008 has improved our cost structure as we experienced a decrease in our
coal costs of approximately $11.75 per ton for the nine months ended
September 30, 2009 as compared to the nine months ended September 30, 2008
($40.33 per ton vs. $52.08 per ton). We used approximately
68,000 tons of coal during the nine months ended September 30, 2009 which
amounted to a savings of approximately
$799,000.
|
|
·
|
Chemical
costs – our chemical costs were approximately $1 million lower for the
nine months ended September 30, 2009 vs. the comparable period in
2008. The lower costs were primarily due to lower chemical
prices as many of the items we buy are commodities and have decreased in
price with most other commodities. Decreased usage of some of
the chemicals has also contributed to the lower costs as we have been able
procure coal with a chemical composition that has the effect of lowering
certain of the emissions from our process which, in turn, decreases the
amount of chemicals needed to control those emissions and we have also
lowered the usage of some chemicals through monitoring our process and
trying to optimize our usage.
|
Our other
cost of goods sold items remained fairly constant between the nine months ended
September 30, 2009 and the nine months ended September 30, 2008.
Cost
of Sales and Gross Margin – Prospective Information
Because
ethanol is a commodity, we cannot necessarily pass along increases in our cost
of goods sold to our customers. For that reason our gross margin is
very sensitive to changes in costs and we anticipate any increase in cost of
goods sold to have a negative impact on our gross margin. Major
components of costs of goods sold are discussed below.
23
Corn
cost
Because
corn is a market driven commodity, corn prices are very hard to
predict. While we have recently seen an improvement in margins as
ethanol prices have strengthened relative to corn prices and the spread between
ethanol prices and corn prices has increased, we cannot accurately predict how
long the improvement will last. We anticipate that some of the
production capacity that has been slowed down or shutdown will come back on line
to take advantage of the improved margins which could create an oversupply
situation and cause ethanol prices to decrease relative to corn
prices. Based on our corn procurement strategies we anticipate that
our corn costs will remain near market prices. We expect that our
corn prices will tend to be slightly higher than market prices in a declining
corn market and slightly under market prices in a rising corn market as we do
have to enter into fixed price contracts for at least a portion of our
production needs to ensure an adequate supply of corn to our Plant.
In an
effort to increase the long-term viability of our Plant we are exploring ways of
partnering with our corn suppliers to purchase corn for a combination of cash,
equity and a deferred payable in exchange for repayment of such deferred amounts
and payment of future incentives, to those that participate in the program, if
the Plant is able to operate with positive cash flows sufficient enough to
support the payments along with applicable debt service. We have
received some positive initial feedback to this concept from our corn suppliers
and are working through the details of how the program would work. If
successful, we anticipate that the program could be in place during the first
quarter of 2010.
Energy
and chemical needs
While we
do have contracts in place for our main energy inputs in an effort to mitigate
future price increases for coal, water, electricity, natural gas and chemicals,
we have experienced an increase in our electric rates and our chemical supply
contract is subject to market pricing.
Coal
cost
We have a
contract in place for our coal needs in an effort to mitigate potential price
increases. Our current contract runs through December 31,
2009. We have negotiated a new coal supply contract to that we
believe should cover our coal needs through 2011. The pricing in the
contract is slightly higher that our current price structure. We
anticipate that the lower coal costs we experienced during the first nine months
of 2009, due to the implementation of our coal unloading facility, will continue
throughout 2009.
Chemical
and Denaturant costs
We have
recently experienced a decrease in the prices of some of the chemicals we use in
our production. Chemical prices increased during the first half of
2008 as commodity prices increased and then also decreased during the last half
of 2008 and early 2009 as commodity prices decreased. We do not
anticipate any significant price increases for chemicals during the fourth
quarter of 2009 but anticipate that we may see some price increases in commodity
prices such as oil, gasoline and natural gas which could have a negative impact
on our chemical costs.
General
and Administrative
Three
Months Ended September 30, 2009 and 2008
General
and administrative costs for the three months ended September 30, 2009 were
approximately $92,000 higher than the comparable period in 2008. The
increase is primarily related to higher professional fees in relation to the
corn procurement program we are developing.
Nine
Months Ended September 30, 2009 and 2008
General
and administrative costs for the nine months ended September 30, 2009 were
approximately $92,000 lower than the comparable period in 2008. The
decrease is primarily due to a decrease in the variable portion of our
management fees, which is based on our net income, of approximately $345,000
along with other decreases in our costs resulting from our cost cutting measures
including lower accounting and consulting fees ($97,000 decrease), lower meeting
and travel expenses ($63,000 decrease) and lower office supply expenses ($38,000
decrease). The lower costs were offset, in part by higher bank fees
related to the Sixth Amendment ($167,000 increase), higher legal costs –
primarily associated with our corn procurement program ($153,000 increase) and
higher real estate taxes ($115,000 increase) due to the phase out of our tax
exemption and higher permitting costs of $63,000. There were many
other small variances within our general and administrative costs but none were
significant.
General
and Administrative - Prospective
For the
rest of 2009, we anticipate our general and administrative costs to remain
consistent with the first nine months of 2009 in that we expect those areas
where we have seen a cost savings to remain lower and we anticipate those areas
where we have seen higher costs to continue to be higher. Overall, we
anticipate our general and administrative costs for the year 2009 to be
comparable or slightly higher than 2008.
24
Interest
Expense
Our
interest expense is made up of the following components:
Interest
Expense
|
For
the three months ended September 30, 2009
|
For
the three months ended September 30, 2008
|
For
the nine months ended September 30, 2009
|
For
the nine months ended September 30, 2008
|
||||||||||||
Interest
expense on long-term debt
|
$ | 817,829 | $ | 705,321 | $ | 2,138,105 | $ | 2,801,327 | ||||||||
Amortization/write-off
of deferred financing costs
|
― | 50,256 | 567,386 | 150,768 | ||||||||||||
Change
in fair value of interest rate swaps
|
86,895 | 168,636 | (262,630 | ) | 275,548 | |||||||||||
Net
settlements on interest rate swaps
|
306,387 | 192,130 | 639,688 | 265,844 | ||||||||||||
Total
interest expense
|
$ | 1,211,111 | $ | 1,116,343 | $ | 3,082,549 | $ | 3,493,487 |
Three
Months Ended September 30, 2009 and 2008
|
·
|
Interest
expense on long-term debt - approximately $113,000 higher due to higher
interest rates and higher debt balances. Our weighted average
interest rate for the three months ended September 30, 2009 was slightly
higher than the comparable period in 2008 and our average outstanding debt
balance was approximately $5 million higher in 2009 as we paid part of
Long-Term Revolving Note paid down during the third quarter of 2008 but
the full amount was outstanding during the third quarter of
2009. The Sixth Amendment to our loan agreements implemented a
minimum interest rate of 6% which is slightly higher than rates in effect
last year.
|
|
·
|
Net
settlements on interest rate swaps – the replacement rates on our interest
rate swaps were lower during the third quarter of 2009 than the comparable
period in 2008 causing us to have to make up a larger difference in rates
through our net settlements.
|
Nine
Months Ended September 30, 2009 and 2008
|
·
|
Interest
expense on long-term debt – approximately $660,000 lower due to lower
interest rates and lower average debt balances outstanding. Our
weighted average interest rate for the nine months ended September 30,
2009 was approximately 1% lower than the comparable period for
2008. Our average outstanding debt balance was also
approximately $2 million lower during the nine months ended September 30,
2009 than the comparable period in 2008 due to regularly scheduled debt
service payments offset in part by advances on our Long-Term Revolving
Note.
|
|
·
|
Amortization/write-off
of deferred financing costs – we wrote off the remaining unamortized
amount of our deferred financing costs during the first quarter of 2009
(approximately $516,000).
|
|
·
|
Change
in fair value of interest rate swaps – we recorded a gain of approximately
$263,000 and a loss of approximately $276,000 on our interest rate swap
during the nine months ended September 30, 2009 and 2008,
respectively. The gain recorded this year is primarily related
to the passage of time as the termination value of our swap decreases as
the maturity date of the swap draws closer. The loss recorded
during the comparable period in 2008 was primarily due to a decrease in
the replacement rates on the swaps.
|
|
·
|
Net
settlements on interest rate swaps – the replacement rates on our interest
rate swaps were lower during the nine months ended September 30, 2009 than
the comparable period in 2008 causing us to have to make up a larger
difference in rates through our net
settlements.
|
Interest
Expense - Prospective
We
anticipate that our interest costs will increase during the rest of 2009 as a
result of the interest rate floor of 6% agreed to in the Sixth
Amendment. The higher interest costs will be offset, in part, by
lower amortization costs due to the write-off of the remaining balance of our
deferred financing costs in the first quarter of 2009. Interest rates
are difficult to predict, especially in the current economic
climate. We would anticipate that an increase in the interest rate
used to calculate the value of our interest rate swaps to have a positive impact
on our net income while a decrease in those rates would have a negative impact
on our net income. We also anticipate that the passage of time will
decrease the termination value of our interest rate swap.
25
Other
Income (Expense), Net
We
recognized other income of approximately $679,000 and $835,000 during the three
months ended September 30, 2009 and 2008, respectively. During 2009,
we received approximately $650,000 from the North Dakota ethanol incentive
program along with other miscellaneous income of approximately
$29,000. During 2008, we received approximately $722,000 from the
North Dakota ethanol incentive program and also had interest income of
approximately $130,000 due to higher cash balances on hand.
We
recognized other income of approximately $1.1 million and $1.7 million during
the nine months ended September 30, 2009 and 2008,
respectively. During 2009, our other income included approximately
$679,000 from the North Dakota ethanol incentive program and approximately
$446,000 of interest income earned on a sales tax refund related to Plant
construction. During 2008, our other income was primarily due to the
receipt of a North Dakota ethanol producer incentive payment of approximately
$1.4 million along with approximately $219,000 of interest income earned on cash
balances.
We do not
anticipate receiving any significant interest income during the last three
months of 2009 as our sales tax refund has been completed and the interest rates
paid on cash we have on deposit are very low. We also do not
anticipate receiving any funds from the North Dakota Ethanol Incentive program
during the rest of 2009 as the fund has been depleted and will not have cash to
disburse until July 2010.
Liquidity
and Capital Resources
Statement
of Cash Flows
|
For
the three months ended September 30, 2009
|
For
the three months ended September 30, 2008
|
For
the nine months ended September 30, 2009
|
For
the nine months ended September 30, 2008
|
|||||||||||
Cash
flows provided by operating activities
|
$ | 2,177,837 | $ | 6,504,415 | $ | 4,613,400 | $ | 19,211,309 | |||||||
Cash
flows provided by (used in) investing activities
|
(52,271 | ) | (1,333,305 | ) | 560,395 | (2,321,106 | ) | ||||||||
Cash
flows provided by (used in) financing activities
|
(13,294 | ) | (1,541,641 | ) | 1,531,501 | (14,712,714 | ) |
Cash Flows
During
the three and nine months ended September 30, 2009 and 2008, respectively, the
net income before depreciation and amortization was a significant contributor to
cash flows from operating activities. The changes in cash flows from
operating activities generally follow the results of operations as discussed in
“Results of Operations for the Three and Nine Months Ended September 30, 2009 as
Compared to the Three and Nine Months Ended September 30, 2008” and also are
affected by changes in working capital.
Three
Months Ended September 30, 2009 and 2008
Operating
activities
Cash
flows provided by operating activities decreased by approximately $4.3 million
during the three months ended September 30, 2009 from the comparable period in
2008. A net positive change in net income of approximately $5.4
million was offset by a net negative change in working capital items during the
period of $6.1 million related to normal working capital changes along with a
significant decrease in our accrued unrealized loss on firm purchase commitments
of approximately $3.6 million as our corn under firm purchase commitments was
priced much closer to market prices at September 30, 2009 as compared to
September 30, 2008.
Investing
activities
Cash
flows used in investing activities decreased by approximately $1.3 million
during the three months ended September 30, 2009 as compared to
2008. The decrease was primarily related to expending funds to build
our coal unloading facility during 2008 and having very minimal capital
expenditures in 2009.
Financing
activities
Cash
flows used in financing activities decreased by approximately $1.5 million
during the three months ended September 30, 2009 from the comparable period in
2008. The Company had a net pay down of debt of approximately $1.5
million during the third quarter of 2008 and did not make any note payments
during the third quarter of 2009 in conjunction with the Sixth
Amendment.
26
Nine
Months Ended September 30, 2009 and 2008
Operating
activities
Cash
flows provided by operating activities decreased by approximately $14.6 million
during the nine months ended September 30, 2009 from the comparable period in
2008, primarily as a result of a net decrease in our net income of approximately
$5.7 million along with a net negative change in our accrued unrealized loss on
firm purchase commitments of approximately $4.3 million and a net negative
change in working capital items of approximately $4.6 million. The
decrease in unrealized loss on firm purchase commitments occurred due to the
corn we had purchased under firm purchase commitments being priced much closer
to market prices at September 30, 2009 when compared to September 30, 2008 and
the working capital fluctuations are just related to timing of cash flows
related to those items.
Investing
activities
Cash
flows provided by investing activities increased by approximately $2.9 million
during the nine months ended September 30, 2009 from the comparable period in
2008. The increase was primarily related to receiving approximately
$1.5 million (50% of which went to offset the cost of our Plant while the other
50% has been accrued as a payable to Fagen pursuant to the terms of the Design
Build Contract) from a sales tax refund related to our Plant construction during
2009 while we were expending funds to build our coal unloading facility and make
a down payment of $105,000 on an investment during the nine months ended
September 30, 2008. We do not anticipate receiving any more funds
from the sales tax refund during 2009 as the refund is now
complete.
Financing
activities
Cash
flows provided by financing activities increased approximately $16.2 million
from the comparable period in 2008. The increase is primarily related
to borrowing the remaining $3.6 million of capacity on our Long-Term Revolving
Note and forgoing our quarterly principal payments, due April 16, 2009 and July
16, 2009, in accord with the terms of the Sixth Amendment during the nine months
ended September 30, 2009 while we used excess cash to pay down $9 million on our
Long-Term Revolving Note and made all of our scheduled quarterly principal
payments during the nine months ended September 30, 2008. Partially
offsetting the increase was an increase in restricted cash set aside as
collateral for our bonding requirements of $750,000.
Capital
Expenditures
We do not
anticipate any significant capital expenditures during 2009, although we may
seek to finance the installation of corn oil extraction equipment at our Plant
site if we can structure the project such that it is acceptable to the
Bank.
Capital
Resources
We are
subject to a number of covenants and restrictions in connection with our credit
facilities, including:
•
|
Providing
the Bank with current and accurate financial
statements;
|
||
•
|
Maintaining
certain financial ratios including minimum net worth, 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; and
|
||
•
|
Limiting
our ability to make distributions to
members.
|
We have
been notified by FNBO that we were in violation of certain of the covenants in
our loan agreements at September 30, 2009. These include the
covenants requiring a minimum working capital balance, minimum net worth and a
minimum fixed charge coverage ratio. The Company has not been granted
a waiver of these violations by the Bank. While the Bank has reserved
its rights to declare us in default of our loan agreements, as of November 13,
2009, the Company has not been declared in default of its loan agreements and is
still considered in good standing by the Bank. As previously
mentioned, the Company executed the Sixth Amendment which allowed it to forgo
two scheduled quarterly principal payments (April 16, 2009 and July 16,
2009). The Company did make its regularly scheduled principal and
interest payment on October 16, 2009.
27
The
Construction Loan Agreement also contains a number of events of default
(including violation of our loan covenants) which, if any of them were to occur,
would give the Bank certain rights, including but not limited to:
•
|
declaring
all the debt owed to the Bank immediately due and payable;
and
|
||
•
|
taking
possession of all of our assets, including any contract
rights.
|
The Bank
could then sell all of our assets or business and apply any proceeds to repay
their loans. We would continue to be liable to repay any loan amounts still
outstanding.
As of
November 13, 2009, we had available capital (cash plus borrowing capacity) of
approximately $5 million. Our available capital does not include
amounts that have been aside in conjunction with construction retainage withheld
from Fagen, Inc. of $3.9 million as described in Note 10 to our Financial
Statements in this Quarterly Report, $750,000 set aside as cash
collateral related to two letters of credit issued in relation to our grain
warehouse and distilled spirits bonds or approximately $1.5 million that is part
of our hedging account. Based on our most recent projections which assume
current market conditions prevail through the end of 2009 and that we break even
during 2010, we anticipate that we will have enough available capital to operate
our business through 2010. As of July 16, 2009, our short term line
of credit was not renewed. We had never advanced funds under the line
of credit and believe that we would not need to borrow against it through
December 31, 2009 based on current market conditions.
If market
conditions worsen, we may not be able to fund our operations from existing cash
flows and existing lines of credit during 2010. We are currently in
violation of our loan covenants and are projecting that we will be in violation
of certain of our loan covenants for the rest of 2009 and into
2010. While the Bank has not yet declared us in default, they could
do so at any time. Due to these uncertainties, we are exploring
whether we can obtain additional debt financing or renegotiate the amortization
of our existing long-term notes.
Short-Term
Debt Sources
As of
July 16, 2009, our $3.5 million line of credit was not renewed by the
Bank. As mentioned above, we had never advanced funds on the line of
credit and do not anticipate that we would have needed to advance funds on the
line of credit through December 31, 2009, based on current market
conditions.
Please
see Note 5 to our Financial Statements in this Quarterly Report for further
information on our Short-Term Debt Sources.
Long-Term
Debt Sources
Please
see Note 5 to our Financial Statements in this Quarterly Report for a
comprehensive discussion of our Long-Term Debt Sources.
We have
the following contractual obligations as of November 13, 2009:
Contractual
Obligations
|
Total
|
Less
than 1 Yr
|
1-3
Years
|
3-5
Years
|
More
than 5 Yrs
|
|||||||||||||||
Long-term
debt obligations *
|
$ | 60,107,987 | $ | 8,422,092 | $ | 51,673,215 | $ | 12,680 | $ | ― | ||||||||||
Capital
leases
|
72,603 | 60,305 | 6,708 | 5,590 | ― | |||||||||||||||
Operating
lease obligations
|
1,533,480 | 489,660 | 905,020 | 138,800 | ― | |||||||||||||||
Corn
Purchases **
|
5,164,500 | 5,164,500 | ― | ― | ― | |||||||||||||||
Coal
purchases
|
3,217,500 | 1,375,650 | 1,841,850 | ― | ― | |||||||||||||||
Management
Agreement
|
386,100 | 171,600 | 214,500 | ― | ― | |||||||||||||||
Water
purchases
|
2,988,000 | 398,400 | 796,800 | 796,800 | 996,000 | |||||||||||||||
Total
|
$ | 73,470,170 | $ | 16,082,207 | $ | 55,438,093 | $ | 953,870 | $ | 996,000 |
* - Long-term debt obligations shown in this table are based on the scheduled payments contained in the Term Notes including the effects of the waiver of principal and interest rate floor provided for in the Sixth Amendment. We used the rates fixed in the interest rate swap agreements (see “Interest Rate Swap Agreements” in Note 5 to our unaudited condensed financial statements in this Quarterly Report.) for the Fixed Rate Note and December 2007 Fixed Rate Note, respectively which should account for possible net cash settlements on the interest rate swaps. These amounts do not take into account any effect of possibly being declared in default of our Construction Loan Agreement.
** -
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, 2009 for basis contracts that had not yet been fixed.
28
Grants
There has
been no change in the repayment status of our grant from the North Dakota State
Industrial Commission (totaling $275,000) during the third quarter of
2009. We did receive $8,000 and $59,000 during the three months ended
September 30, 2009 and 2008, respectively from the Job Service North Dakota
grant related to employee training. We do anticipate receiving funds
from this grant during 2010. We cannot accurately estimate the amount
but anticipate it will be less than $50,000.
North
Dakota Ethanol Incentive Program
Under the
program, each fiscal quarter, eligible ethanol plants may receive a production
incentive based on the average North Dakota price per bushel of corn received by
farmers during the quarter, as established by the North Dakota agricultural
statistics service, and the average North Dakota rack price per gallon of
ethanol during the quarter, as compiled by AXXIS Petroleum. The
amount is capped at $1.6 million per plant per year up to a lifetime maximum of
$10 million per plant. We did receive approximately $650,000 and $1.4
million during the nine months ended September 30, 2009 and 2008,
respectively. We do anticipate receiving any additional funds from
this program until the third quarter of 2010 as there are currently no funds
available and the next round of funding will not occur until July
2010. The incentive received is calculated by using the sum arrived
at for the corn price average and for the ethanol price average as calculated
below:
Corn
Price
|
·
|
For
every cent that the average quarterly price per bushel of corn exceeds
$1.80, the state shall add to the amounts payable under the program $.001
multiplied by the number of gallons of ethanol produced by the facility
during the quarter.
|
|
·
|
If
the average quarterly price per bushel of corn is exactly $1.80, the state
shall not add anything to the amount payable under the
program
|
|
·
|
For
every cent that the average price per bushel of corn is below $1.80, the
state shall subtract from the amounts payable under the program $.001
multiplied by the number of gallons produced by the facility during the
quarter.
|
Ethanol
Price
|
·
|
For
every cent that the average quarterly rack price per gallon of ethanol is
above $1.30, the state shall subtract from the amounts payable under the
program $.002 multiplied by the number of gallons of ethanol produced by
the facility during the quarter.
|
|
·
|
If
the average quarterly price per gallon of ethanol is exactly $1.30, the
state shall not add anything to the amount payable under the
program.
|
|
·
|
For
every cent that the average quarterly rack price per gallon of ethanol is
below $1.30, the state shall add to the amounts payable under the program
$.002 multiplied by the number of gallons of ethanol produced by the
facility during the quarter.
|
If corn
prices are low compared to historical averages and ethanol prices are high
compared to historical averages, we will receive little or no funds from this
program.
Critical Accounting
Estimates
Our most
critical accounting policies, which are those that require significant judgment,
include policies related to the carrying amount of property, plant and
equipment; valuation of derivatives, inventory and purchase commitments of
inventory; and analysis of intangibles impairment. An in-depth
description of these can be found in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2008. For valuation allowances
related to firm purchase commitments of inventory, please refer to the
disclosures in Note 2 and Note 4 of the Notes to the unaudited condensed
financial statements in this Quarterly Report. Management has not
changed the method of calculating and using estimates and assumptions in
preparing our condensed financial statements in accordance with generally
accepted accounting principles. There have been no changes in the
policies for our accounting estimates for the quarter ended September 30,
2009.
29
Off-Balance Sheet
Arrangements
We have
not entered into any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors.
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 United States
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 we use ethanol swaps to hedge
changes in the commodity price of 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 Generally Accepted Accounting
Principals.
Interest
Rate Risk
We are
exposed to market risk from changes in interest rates. Exposure to interest rate
risk results primarily from holding a revolving promissory note and construction
term notes which bear variable interest rates. Approximately $17 million of our
outstanding long-term debt is not covered under an interest rate swap and is at
a variable rate as of September 30, 2009. We anticipate that a
hypothetical 1% change in interest rates, from those in effect on September 30,
2009, would change our interest expense by approximately $170,000 on an annual
basis. In order to achieve a fixed interest rate on the construction
loan and reduce our risk to fluctuating interest rates, we entered into an
interest rate swap contract that effectively fixed the interest rate at 8.08% on
approximately $27.6 million of the outstanding principal of the
construction loan. We entered into a second interest rate swap in
December 2007 and effectively fixed the interest rate at 7.695% on an additional
$10 million of our outstanding long-term debt. The interest rate
swaps are not designated as either a cash flow or fair value
hedge. Market value adjustments and net settlements are recorded in
interest expense. We anticipate that a hypothetical 1% change in
interest rates, from those in effect on September 30, 2009, would change the
fair value of our interest rate swaps by approximately $725,000.
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. Based on management’s analysis, a trend has developed where
ethanol and corn prices appear to be “linked,” meaning that as corn prices move
up or down, ethanol prices also move up or down accordingly.
We did
use corn futures and options and ethanol swap contracts on a limited basis
during the third quarter of 2009 in an effort to offset a portion of our long
corn position. We have implemented procurement procedures to try and
limit our long corn position as much as possible and still efficiently operate
our Plant and ensure that we have a sufficient supply of corn to operate the
Plant.
As of
September 30, 2009 we had approximately 1.4 million bushels of corn under fixed
price contracts. We had accrued a loss on firm purchase commitments
of approximately $218,000 related to these bushels as average fixed price of
these contracts was approximately $0.16 above market value. We would
expect a sustained $0.10 change in the price of corn to have an approximate
$140,000 impact on our net income.
We
entered into some ethanol swap contracts to lock in a price for a small portion
of our ethanol production. We exited this position early in October
2009 in conjunction with our normal fall maintenance outage. It is
the position of RPMG (our ethanol marketing company) 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 had no fixed price
contracts for the sale of physical ethanol outstanding at September 30, 2009 or
2008.
The
immediate recognition of hedging gains and losses under fair value accounting
can cause net income to be volatile from quarter to quarter due to the timing of
the change in value of the derivative instruments relative to the cost and use
of the commodity being hedged. As of September 30, 2009 and December 31, 2008,
the value of our futures, options and ethanol swap positions was approximately
$768,000 and $1,051,500, respectively. There are several variables
that could affect the extent to which our derivative instruments are impacted by
price fluctuations in the cost of corn or ethanol. 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.
30
We
estimate that our expected corn usage will be between 18 million and 20
million bushels per 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.
ITEM 4. 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.
Our Chief
Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of our disclosure controls and procedures as of September 30,
2009, 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, 2009, 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.
31
PART II — OTHER
INFORMATION
None.
In
addition to the other information set forth in this report, including the
important information under the heading “Disclosure Regarding Forward-Looking
Statements,” you should carefully consider the “Risk Factors” discussed in our
Annual Report on Form 10-K for the year ended December 31, 2008. “Risk
Factors” are conditions that may cause investment in our Company to be
speculative or risky. In light of developments during the third quarter of
fiscal 2009, we have decided to update our Risk Factors as set forth below.
Other than these updates, we are not currently aware of factors other than those
set forth in our Annual Report on Form 10-K that would have a foreseeable effect
on the level of risk associated with investment in our Company; however,
additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial might materially adversely affect our actual
business, financial condition and/or operating results.
The Company has
withheld $3.9 million from its Plant design-builder, Fagen, Inc., related
to the coal combustor.
The
Company has withheld $3.9 million from its Plant design-builder, Fagen,
Inc. (“Fagen”), due to punch list items which are not complete as of November
13, 2009 and problems with the coal combustor. The punch list is an item that
must be complete under the terms of the Design-Build Agreement in order for the
Company to sign off on final completion and authorize payment of the
$3.9 million. In addition to a number of other punch list items,
the Design-Build Agreement specified that the coal combustor would operate on
lignite coal; however, the coal combustor did not run consistently on lignite
and the Company has suffered plant shut-downs as a result. The Company continues
to work with Fagen and its subcontractors on these issues; however, there is no
assurance that any potentially agreed upon solution would solve the problems for
$3.9 million or less, if at all. There is also no assurance that Fagen and
its subcontractors will agree on any solution or even agree that the problem is
their responsibility to correct. If Fagen disputes the withholding of the $3.9
million and demands payment, the Company may be forced to pay the
$3.9 million and there would be no assurance that the punch list items
would be completed or that the coal combustor would be able to use lignite
coal.
Our level of
indebtedness may adversely affect our ability to react to changes in our
business, and we may be limited in our ability to refinance our existing debt or
use debt to fund future capital needs. We have a substantial
amount of indebtedness. As a result of our substantial debt, demands on
our cash resources are higher than they otherwise would be which could
negatively impact our business, results of operations and financial
condition. As a result of our substantial indebtedness, we may be
more vulnerable to general adverse economic and industry conditions. We may find
it more difficult to obtain additional financing to fund future working capital,
capital expenditures and other general operating requirements. We will be
required to dedicate a substantial portion of our cash flow from operations to
the payment of principal and interest on our debt, reducing the available cash
flow to manage our corn and ethanol price risk, fund operations or make capital
expenditures. We may have a competitive disadvantage relative to other companies
in our industry with less debt. We may also experience decreases in our
regular trade credit from vendors which could adversely impact our cash flow if
we need to start prepaying for items we have been able to purchase on trade
credit in the past. In early 2007, a crisis began in the sub prime
mortgage sector, as a result of rising delinquencies and credit quality
deterioration, and has subsequently spread throughout the credit market. There
can be no assurances that this credit crisis will not worsen or impact our
availability and cost of debt financing including with respect to any
refinancings.
We have not been
granted a waiver of loan covenant violations that occurred as of March 31, 2009,
June 30, 2009 or September 30, 2009 which gives the Bank the ability to exercise
their rights under the terms of our Construction Loan
Agreement. We have been notified that we were in violation of
certain of our loan covenants as of March 31, 2009, June 30, 2009 and September
30, 2009. The Bank has not granted a waiver of those covenant
violations. As of November 13, 2009, we have not been declared in
default of our loan agreements and the Bank considers us in good
standing. Because of our covenant violations, however, the Bank could
call our notes due and payable at any time and could sell all the assets of the
Company to satisfy our outstanding loan obligations.
32
Approval of a Low
Carbon Fuel Standard (“LCFS”) by the California Air Resources Board (“CARB”) may
have a negative impact on our ability to market our ethanol in
California. The CARB recently passed a LCFS, which sets
standards for the carbon intensity of fuels used in the state starting in
2011. Certain provisions of the LCFS, which are not yet final, have
the potential to ban ethanol produced at our Plant from being sold in
California. While we believe there may be some negative impact to our
sales from the approval of the LCFS in California, we believe we will still be
able to market all the ethanol produced by our Plant. If more states,
or the federal government, adopt similar provisions it could have a severe
negative impact on our ability to sell all of the ethanol produced at our
Plant.
We are in the
process of implementing a corn procurement program and there can be no guarantee
that this will be successful. We are in the process of
implementing a corn procurement program available to members and non-members of
the Company. In general terms, the program would allow us to procure
corn in exchange for a combination of cash, equity and deferred payables along
with the opportunity, for those that participate in the program, to receive a
future incentive based on our financial performance. There is no
assurance that the program will be successfully implemented, will be successful
once implemented, or that we will maintain our cash flow even with the
discounted corn under the program.
We may have
conflicting interests with Greenway that could cause Greenway to put its
interests ahead of ours. Greenway Consulting, LLC (“Greenway”)
serves as our management consultant. Greenway has and continues to
advise our governors and has been, and is expected to be, involved in
substantially all material aspects of our operations. In addition,
Gerald Bachmeier, who was named as our interim Chief Executive Officer on June
15, 2009, serves as Chief Manager of Greenway and is also a member of the
Company. Consequently, the terms and conditions of any future
agreements and understandings with Greenway may not be as favorable to us as
they could be if they were to be obtained from third parties. In
addition, because of the extensive role that Greenway had in the construction of
the Plant and has in its operations, it may be difficult or impossible for us to
enforce claims that we may have against Greenway. Such conflicts of
interest may impact our operations and financial performance.
None.
While we
have not been declared in default of our Construction Loan Agreement by FNBO, we
have been notified that we are in violation of certain loan covenants as of
September 30, 2009. Please see Note 2 and Note 5 to our unaudited
condensed financial statements in this Quarterly Report.
None.
ITEM 6. EXHIBITS
See
Exhibit Index following the signature page of this report.
33
In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RED
TRAIL ENERGY, LLC
|
||||||
Date:
November 16, 2009
|
By:
|
/s/
Gerald Bachmeier
|
||||
Gerald
Bachmeier
|
||||||
Chief
Executive Officer
|
||||||
Date:
November 16, 2009
|
By:
|
/s/
Mark E. Klimpel
|
||||
Mark
E. Klimpel
|
||||||
Chief
Financial Officer
|
34
EXHIBIT INDEX
RED
TRAIL ENERGY, LLC
FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 2009
10.1*+
|
Coal
Sales Order by and between Red Trail Energy, LLC and Westmoreland Coal
Sales Company dated November 5, 2009.
|
|
10.2*
|
Amended
and Restated Management Agreement by and between Red Trail Energy, LLC and
Greenway Consulting, dated September 10, 2009.
|
|
31.1*
|
Certification
by Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Securities
Exchange Act of 1934).
|
|
31.2*
|
Certification
by Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Securities
Exchange Act of 1934).
|
|
32.1*
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.2*
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
|
Filed
herewith.
|
|
+
|
Confidential
treatment requested for portions of this
exhibit.
|
35