Attached files

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EX-14 - Lincolnway Energy, LLCv169543_ex14.htm
EX-32.1 - Lincolnway Energy, LLCv169543_ex32-1.htm
EX-31.2 - Lincolnway Energy, LLCv169543_ex31-2.htm
EX-32.2 - Lincolnway Energy, LLCv169543_ex32-2.htm
EX-31.1 - Lincolnway Energy, LLCv169543_ex31-1.htm
EX-10.15 - Lincolnway Energy, LLCv169543_ex10-15.htm
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended September 30, 2009

OR

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: 000-51764
 


LINCOLNWAY ENERGY, LLC
(Exact name of registrant as specified in its charter)


 
Iowa
20-1118105
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)
   
59511 W. Lincoln Highway, Nevada, Iowa
50201
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code: (515) 232-1010

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  Limited Liability Company Units

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.                                               Yes    o      No        þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.                                               Yes    o      No        þ

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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                               Yes    o      No          o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.                                               þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:

 
Large accelerated filer
o
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).                                               Yes      o      No      þ
 
The aggregate market value of the units held by non-affiliates of the registrant was $48,265,270 as of March 31, 2009. The units are not listed on an exchange or otherwise publicly traded.  The value of the units for this purpose has been based upon the $1,213 book value per-unit as of March 31, 2009.  In determining this value, the registrant has assumed that all of its directors and its president and its chief financial officer are affiliates, but this assumption shall not apply to or be conclusive for any other purpose.
 
The number of units outstanding as of November 30, 2009 was 42,049.

DOCUMENTS INCORPORATED BY REFERENCE:  Portions of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission with respect to the 2010 annual meeting of the members of the registrant are incorporated by reference into Item 11 of Part III of this Form 10-K.

 

 
 

 

LINCOLNWAY ENERGY, LLC
FORM 10-K
For the Fiscal Year Ended September 30, 2009

INDEX

Part I.
       
         
 
Item 1.
Business.
 
1
 
Item 1A.
Risk Factors.
 
13
 
Item 1B.
Unresolved Staff Comments.
 
35
 
Item 2.
Properties.
 
35
 
Item 3.
Legal Proceedings.
 
36
 
Item 4.
Submission of Matters to a Vote of Security Holders.
 
37
         
Part II.
       
         
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
37
 
Item 6.
Selected Financial Data.
 
41
 
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
42
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
 
64
 
Item 8.
Financial Statements and Supplementary Data.
 
67
 
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
 
85
 
Item 9A(T).
Controls and Procedures.
 
85
 
Item 9B.
Other Information.
 
86
         
Part III.
       
         
 
Item 10.
Directors, Executive Officers and Corporate Governance.
 
86
 
Item 11.
Executive Compensation.
 
91
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
92
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
 
93
 
Item 14.
Principal Accounting Fees and Services.
 
94
       
 
Part IV.
     
 
 
Item 15.
Exhibits, Financial Statement Schedules.
 
95
       
 
SIGNATURES
     
       
Ethanol Marketing Agreement
 
 E-1
Code of Ethics
 
 E-26
Certification of President and CEO
 
E-30
Certification of Chief Financial Officer
 
  E-32
Section 1350 Certification of President and CEO
 
 E-34
Section 1350 Certification of Chief Financial Officer
 
  E-35

 
 

 

CAUTIONARY STATEMENT ON FORWARD LOOKING STATEMENTS
AND INDUSTRY AND MARKET DATA

Various discussions and statements in this annual report are or contain forward looking statements that express Lincolnway Energy's current beliefs, forecasts, projections and predictions about future events.  All statements other than statements of historical fact are forward looking statements, and include statements with respect to financial results and condition; anticipated trends in business, revenues, net income, net profits or net losses; projections concerning operations, capital needs and cash flow; investment, business, growth, expansion, acquisition and divestiture opportunities and strategies; management's plans or intentions for the future; competitive position or circumstances; and other forecasts, projections and statements of expectation.  Words such as "expects," "anticipates," "estimates," "plans," "may," "will," "contemplates," "forecasts," "strategy," "future," "potential," "predicts," "projects," "prospects," "possible," "continue," "hopes," "intends," "believes," "seeks," "should," "could," "thinks," "objectives" and other similar expressions or variations of those words or those types of words help identify forward looking statements.

Forward looking statements involve and are subject to various material risks, uncertainties and assumptions.  Forward looking statements are necessarily subjective and are made based on numerous and varied estimates, projections, views, beliefs, strategies and assumptions made or existing at the time of such statements and are not guarantees of future results or performance.  Forecasts and projections are also in all events likely to be inaccurate, at least to some degree, and especially over long periods of time, and in particular in a still relatively new and developing industry such as the ethanol industry.  Forecasts and projections are also currently difficult to make with any degree of reliability or certainty given the difficult and uncertain credit, market and other economic circumstances in existence at the time of the preparation of this annual report, both generally and with respect to the ethanol industry in particular.  Lincolnway Energy disclaims any obligation to update or revise any forward looking statements based on the occurrence of future events, the receipt of new information, or otherwise.  Lincolnway Energy cannot guarantee Lincolnway Energy's future results, performance or business conditions, and strong or undue reliance must not be placed on any forward looking statements.

Actual future performance, outcomes and results may differ materially from those suggested by or expressed in forward looking statements as a result of numerous and varied factors, risks and uncertainties, some that are known and some that are not, and many of which are beyond the control of Lincolnway Energy and Lincolnway Energy's management.  It is not possible to predict or identify all of those factors, risks and uncertainties, but they include inaccurate assumptions or predictions by management, the accuracy and completeness of the publicly available information upon which part of Lincolnway Energy's business strategy is based and all of the various factors, risks and uncertainties discussed in this annual report, and in particular in Items 1, 1A, 7 and 7A of this annual report.


 
(i)

 

Lincolnway Energy may have obtained industry, market, competitive position and other data used in this annual report or in Lincolnway Energy's general business plan from Lincolnway Energy's own research or internal surveys, studies conducted by other persons and/or trade or industry associations or general publications and other publicly available information.  Lincolnway Energy attempts to utilize third party sources of information which Lincolnway Energy believes to be materially complete, accurate, balanced and reliable, but there is no assurance of the accuracy, completeness or reliability of any third party information.  For example, a trade or industry association for the ethanol industry may present information in a manner that is more favorable to the ethanol industry than would be presented by an independent source.  Industry publications and surveys and other publicly available information also generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of any information.

[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

 
(ii)

 

PART I

Item 1.
Business.

General Overview

Lincolnway Energy, LLC is an Iowa limited liability company that operates a dry mill, coal fired ethanol plant located in Story County, Iowa, near Nevada, Iowa.  Lincolnway Energy has been processing corn into fuel grade ethanol and distiller's grains at the ethanol plant since May 22, 2006.  The first full month of production at full capacity was July of 2006.

The ethanol plant has a nameplate production capacity of 50,000,000 gallons of ethanol per year, which, at that capacity, would also generate approximately 136,000 tons of distiller's grains per year.

Lincolnway Energy began extracting corn oil from the syrup which is generated in the production of ethanol in April, 2008.  Lincolnway Energy estimates that it will produce approximately 3,000 tons of corn oil per year at the plant.

Lincolnway Energy currently does not capture or market the carbon dioxide which is produced as part of the ethanol production process.

Financial Information

Financial statements for Lincolnway Energy are included in Item 8 of this annual report.  The financial statements include information regarding Lincolnway Energy's revenues, profits or losses and total assets.  Item 6 of this annual report includes summary selected financial data.

Lincolnway Energy did not derive any revenue during the fiscal year ended September 30, 2009 from any customers located in any foreign country, and Lincolnway Energy did not have any assets located in a foreign country during that fiscal year.

Principal Products and Their Markets

Lincolnway Energy's principal products are fuel grade ethanol and distiller's grains.

 
1

 

Ethanol

Lincolnway Energy produces ethanol from corn.  The ethanol produced by Lincolnway Energy is fuel grade ethanol, which can be used as a blend component/fuel additive in gasoline.  Ethanol increases the octane rating of gasoline and reduces vehicle emissions, primarily carbon monoxide.  The use of ethanol is currently heavily supported by various governmental incentives and programs.  The loss of one or more of those incentives or programs could be highly detrimental to the ethanol industry.

All of Lincolnway Energy's ethanol production was sold to Renewable Products Marketing Group, Inc. (RPMG, Inc.) until September 30, 2009, when Lincolnway Energy entered into an ethanol marketing agreement with Green Plains Trade Group LLC, as is discussed below.  Under the agreement with RPMG, Inc., Lincolnway Energy's ethanol was pooled with the ethanol of other ethanol producers whose ethanol is marketed by RPMG, Inc.  Lincolnway Energy paid RPMG, Inc. a pooling fee of $.01 per gallon of ethanol, and RPMG, Inc. paid Lincolnway Energy a netback price per gallon that was based upon the difference between the pooled average delivered ethanol selling price and the pooled average distribution expense.  The averages were calculated based upon each pool participant's selling price and expense averaged in direct proportion to the volume of ethanol supplied by each pool participant.  The agreement was terminated effective as of October 1, 2009 by mutual agreement of Lincolnway Energy and RPMG, Inc., but any outstanding purchase orders between Lincolnway Energy and RPMG, Inc. under the agreement were finalized and closed out pursuant to the agreement.

Lincolnway Energy entered into an ethanol marketing agreement with Green Plains Trade Group LLC effective as of September 25, 2009.  Under the agreement, Green Plains Trade Group LLC has the exclusive right to market all of the ethanol which is produced by Lincolnway Energy, except that the agreement permits Lincolnway Energy to close out any outstanding purchase orders under Lincolnway Energy's agreement with RPMG, Inc. and that Lincolnway Energy may market some of its ethanol in certain limited circumstances, such as ethanol which is the subject of any purchase order which was submitted by Green Plains Trade Group LLC but was rejected by Lincolnway Energy.  Lincolnway Energy may reject any purchase orders submitted by Green Plains Trade Group LLC, at Lincolnway Energy's sole discretion.  The purchase price payable to Lincolnway Energy under the agreement is Green Plains Trade Group LLC's contract selling price for the ethanol in question, less various costs and a fee to Green Plains Trade Group LLC, but the agreement includes a minimum purchase price.  Lincolnway Energy is dependent upon its agreement with Green Plains Trade Group LLC for the marketing and sale of Lincolnway Energy's ethanol, and Lincolnway Energy's loss of the agreement, or Lincolnway Energy's inability to negotiate a new agreement with Green Plains Trade Group LLC or another marketer before the expiration or termination of the agreement, could have material adverse effects on Lincolnway Energy.

The primary purchasers of ethanol are refiners, blenders or wholesale marketers of gasoline.  Lincolnway Energy anticipates that its ethanol production will be sold in all regional markets given the availability of rail service at Lincolnway Energy's ethanol plant and local markets that will be shipped by truck, but Green Plains Trade Group LLC controls the marketing of all of Lincolnway Energy's ethanol output.

 
2

 

Lincolnway Energy’s primary means of shipping and distributing ethanol will be by rail and truck.

The nameplate production capacity of Lincolnway Energy's ethanol plant is 50,000,000 gallons of ethanol per year, or approximately 4,167,000 gallons per month.  The ethanol plant exceeded the nameplate production capacity for the fiscal year ended September 30, 2009, however, by approximately 4.9%, with 52,465,534 gallons of ethanol produced during that period, and with an average monthly production of 4,372,128 gallons.

Lincolnway Energy anticipates that the ethanol plant will produce ethanol at a similar rate during the fiscal year ending September 30, 2010, and that Lincolnway Energy will process approximately 19,800,000 bushels of corn into approximately 55,000,000 gallons of ethanol during the fiscal year ending September 30, 2010.

Lincolnway Energy's revenues from the sale of ethanol during the fiscal years ended September 30, 2007, September 30, 2008 and September 30, 2009 accounted for approximately 87%, 83% and 80%, respectively, of Lincolnway Energy's total revenues during those periods.  Lincolnway Energy estimates that its revenues from the sale of ethanol for the fiscal year ending September 30, 2010 will account for approximately 81% of Lincolnway Energy's total revenues for that fiscal year.

Distiller's Grains

Lincolnway Energy's other primary product is distiller's grains, which is a byproduct of the ethanol production process.  Distiller's grains are, in general, the solids which are left after the processing and fermentation of corn into ethanol.  Distiller's grains are a high protein feed supplement that are marketed primarily in the swine, dairy and beef industries.  Distiller's grains can also be used in poultry and other livestock feed.

A dry mill ethanol process such as that utilized by Lincolnway Energy can produce wet distiller's grains and dried distiller's grains.  Wet distiller's grain contains approximately 60% moisture, and has a shelf life of only approximately three days.  Wet distiller's grains can therefore only be sold to users located within relatively close proximity to the ethanol plant.  Dried distiller's grain is wet distiller's grain that has been dried to 10% to 12% moisture.  Dried distiller's grain has an extended shelf life and may be sold and shipped to any market.

Lincolnway Energy's output of distiller's grains is sold to Hawkeye Gold, LLC under a Distiller's Grains Marketing Agreement that became effective on October 1, 2007.  Lincolnway Energy pays Hawkeye Gold, LLC a marketing fee for dried distiller's grains equal to the greater of 2% of the FOB plant price for the dried distiller's grains or a per-ton fee of $1.30 for the dried distiller's grains.  The marketing fee for wet distiller's grains is the greater of 3% of the FOB plant price for the wet distiller's grains or a per-ton fee of $1.00 for the wet distiller's grains.  The Distiller's Grains Marketing Agreement can be terminated by Lincolnway Energy or Hawkeye Gold, LLC on 90 days written notice.  Lincolnway Energy is dependent upon its agreement with Hawkeye Gold, LLC for the marketing and sale of Lincolnway Energy's distiller's grains, and Lincolnway Energy's loss of the agreement, or Lincolnway Energy's inability to negotiate a new agreement with Hawkeye Gold or another marketer before the expiration or termination of the agreement, could have material adverse effects on Lincolnway Energy.

 
3

 

The primary purchasers of distiller's grains are individuals or companies involved in dairy, beef or other livestock production.  Lincolnway Energy anticipates that approximately 7% of its distiller's grains will be locally marketed to nearby livestock producers, but Hawkeye Gold, LLC controls the marketing of all of Lincolnway Energy's distiller's grains.

Lincolnway Energy anticipates that its means of shipping and distributing distiller's grain will be by rail or by truck.  Local livestock producers are also able to pick up distiller's grains directly from the ethanol plant.

Lincolnway Energy produced 146,050 tons of distiller's grains during the fiscal year ended September 30, 2009, or approximately 12,171 tons of distiller's grains per month.  The composition of the distiller's grains was approximately 12% wet distiller's grains and 88% dried distiller's grains.

Lincolnway Energy anticipates processing approximately 154,000 tons of distiller's grains during the fiscal year ending September 30, 2010.

Lincolnway Energy's revenues from the sale of distiller's grains during the fiscal years ended September 30, 2007, September 30, 2008 and September 30, 2009 accounted for approximately 13%, 17% and 19%, respectively, of Lincolnway Energy's total revenues during those periods.  Lincolnway Energy estimates that its revenues from the sale of distiller's grains for the fiscal year ending September 30, 2010 will account for approximately 18% of Lincolnway Energy's total revenues for that fiscal year.

Other Byproducts

There are other potential byproducts from the production of ethanol at a dry mill plant, primarily corn oil and carbon dioxide.

Corn Oil

Lincolnway Energy purchased a corn oil extraction system from FEC Solutions, L.L.C., which was put into operation in April, 2008.  The system extracts corn oil from the syrup which is generated in the production of ethanol.  Lincolnway Energy entered into an agreement with FEC Solutions, L.L.C. on October 13, 2008 under which FEC Solutions, L.L.C. purchases all of Lincolnway Energy's output of corn oil for resale by FEC Solutions, L.L.C.  Lincolnway Energy pays FEC Solutions, L.L.C. a marketing and technical assistance fee of 5% of the FOB sales price of the corn oil.  The agreement has an initial term of 36 months commencing from October 13, 2008, and will renew for successive 36 month terms unless Lincolnway Energy or FEC Solutions, L.L.C. elect to terminate the agreement at the end of the then current 36 month term.

 
4

 

Lincolnway Energy anticipates that its means of shipping and distributing corn oil will be by truck.

Lincolnway Energy anticipates that FEC Solutions, L.L.C. will sell most of the corn oil in the biodiesel industry, but FEC Solutions, L.L.C. controls the marketing of all of Lincolnway Energy's output of corn oil.

Lincolnway Energy estimates that it will produce approximately 3,000 tons of corn oil per year at the plant.  Lincolnway Energy does not, however, anticipate that corn oil will be a principal or material product of Lincolnway Energy because Lincolnway Energy’s corn oil sales were approximately $1,200,000 for fiscal year ending September 30, 2009, which is approximately only 1% of Lincolnway Energy's total revenues for the fiscal year ended September 30, 2009.

Carbon Dioxide

Lincolnway Energy currently does not attempt to capture or market the carbon dioxide which is produced as part of the ethanol production process, and Lincolnway Energy currently has no plans to do so.  Lincolnway Energy estimates that it will produce approximately 150,000 tons of carbon dioxide per year, assuming full production.

 
5

 

Sources and Availability of Raw Materials

Corn and coal are the primary raw materials that are utilized by Lincolnway Energy in the production of ethanol.  Corn is used to produce the ethanol, and coal is Lincolnway Energy's primary energy source for its ethanol plant.

Corn

Lincolnway Energy estimates that it will utilize approximately 19,800,000 bushels of corn per year at its ethanol plant, or approximately 1,650,000 bushels per month, assuming production at a capacity of 55,000,000 gallons of ethanol per year.

Lincolnway Energy's ethanol plant is located in Story County, Iowa, near Nevada, Iowa.  Although Lincolnway Energy anticipates purchasing corn from various sources and areas, Lincolnway Energy believes that Story County will produce a sufficient supply of corn, assuming normal growing conditions, to generate the necessary annual requirements of corn for the ethanol plant.  There is not, however, any assurance that Lincolnway Energy will be able to purchase sufficient corn supplies from Story County or regarding the supply or availability of corn given the numerous factors which affect the supply and price for corn.

Lincolnway Energy has an agreement with Heart of Iowa Cooperative pursuant to which Lincolnway Energy can obtain up to 50% of its corn needs from Heart of Iowa Cooperative's facility located adjacent to Lincolnway Energy's ethanol plant, with the remaining 50% to be obtained from other Heart of Iowa Cooperative facilities or other licensed grain dealers. The 50% limitation for Heart of Iowa Cooperative's Nevada, Iowa location was imposed by the Iowa Department of Natural Resources, as part of the air permitting process.  Heart of Iowa Cooperative is a licensed grain dealer and has locations throughout Story County, Iowa.  Heart of Iowa Cooperative is also a member of Lincolnway Energy.

Lincolnway Energy's agreement with Heart of Iowa Cooperative will terminate by its terms on May 22, 2026.  The agreement may also be terminated, however, at any time upon six months notice and the payment of a termination fee by the terminating party.  The termination fee starts at $2,000,000, and is reduced by $50,000 for each completed year of the agreement.  The term of the agreement commenced on May 22, 2006.

Lincolnway Energy purchased approximately 18,800,000 bushels of corn for $69,260,000 from Heart of Iowa Cooperative during the fiscal year ended September 30, 2009.

Corn is delivered to Lincolnway Energy's ethanol plant by truck.  Lincolnway Energy has corn storage capabilities for approximately 10 days of continuous ethanol production.

Coal

Lincolnway Energy's ethanol plant is a coal fired plant.  Lincolnway Energy's ethanol plant will utilize approximately 300 tons of coal per day, assuming production at a capacity of 55,000,000 gallons of ethanol per year.

 
6

 

Lincolnway Energy purchased approximately 95,000 tons of coal for $5.6 million. during the fiscal year ended September 30, 2009.

Lincolnway Energy currently obtains all of its coal pursuant to an agreement between Lincolnway Energy and Williams Bulk Transfer.  The agreement allows Lincolnway Energy to purchase up to 220,000 tons of coal per year at a per ton price equal to the sum of the coal price and the transportation price, as those terms are defined in the agreement.  The coal price and the transportation price are subject to adjustment in various circumstances and based on various factors.  For example, the transportation price is subject to quarterly adjustment, upward or downward (but never below the initial transportation price stated in the agreement), by 100% of the quarterly percentage change in the All Inclusive Index—Less Fuel, and to a monthly adjustment, upward but not downward, through the addition of a fuel surcharge determined by the amount by which the average Retail On-Highway Diesel Fuel Price of the U.S. exceeds a specified amount per gallon.  The transportation price will also be increased on the scheduled adjustment dates set out in the agreement.  The coal price adjustments are based upon, in general, any increased costs as a result of any changes in laws, changes in inflation as determined by designated indices, and the quality of the coal.  Lincolnway Energy is required to pay a penalty of $16.00 per ton multiplied by the difference of the minimum requirement and actual quantity purchased, if Lincolnway Energy fails to purchase a minimum of 80,000 tons of coal in any calendar year.  The $16.00 per ton penalty amount is subject to adjustment as provided in the agreement.  Lincolnway Energy's agreement with Williams Bulk Transfer will expire by its terms on January 1, 2013.

Lincolnway Energy is dependent upon its agreement with Williams Bulk Transfer for the supply of all of Lincolnway Energy's coal needs.  Lincolnway Energy's loss of its contract with Williams Bulk Transfer, or Lincolnway Energy's inability to negotiate a new contract with Williams Bulk Transfer or another supplier on favorable terms before the expiration or termination of the agreement, would have material adverse effects on Lincolnway Energy.

All of the coal utilized by Lincolnway Energy is delivered by truck.  Lincolnway Energy has coal storage for approximately 6 days of continuous ethanol production.

 
7

 

Other Raw Materials

Lincolnway Energy's ethanol plant also requires a significant amount of electricity and significant supplies of water.

Lincolnway Energy's electricity needs are currently met by Alliant Energy.  Lincolnway Energy pays the general service rates for its electricity.

Lincolnway Energy utilizes approximately two gallons of water to produce a gallon of ethanol, which results in the use of approximately 325,000 gallons of water per day.  Lincolnway Energy discharges 275,000 gallons of water per day that has been treated by a reverse osmosis system. Lincolnway Energy's water needs are currently met by the City of Nevada.

Rail Access

Rail access is critical to the operation of Lincolnway Energy's ethanol plant because rail is used for the shipment and distribution of ethanol and distiller's grains.  Lincolnway Energy utilizes rail track owned by Lincolnway Energy, as well as tracks owned by the Union Pacific and Heart of Iowa Cooperative.  Lincolnway Energy has agreements with the Union Pacific and Heart of Iowa Cooperative regarding the use of their tracks.

Lincolnway Energy owns approximately 25 acres of real estate which is to the west of Lincolnway Energy's existing real estate and which is adjacent to the Union Pacific railroad tracks near Nevada, Iowa.  The real estate was acquired primarily for potential future use in the construction of additional railroad spur tracks.  Lincolnway Energy has a Memorandum of Understanding with the Union Pacific Railroad Company and has worked with a consultant to determine the cost and feasibility of constructing additional railroad spur tracks.  Lincolnway Energy has not, however, made any determination as to whether, and if so, when, Lincolnway Energy will pursue the construction of any additional railroad spur tracks.  The current general economic and ethanol industry circumstances may make construction of any additional railroad spur tracks difficult, at least through 2010.

Expansion Plans

Lincolnway Energy currently has no definite plans to expand its ethanol plant or to construct or acquire any additional ethanol plants.  Lincolnway Energy will, however, consider those matters as part of its ongoing operations and analysis of its business and the ethanol industry in general.  Lincolnway Energy believes there may be consolidations within the ethanol industry through the sale and purchase of ethanol plants during 2010.

Technology Changes

Lincolnway Energy continues to monitor and evaluate any other opportunities that may arise with respect to possible technological improvements and alternative energy sources for Lincolnway Energy's ethanol plant.  For example, as is discussed in Item 7 of this annual report, Lincolnway Energy is considering switching the fuel source for its plant from coal to biomass.  Lincolnway Energy also continues to monitor technological developments in the industry, such as those purported to increase operating or production efficiencies or to generate energy or other savings in ethanol production.

 
8

 

Research and Development Activities

Lincolnway Energy is not currently engaged in any significant research or development activities.

Competition

The ethanol industry and markets remain highly competitive even though new construction and expansion of ethanol plants slowed during 2007, 2008 and 2009, and in particular 2008 and 2009, due to unfavorable credit and market conditions.  According to the Renewable Fuels Association, ethanol production in the U.S. has more than tripled since 2003, with the U.S. ethanol industry having produced a record of approximately 9 billion gallons of ethanol from 170 plants located in 26 states in 2008, as compared to the 2007 U.S. ethanol production of approximately 7.8 billion gallons from 139 plants in 21 states.  The U.S. became the world's largest producer of ethanol in 2006, surpassing Brazil.  World production also reached an all time high of approximately 17.3 billion gallons in 2009, according to the Renewable Fuels Association. The countries producing ethanol include Brazil, Canada, China, India, Thailand, Columbia, Australia, Turkey, Pakistan, Argentina and various other countries in the European Union and Central America.  Many of those countries have also enacted renewable fuel use requirements.

As of January 2009, the Renewable Fuels Association was estimating that approximately 2 billion gallons of ethanol production capacity would come on line during 2009 from 24 plants that were then under construction or expanding.

The general economic and ethanol industry circumstances have, however, been difficult and adverse over the past two years, with various ethanol plants having been closed or having cut production and some openings or construction or expansions of plants having been cancelled or postponed.  The past projections for the growth of the ethanol industry may, therefore, no longer be accurate.

Given that the Energy Independence and Security Act of 2007 increased the renewable fuels standard to 36 billion gallons of annual renewable fuel use by 2022 (up from the prior mandate of 7.5 billion gallons of annual use by 2012), it is probable that there will, however, continue to be at least some growth in the ethanol industry, both domestically and internationally, over the longer term.

Lincolnway Energy's competitors in the U.S. include not only regional farmer-owned entities, but also the major oil companies and other large companies such as Archer Daniels Midland, Cargill, Inc., Valero, Hawkeye Renewables, Poet, Green Plains Renewable Energy and Abengoa Bioenergy Corp.

The competition in the ethanol industry has increased during the past two years, with declining ethanol prices, excess supplies of ethanol and, until recently, rising corn costs.

 
9

 

The ethanol industry will also continue to face increasing competition from international suppliers of ethanol.  International suppliers produce ethanol primarily from inputs other than corn, such as sugar cane, and have cost structures that may be substantially lower than Lincolnway Energy's and other U.S. based ethanol producers.  Although there is currently a $.54 per gallon tariff on foreign produced ethanol, ethanol imports equivalent to up to 7% of total U.S. production in any given year from various countries were exempted from the tariff under the Caribbean Basin Initiative to spur economic development in Central America and the Caribbean.  Foreign suppliers of ethanol may significantly increase their imports into the U.S.  Also, Canada may import ethanol duty free, and Mexico may import ethanol under a duty rate of $.10 per gallon.  Some of the larger competitors in the ethanol industry may construct or establish ethanol plants in Central America or the Caribbean.

Smaller competitors also pose a threat.  Farmer-owned cooperatives and independent companies consisting of groups of individual farmers and investors have been able to compete successfully in the ethanol industry; although Lincolnway Energy believes that smaller ethanol plants will have increasing difficulty in competing with larger plants if the current market conditions continue.  These smaller competitors operate smaller facilities which do not affect the local price of corn grown in the proximity to the facility as much as larger facilities do, and some of the smaller competitors are farmer-owned and the farmer-owners either commit, or are incented by their ownership in the facility, to sell corn to the facility.

The continuing increase in domestic or foreign competition could cause Lincolnway Energy to have to reduce its prices and take other steps to compete effectively, which could adversely affect Lincolnway Energy's results of operations and financial position.

Many competitors will have greater production capacity, greater experience, more access to information and/or greater capital or other financial resources, any of which will make it difficult for Lincolnway Energy to compete with those competitors.  For example, greater ethanol production may allow a competitor to market its ethanol or distiller's grains at lower prices than Lincolnway Energy.  Lincolnway Energy believes there may be acquisitions and consolidations in the ethanol industry in 2010, and if those acquisitions and consolidations occur, they could lead to additional competitors with greater advantages over Lincolnway Energy.  A competitor may also offer other products or services that are not offered by Lincolnway Energy, which may give the competitor an additional advantage over Lincolnway Energy.

An ethanol plant utilizing corn to produce ethanol may also experience competition in the form of other plants which produce ethanol from other products.  For example, ethanol can be produced from corn stover, corn fiber, wheat straw, barley straw, switchgrass, miscanthus, trees, grasses. woodwastes, vegetative wastes and other wastes.  Lincolnway Energy's ethanol plant is designed to produce ethanol only from corn.

 
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The Energy Independence and Security Act of 2007 requires that 21 billion gallons of the new 36 billion gallon renewable fuels standard must come from advanced biofuels, with 16 billion gallons of that amount required to come from cellulosic ethanol by 2022.  Research will therefore continue regarding cellulosic ethanol, and it is likely that processes will be developed in the near future which will make the production of ethanol from these types of sources economical.  According to the Renewable Fuels Association, there were 22 companies with cellulosic ethanol projects under development or construction or in operation as of September 24, 2009.  Some of those projects are properly categorized as "pilot" or "test:" plants, but others are at a larger production level.  For example, Poet plans to open a 25,000,000 gallon per year cellulosic ethanol plant in Iowa in 2011, with the plant to produce ethanol from corn cobs.  Some of the cellulosic ethanol plants are working with the U.S. Department of Energy, and have received grant funds.

It is also possible that one or more of the other sources for producing ethanol may have greater advantages than corn, which would adversely affect an ethanol plant that produces ethanol solely from corn.  For example, a plant using one of those sources may be able to produce ethanol on a more economical basis or on a more efficient or greater scale.

The increased production of ethanol from other sources could also adversely affect the price for ethanol generally.

Some competitors operate their ethanol plant and produce ethanol using different sources of energy than coal, or using various other sources of energy.  The other sources of energy include natural gas and various forms of waste type products, such as woodwaste, tires, construction waste and manure.  Those competitors may have lower production and input costs and/or higher operating efficiencies than Lincolnway Energy, which would allow them to produce and market their ethanol at lower prices than Lincolnway Energy.

Competition from newly developed fuel additives would also reduce the use of ethanol and Lincolnway Energy's profitability.  Although it is difficult to predict if any new fuel additives will be developed, it likely will occur at some point, and it could be in the near future.

Research is also continually being conducted for alternatives to petroleum based fuel products and for additional renewable fuel products.  For example, research is ongoing regarding the use of hydrogen, electric or solar powered vehicles and fuel cells.  A breakthrough or discovery in any research could conceivably occur at any time, and could have the effect of greatly reducing the use of ethanol or of even making the use of ethanol obsolete at some point.  There will be increased incentives to develop alternatives to petroleum based fuel products given the higher gasoline prices that have occurred in 2008 and 2009 and the continuing security and other concerns with the Middle East and certain other major oil producing nations.

Ethanol is a commodity and is priced on a very competitive basis.  Lincolnway Energy believes that its ability to compete successfully in the ethanol industry will depend upon its ability to price its ethanol competitively, which in turn will depend on many factors, many of which are beyond the control of Lincolnway Energy and its management.  As indicated above, one of those factors is that Lincolnway Energy is subject to material and substantial competition, including from competitors who will be able to produce or market significantly higher volumes of ethanol and at lower prices.

 
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Lincolnway Energy believes that the principal competitive factors with respect to distiller's grains are price, proximity to purchasers and product quality.

Government Oversight and Regulation

Lincolnway Energy's business is subject to substantial governmental oversight and regulation, including relating to the discharge of materials into the air, water and soil; the generation, storage, handling, use, transportation and disposal of hazardous materials; and the health and safety of Lincolnway Energy's employees.

Lincolnway Energy needs to maintain various permits to be able to maintain and continue its operations.  The permits include water and air permits from the Iowa Department of Natural Resources.

On December 4, 2007, the Iowa Environmental Protection Commission referred alleged environmental law violations by Lincolnway Energy to the Iowa Attorney General's office for enforcement action.  The referred allegations concern wastewater releases relating to construction activities and exceedences of iron and total suspended solid limits in Lincolnway Energy's NPDES wastewater discharge permit, and air permitting, emissions limit exceedences, stack testing, monitoring and reporting.  Lincolnway Energy anticipates reaching a negotiated settlement of all of the allegations by the first calendar quarter of 2010.

As part of the process of attempting to negotiate a settlement of the allegations regarding emissions limit exceedences and to otherwise comply with air emissions requirements, Lincolnway Energy filed an application with the Iowa Department of Natural Resources on August 28, 2008 for Lincolnway Energy to obtain a new air quality permit under the 250 ton rules which were adopted in late 2007.  Lincolnway Energy believes that its current levels of emissions would comply with the conditions of that air quality permit.  There is not, however, any assurance that the air quality permit will be issued to Lincolnway Energy or that Lincolnway Energy will be issued a permit which will allow emissions to the full level that would otherwise be permitted under the 250 ton rules.  Lincolnway Energy may also be subject to higher ongoing compliance and operating costs under the new air quality permit.

The principal risks associated with the substantial governmental oversight and regulation of Lincolnway Energy and its business are discussed in Item 1A of this annual report, at "Lincolnway Energy's Operations Are Subject To Substantial and Extensive Governmental Laws and Regulations Which Restrict and Increase the Cost of Lincolnway Energy's Business".

The ethanol industry is also substantially supported by and dependent upon various federal and state programs, including various subsidies, tax exemptions and other forms of financial incentives.  Some of those programs and the principal risks associated with the governmental support of the ethanol industry are discussed in Item 1A of this annual report, under "Loss of Current Governmental Support and Incentives for Ethanol Would Reduce the Use of Ethanol and Materially and Adversely Affect Lincolnway Energy's Results of Operations and Financial Position".

 
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Employees

As of December 15, 2009, Lincolnway Energy had 45 employees.

Item 1A.
Risk Factors.

Any of the following risks could significantly and adversely affect Lincolnway Energy's prospects, business, results of operation and financial condition.  The following risks are not the only risks Lincolnway Energy is subject to or may face, and they are not intended to be set forth in order of materiality or significance.

Risks Relating to Lincolnway Energy and Its Business

The Economy And The Ethanol Industry Are Currently Subject To Generally Unfavorable Market, Credit, Profits And Other Circumstances  The United States and virtually all international economies are widely viewed as being in a recession that may continue well into 2010, and perhaps longer.  The United States and nearly all international economic circumstances include a critical and severe lack of available loans and credit to nearly all types of industries, significant unemployment, falling profits or losses in many industries, losses in the stock and other investment markets, individual and business failures and bankruptcies, significant deficit spending and "bailout" programs by governments, and falling business and consumer confidence.

The ethanol industry has been similarly affected.  For example, lenders and the credit markets have been generally unfavorable to the ethanol industry during the last year to two years, and the lack of available credit has caused the proposed construction or expansion of some ethanol plants to be cancelled or indefinitely delayed.  The ethanol industry also experienced decreasing profits over that time period, and many ethanol plants experienced losses over most or some of that time period, and may continue to do so throughout 2010.  It is also possible that more ethanol plants will be forced to seek bankruptcy protection in 2010.  VeraSun Energy Corp. and other ethanol companies have already sought bankruptcy protection, and the assets of some of the ethanol companies have been bought by buyers at a significant discount.  The prices of the publicly traded ethanol companies have declined by anywhere from 85-95% of their past highs, and some have traded below $1.00 at times.  The ethanol industry has also struggled with extremely volatile corn prices, and record high corn prices during parts of 2008 and 2009.  The record high corn prices, coupled with declining ethanol prices, has negatively impacted profits and, as noted, has caused some ethanol companies to declare bankruptcy or to halt construction or expansion projects and/or to delay the opening of recently completed ethanol plants.

There is also uncertainty in the economy arising from the health care debate, continuing terrorism concerns, both in the United States and internationally, and the uncertainties and difficulties in Pakistan, Afghanistan, Iran and other parts of the Middle East.

Lincolnway Energy is therefore operating in an uncertain and volatile economic and industry environment, and Lincolnway Energy incurred a loss of approximately $6.4 million for the fiscal year ending September 30, 2009.

 
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Lincolnway Energy Has A Limited Operating History.  Lincolnway Energy was organized in May, 2004, and its ethanol plant did not become operational until May 22, 2006.  Lincolnway Energy therefore still has a somewhat limited business, operating and financial history.  Lincolnway Energy is in an expanding and evolving industry where supply and demand and other industry and market factors and occurrences can change materially in a short amount of time.  The ethanol industry is also currently facing many difficult market issues, as noted above.  Lincolnway Energy may therefore not always be able to achieve its purposes or objectives.

Lincolnway Energy's Managers And Officers Do Not Have Substantial Experience With An Ethanol Plant Or In The Ethanol Industry.  The board and the officers of Lincolnway Energy do not have any significant or material experience with an ethanol plant or the ethanol industry, other than through their positions with Lincolnway Energy.  Lincolnway Energy has one ethanol plant that did not commence operations until May 22, 2006.  The managers and officers therefore do not have significant or material experience in, or knowledge of, the operation of an ethanol plant or in or of the ethanol industry, and in particular during difficult economic and market circumstances such as those prevailing at the time of the preparation of this annual report.

Lincolnway Energy Is Heavily Dependent On A Management Team And Certain Suppliers And Service Providers, But Could Lose Any Of Their Services At Any Time.  Lincolnway Energy is heavily dependent upon its core management team of its president and chief executive officer, chief financial officer, plant manager, commodities manager and controller, as well as on the companies which provide coal and corn to Lincolnway Energy and the companies which market Lincolnway Energy's ethanol and distiller's grains.  If any of those management team members or companies terminate their services or for any reason cease to provide services to Lincolnway Energy, Lincolnway Energy's business and operations could be adversely affected in a sudden and material way.  The services could be lost for reasons outside of anyone's control, such as death or disability.  The marketing companies may also be heavily dependent upon one or more key employees or other relationships, and the loss of any of those employees or relationships by a company could adversely affect the company's ability to continue to provide timely and quality services to Lincolnway Energy.

Lincolnway Energy's Ethanol Plant Has Only Been Operating Since May 22, 2006.  Lincolnway Energy's ethanol plant has only been operating since May 22, 2006. Lincolnway Energy may still discover defects or deficiencies in the ethanol plant.  For example, Lincolnway Energy is currently subject to regulatory proceedings with the Iowa Environmental Protection Commission and the Iowa Attorney General regarding alleged water and air emissions violations.  Any defects or deficiencies could cause production and other delays as well as substantial costs and expenses.

Lincolnway Energy Is Subject To Risk Because Its Ethanol Plant Utilizes Coal.  The primary energy source for Lincolnway Energy's ethanol plant is coal.  The use of coal is subject to numerous federal and state regulations, including regarding permissible emissions levels.

 
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As noted in Item 3 of this annual report, Lincolnway Energy is currently subject to proceedings with the Iowa Environmental Protection Commission and the Iowa Attorney General concerning, among other things, air permitting, emission limit exceedences, stack testing, monitoring and reporting.  Lincolnway Energy is hopeful that it will be able to reach a settlement regarding the allegations, but there is no assurance that they will be settled, and Lincolnway Energy cannot definitely predict at this time the result of any settlement or other proceedings that may arise out of the allegations.

Lincolnway Energy's ability to comply with the emissions and other requirements arising from its use of coal will depend to a degree on the type and quality of coal that is provided to Lincolnway Energy by its coal supplier.  If the coal does not meet the content and quality standards anticipated by Lincolnway Energy, Lincolnway Energy may not be able to meet its emissions and other regulatory and permit conditions and requirements.

As global warming and climate change issues become more prevalent and accepted, there will likely be increased governmental and public sentiment for more regulation of the use of coal as a source of energy.  Coal is generally viewed unfavorably in any "carbon footprint" type analysis in any event, but may be viewed even more unfavorably when used by an ethanol plant because some experts and regulatory agencies are taking the position that the ethanol industry in general also performs poorly in any carbon footprint and/or land use type analysis.  One result of those types of analysis will likely be stricter emissions requirements, which could lead to the need for capital expenditures in order to meet those requirements and higher ongoing compliance and operating costs.  Those expenditures and costs could be material, and adversely affect Lincolnway Energy's results of operation and business.

Lincolnway Energy believes there will be increased regulatory requirements for coal at some point in the future.

The use, storage and handling of coal also creates risks related to dust explosions and fire.  Although Lincolnway Energy will take precautions to try to avoid those types of incidents, there is no assurance that those precautions will be successful in every circumstance.

The use of coal also generates fly ash, and Lincolnway Energy may face economic, logistic and environmental issues and difficulties in disposing of its fly ash.

Lincolnway Energy currently obtains all of its coal from one coal supplier.  If the agreement is terminated or if that supplier fails to perform for any reason, Lincolnway Energy might face an interruption in the supply of coal and have to seek an alternate supply source.  Lincolnway Energy does not have any agreement with any alternative suppliers at this time. As with natural gas and other energy sources, coal supplies can be subject to interruption by weather, strikes, transportation, and production problems that can cause supply interruptions or shortages.  Lincolnway Energy has coal storage for approximately 6 days of continuous ethanol production, and an interruption in the supply of coal beyond that period could cause Lincolnway Energy to halt or discontinue the production of ethanol, which would damage Lincolnway Energy's ability to generate revenues.

 
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Lincolnway Energy May Not Be Successful In Converting To Another Fuel Source For Its Plant, And Even If It Is Successful, There Will Be Other Risks Associated With Other Fuel Sources.  As discussed in Item 7 of this annual report, Lincolnway Energy is considering the possibility of changing the energy source for its plant from coal to another source or sources, such as wood waste, agricultural residues  and/or construction and demolition waste.  There is not, however, any assurance that Lincolnway Energy will be successful in converting its plant from coal to another energy source because the conversion involves various material considerations and issues, including regulatory, technological and financial considerations and issues.  You therefore should not assume that Lincolnway Energy will be able to convert its plant to another energy source, or on economical terms.

Even if Lincolnway Energy determines that it is technologically and economically feasible to convert its plant to another energy source, and is able to successfully implement the conversion, Lincolnway Energy will still face regulatory and other risks related to another energy source.  For example, there will still be air permit and emission limits requirements and issues that will need to be met by Lincolnway Energy.  As another example, Lincolnway Energy will need to be able to secure adequate sources of supply of the other energy source at an economical price, and from reputable third parties.  Some of the other possible energy sources, such as woodwastes, may vary in availability from time to time due to various factors, such as the economic circumstances of the industry in question.  For example, the availability of woodwaste from the construction industry will decline when the construction industry is struggling, such as was the case at the time of the preparation of this annual report.  Some of these other risks are not as equally applicable to coal.

Lincolnway Energy may also experience down time at its plant as part of any conversion of the plant from coal to another energy source.

Lincolnway Energy's Business Is Not Diversified Because It Is Limited To The Operation Of A Single Ethanol Plant In The Midwest.  Lincolnway Energy's business is limited to the ownership and operation of a single ethanol plant; although it is possible that Lincolnway Energy may attempt to own and operate other ethanol plants at some point in the future.  The products of the ethanol plant are limited to ethanol, distiller's grains and corn oil, and the ethanol is limited to use as a fuel additive, as opposed to industrial and food and beverage ethanol.  Lincolnway Energy is not, therefore, a diversified business.

Lincolnway Energy's plant is located in Story County, Iowa.  Lincolnway Energy contemplates that if it ever owns or operates any additional ethanol plants, the plants will also be located in the Midwest.  The geographic location of Lincolnway Energy's business may therefore be limited to Iowa or, perhaps, the Midwest.  Lincolnway Energy is therefore subject to any adverse economic conditions or occurrences which may be particular to the Midwest.  Lincolnway Energy's location in the Midwest may also lower Lincolnway Energy's potential customer base given, among other things, the logistics and cost to transport ethanol and distiller's grains to other regions, and in particular if ethanol plants are developed in other areas of the country where Lincolnway Energy's ethanol and distiller's grains are currently shipped.

 
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If Lincolnway Energy Ever Expands Or Attempts To Convert Its Plant To Another Fuel Source, It Will Be Subject To The Risks Inherent In The Development And Construction Process.  If Lincolnway Energy ever determines to expand its existing ethanol plant or to pursue the construction of an additional ethanol plant, or to convert its plant to a fuel source other than coal, Lincolnway Energy will be subject to the numerous material risks and uncertainties inherent in the development and construction process.  For example, it may be difficult to identify a suitable location for another ethanol plant because many favorable locations have already been acquired by other ethanol plants or ethanol plant developers.  Lincolnway Energy also believes that it could be difficult to obtain the necessary financing, at least at this time, given the generally unfavorable debt and equity financing market for the ethanol industry at the time of the preparation of this annual report and the Iowa regulatory proceedings to which Lincolnway Energy was subject at the time of the preparation of this annual report.  Any expansion of Lincolnway Energy's plant or conversion of the plant to another fuel source may also involve some down time for the plant, which would in turn result in decreased ethanol and distiller's grain production.

Lincolnway Energy May Make Other Investments Or Engage In Other Business.  Lincolnway Energy's board has the authority to cause Lincolnway Energy to construct or acquire or to invest in other ethanol plants or to make other investments or to engage in other businesses.  The scope and nature of Lincolnway Energy's business could therefore change significantly, which could expose Lincolnway Energy to numerous other risks and uncertainties.  Lincolnway Energy's business may not always be limited only to owning and operating its current ethanol plant.

Lincolnway Energy Is Leveraged And Has Substantial Debt And Debt Service Requirements.  Lincolnway Energy financed the construction and start-up of its ethanol plant with significant debt, and Lincolnway Energy will have loans outstanding from time to time under its operating and working lines of credit.

The use of leverage creates risks.  For example, if Lincolnway Energy is unable to generate profits and cash flow to service its substantial debt and its ongoing operations and working capital needs, Lincolnway Energy may be forced to reduce or delay capital expenditures or any expansion plans, sell assets or operations, obtain additional loans or capital or attempt to restructure its loans and other debt.  Lincolnway Energy also may not be able to renew, extend or replace any existing loans or financing arrangements Lincolnway Energy may have in place from time to time.  If any of those events occur, Lincolnway Energy will need to attempt to obtain additional financing through the sale of additional units or debt in Lincolnway Energy or through additional loans from other lenders.  Lincolnway Energy believes, however, that the debt and equity financing market is currently adverse to the ethanol industry in general.  Any additional financing may lower returns and adversely affect Lincolnway Energy's cash flow, business and operations.  If Lincolnway Energy is unable to obtain financing when needed, Lincolnway Energy may be forced to liquidate or otherwise sell some or all of its assets or operations.

 
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Lincolnway Energy will also need to comply with the numerous restrictions and covenants that are included as part of Lincolnway Energy's credit and loan agreements.  The restrictions and covenants include prohibitions or restrictions on incurring additional debt, granting additional security interests or liens, acquiring additional assets, mergers, the issuance of additional units, and making distributions to Lincolnway Energy's members.  The credit and loan agreements also require Lincolnway Energy to maintain various financial ratios and other similar financial covenants.  Those restrictions and requirements may limit Lincolnway Energy's flexibility in planning for, or reacting to, competition or changes in the ethanol industry and Lincolnway Energy's ability to pursue other perceived business opportunities.

Lincolnway Energy's loans are secured by liens on all of Lincolnway Energy's assets, and if Lincolnway Energy breaches any of its agreements with its lenders, the lenders will be able to foreclose on Lincolnway Energy's assets.

Lincolnway Energy's debt and leverage may place it at a competitive disadvantage with competitors which have less debt or greater financial resources, and may also increase Lincolnway Energy's vulnerability to adverse economic or industry conditions or occurrences.

Any increases in Lincolnway Energy's debt will increase the risks discussed above.

Lincolnway Energy's Financing Costs Will Rise If Interest Rates Increase.  Lincolnway Energy will be adversely affected by any increase in interest rates or other lending costs because Lincolnway Energy has substantial debt.  Although difficult to predict and outside of Lincolnway Energy's control, it is likely that there will be increases in interest rates, at least over the longer term.

Lincolnway Energy's Potential Success Is Almost Exclusively Dependent On Ethanol Sales, And The Price Of Ethanol And Gasoline Can Vary Greatly And Are Beyond Lincolnway Energy's Control.  Although Lincolnway Energy's ethanol plant produces distiller's grains and corn oil, ethanol is the primary and material source of revenue for Lincolnway Energy, having generated approximately 83% and 80% of Lincolnway Energy's total revenues for the fiscal years ended September 30, 2008 and 2009, respectively.

Ethanol prices can vary significantly over both short and long term periods, and it is difficult to accurately predict changes in ethanol prices or in ethanol trends.  For example, Chicago Board of Trade price of ethanol reached $2.09 on October 1, 2008 but fell to $1.47 on July 10, 2009.

The price of gasoline also varies significantly over both short and long term periods.  The price for ethanol has generally had some correlation to the price of gasoline, so low gasoline prices or reductions in gasoline prices will also generally reduce ethanol prices and profitability.  Gasoline prices fell significantly during the fourth quarter of 2008 from the increasing and record level prices that had existed from approximately late June 2006 through October 2008.

The recent record prices for gasoline were causing businesses and consumers to actively seek ways to lower or reduce their gasoline consumption.  For example, there is increased attention to requiring the auto industry to produce cars with higher fuel efficiency.  Higher gasoline prices also increase the focus and attention on the research and development of alternative energy options, such as fuel cells.  The existence of higher gasoline prices can therefore also adversely affect gasoline and ethanol prices and the profitability of ethanol plants.

 
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Lincolnway Energy's inability to foresee or accurately predict changes in the supply or prices of ethanol or gasoline will adversely affect Lincolnway Energy's business.

If ethanol prices decline to the point where it is unprofitable to produce ethanol and remain at that level, Lincolnway Energy could be required to suspend operations until the price increases to the level where it is once again economical or profitable to produce and market the ethanol.  Any suspension of operations would have a material adverse effect on Lincolnway Energy's business, results of operations and financial condition.  Some ethanol plants have delayed opening or have curtailed production due to the unfavorable market conditions which were in existence over the two year period preceding the date of this annual report.

Even if ethanol prices are generally favorable, Lincolnway Energy still may not be able to sell all of its ethanol, or at favorable prices.

The Increase In Supplies Of Ethanol May Adversely Affect Ethanol And Ethanol Byproduct Prices.  There has been a significant increase in ethanol production since 2000 and in particular over the past two to three years.  Lincolnway Energy anticipates that there will continue to be material increases in ethanol production over the long term, both in the United States and internationally.

The increasing ethanol production will at times lead or contribute to lower ethanol prices and lower prices for distiller's grains due to the increased supplies of those products in general.  The increasing ethanol production may also lead to there being excess ethanol and/or distiller's grains production at some point, which would also lower ethanol and distiller's grains prices.

Excess ethanol production capacity could also result from decreases in demand for ethanol, which could result from a number of factors, such as regulatory developments, reduced gasoline consumption in the United States or advancements in alternatives to gasoline or in other gasoline additives.

Purchases Of Ethanol Blended Gasoline Will Decline If The Price Exceeds The Price For Regular Unleaded Gasoline.  The price of ethanol blended gas at the pump has at times exceeded the price of regular unleaded gasoline.  Consumers' purchases of gasoline are price driven, so it is likely that the use of ethanol blended gasoline will be reduced during periods where the price of ethanol blended gasoline exceeds the price of regular unleaded gasoline.

Continued Growth In The Ethanol Industry Depends On Changes To And Expansion Of Related Infrastructure Which May Not Occur On A Timely Basis, If At All.  Substantial development and/or expansion of infrastructure will be required by persons outside of Lincolnway Energy's control for the ethanol industry to be able to continue to grow.  Some areas potentially requiring development or expansion include:

 
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·
Rail and rail car capacity;
 
·
Storage facilities for ethanol;
 
·
Truck fleets capable of transporting ethanol within localized markets;
 
·
Pipelines for the transportation of ethanol;
 
·
Refining and blending facilities to handle ethanol;
 
·
Service stations equipped to handle higher ethanol blends, such as E20, E30 and E85 fuels; and
 
·
Flexible fuel vehicles which are capable of using fuel with significantly higher ethanol blend than 10%.

Some experts believe that for ethanol use to grow significantly over both the near and longer term, there must be increased use of ethanol blends in excess of 10%, such as E20, E30 and, in particular, E85.  As noted above, there are various areas that need substantial development and expansion for that to occur, including expanded production of flex fuel vehicles and the expanded use of pumps that can utilize higher ethanol blends, such as blender pumps.  A blender pump allows a driver to fill his or her vehicle with any blend of ethanol from 0% to 85% depending on the type of vehicle they drive.  Brazil has blender pumps at many of its refueling locations.  There will also need to be changes in the public's views and perceptions of ethanol in order for there to be increased use of higher blends of ethanol.

The substantial investments required for these infrastructure developments may not be made or they may not be made on a timely basis, in particular given the difficult economic and credit circumstances that were prevailing at the time of the preparation of this annual report.  Any failure or delay in making the developments to or expansion of the infrastructure could hurt the demand or prices for ethanol, impede Lincolnway Energy's delivery of ethanol, impose additional costs on Lincolnway Energy or otherwise have a material adverse effect on Lincolnway Energy's results of operations and financial condition.

Any Significant Dependence On Any Particular Customer Or Supplier Could Have Adverse Effects On Lincolnway Energy In The Event Of The Loss Of Any Such Customer Or Supplier.  If Lincolnway Energy is overly dependent on any particular customer or group of customers for the sale of its ethanol or distiller's grains or on any supplier or group of suppliers for Lincolnway Energy's corn, coal or other inputs, the loss of any such customer or supplier could have a material adverse effect on Lincolnway Energy and its business.  Lincolnway Energy is currently heavily dependent upon a single supplier for obtaining a significant portion of its corn needs and upon another supplier for all of its coal needs.  Lincolnway Energy also currently utilizes a single company to market all of Lincolnway Energy's ethanol and another company to market all of its distiller's grains.  The loss of any of those relationships could have material adverse effects on Lincolnway Energy.

 
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Lincolnway Energy's Results Of Operations, Financial Position And Business Outlook Will Likely Fluctuate Substantially Because Lincolnway Energy's Business Is Highly Dependent On Commodity Prices, Which Are Subject To Significant Volatility And Uncertainty, And On The Availability Of Raw Materials Supplies.  Lincolnway Energy's results of operations will be substantially dependent on commodity prices, especially prices for corn, coal, ethanol and unleaded gasoline.  The prices of these commodities are volatile and beyond Lincolnway Energy's control.  For example, the price of corn has been extremely volatile during 2008 and parts of 2009.  As a result of the volatility of the prices for these commodities, Lincolnway Energy's results will likely fluctuate substantially over time.  Lincolnway Energy will experience periods during which the prices for ethanol and distiller's grains decline and the costs of Lincolnway Energy's raw materials increase, which will result in lower profits or operating losses and which will adversely affect Lincolnway Energy's financial condition.  For example, the higher corn prices and lower ethanol prices that generally prevailed from October, 2008 to June, 2009 led to losses to Lincolnway Energy over that period.  Lincolnway Energy may attempt to offset a portion of the effects of such fluctuations by entering into forward contracts to supply ethanol or to purchase corn, coal or other items or by engaging in hedging and other futures related activities, but those activities also involve substantial risks and may be ineffective to mitigate price fluctuations and may in fact lead to substantial losses.

The Supply And Costs Of The Inputs Required By Lincolnway Energy Can Vary Greatly And Adversely Affect Lincolnway Energy's Profits And Financial Position.  Lincolnway Energy's ethanol plant produces ethanol from corn.  Lincolnway Energy estimates that corn costs will, on the average, make up approximately 69% of Lincolnway Energy's total annual operating costs, but the percentage could be higher dependent on the price of corn from time to time.  Accordingly, rising corn prices will lower profit margins, and, at certain levels, corn prices would make ethanol uneconomical to produce and to use in the fuel markets.  Lincolnway Energy generally will be unable to pass along increased corn costs to Lincolnway Energy's customers.  Corn prices began to rise significantly in approximately July, 2006 (when the cash corn price in Lincolnway Energy's local market area was approximately $2.09 per bushel) and generally continued to rise until mid-year 2008 (when the cash corn price in Lincolnway Energy's local market area reached approximately $7.15 per bushel).  The cash corn price in Lincolnway Energy's local market area was approximately $3.85 per bushel as of November 30, 2009.  The corn price on the Chicago Board of Trade daily futures ranged from a low of $3.06 per bushel to a high of $4.84 per bushel during Lincolnway Energy's fiscal year ended September 30, 2009.

The price of corn is influenced by many factors, including general economic, market and regulatory factors, such as government policies and subsidies with respect to agriculture and international trade, and global and local demand and supply.  The expansion in the ethanol industry has also affected the corn markets and the supply of corn, and has contributed to higher corn prices.  Lincolnway Energy anticipates that the continuing expansion of the ethanol industry will continue to significantly increase the demand for corn, which may result in higher corn prices and, possibly, shortages of corn from time to time.

The price for corn in the market area encompassing Lincolnway Energy's ethanol plant could be higher than the corn price payable in other markets, and in particular if another ethanol plant is constructed in the same market area or another ethanol plant attempts to purchase corn in Lincolnway Energy's market area.  Lincolnway Energy will also compete for corn with the livestock producers and elevators located within Lincolnway Energy's market area.

 
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The price of corn is also influenced by the supply of corn, which is subject to many risks which are beyond anyone's control, such as farmer planting decisions, imports, weather and disease.

Lincolnway Energy will have difficulty from time to time in obtaining corn on economical terms, due to increasing prices or supply shortages.  Lincolnway Energy may not always have short-term or long-term agreements or positions in place for the purchase of all of its corn needs, and Lincolnway Energy will at times need to buy all, or at least some, of Lincolnway Energy's corn needs on the open market.  There may not be adequate supplies of corn available on the open market or at prices which are favorable or acceptable to Lincolnway Energy.

If Lincolnway Energy is unable to obtain corn or to obtain corn at favorable prices, Lincolnway Energy could be required to suspend operations until corn became available or at economical terms, as some other ethanol plants did during 2008 and parts of 2009.  Any suspension of operations would have a material adverse effect on Lincolnway Energy's business, results of operations and financial condition.

The volatility in the corn markets and record high corn prices is one factor that has caused some ethanol companies to incur significant losses and, in some cases, to seek bankruptcy protection.

Lincolnway Energy's gross margin will depend significantly on the spread between ethanol and corn prices, and in particular the spread (sometimes referred to as the crush spread) between the price of a gallon of ethanol and the price for the amount of corn required to produce a gallon of ethanol.  The price of ethanol and corn fluctuates frequently and widely, however, so any favorable spread between ethanol and corn prices which may exist from time to time cannot be relied upon as indicative of the future.

The supply and cost of other inputs needed by Lincolnway Energy can also vary greatly, such as coal, electric and other energy costs.  Lincolnway Energy's ethanol plant utilizes coal as its primary energy source, and Lincolnway Energy estimates that coal costs will, on average, make up approximately 5% of Lincolnway Energy's annual total operating costs.  The prices for and availability of coal are subject to numerous market conditions and factors which are beyond Lincolnway Energy's control.  Significant disruptions in the supply of coal would impair Lincolnway Energy's ability to produce ethanol, and increases in coal prices or changes in Lincolnway Energy's coal costs relative to the costs paid by Lincolnway Energy's competitors would adversely affect Lincolnway Energy's competitiveness and results of operation and financial position.

Lincolnway Energy is currently reliant upon its contract with a single coal supplier for the supply of all of Lincolnway Energy's coal needs.  The contract will terminate by its terms on January 1, 2013, and there is no assurance that Lincolnway Energy will be able to enter into a similar agreement for the supply of coal after that time.  Lincolnway Energy believes its current contract for coal provides it with some protection regarding extreme changes in the price of coal, but there is no assurance that Lincolnway Energy will be able to enter into another contract that provides those same protections to Lincolnway Energy.

 
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There may also be seasonal fluctuations experienced by Lincolnway Energy in the price of corn and coal and the price of ethanol.  For example, the spot price of corn has historically tended to rise during the spring planting season in May and June and to decrease during the fall harvest in October and November.  The price of gasoline has tended to rise during the summer and winter months.  Lincolnway Energy does not, however, know if the historical seasonal fluctuations will continue or will affect Lincolnway Energy's results over time.

Transportation costs can also be a factor in the price for ethanol because ethanol is currently shipped by truck or by rail, and not by pipeline, and because ethanol generally needs to be shipped long distances to a terminal where the ethanol can be blended with gasoline.  The recent high fuel prices resulted in greatly increased transportation costs.

Lincolnway Energy's inability to foresee or accurately predict changes in the supply or prices of corn, coal and other inputs, or the inability to pass on any increased costs to Lincolnway Energy's customers, will adversely affect Lincolnway Energy's business, results of operation and financial position.

Lincolnway Energy's inability to obtain, or any delays in obtaining, corn, coal or other inputs in times of shortages or high demand will also adversely affect Lincolnway Energy's business, results of operation and financial position.

Market Prices And Futures Prices For Ethanol And For Corn, Coal And Other Inputs Are Very Difficult To Predict Because They Are Speculative And Volatile.  The agricultural economy and the economy in general, and market prices and futures prices for oil, gasoline, ethanol, distiller's grains, corn oil, corn, coal and other inputs needed for Lincolnway Energy's ethanol operation, are all highly volatile and are influenced by many varying factors.  It is not possible to identify all possibly relevant factors, but some of the factors include the following and rumors or speculation about the following:

 
·
Changing supply and demand relationships and trade deficit issues;
 
·
Weather and other environmental conditions;
 
·
Acts of God, including drought and storms;
 
·
Agricultural, fiscal, monetary, economic, trade and exchange control programs and policies of governments;
 
·
International, national, regional and local political and economic events and policies;
 
·
Changes in fuel and energy costs or in interest rates or rates of inflation;
 
·
Controversies or disputes about the use of biotechnology in crops, or errors or adverse reactions caused by the use of biotechnology in crops, such as the past issues with Starlink corn;
 
·
Infestations or diseases in crops;
 
·
Acts of terrorism or war, both nationally and internationally, including in Afghanistan, Pakistan, India and the Middle East;
 
·
Illegal or improper activities or scandals by participants in the markets, such as those that have previously occurred in the accounting industry, the stock and mutual fund industry and the insurance industry; and

 
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·
The general emotions and psychology of businesses, consumers and of the market place in general, which at times can be totally unrelated to actual economic or market conditions or other more tangible factors.

The internet, e-mail, television and other forms of communication allow rumors and speculation to be quickly and widely circulated, which can have immediate and substantial effects on the markets, even if the rumor or speculation is later found to be incorrect or unjustified.

It is very likely that there will be further acts of terrorism in the United States and abroad, including the possibility of acts aimed at disrupting the economy or the markets or various industries or sectors within the markets.  For example, there has been speculation about possible acts of terrorism aimed at the energy, agricultural and food industries.  Any speculation or rumors about, or actual acts of, terrorism could cause immediate and substantial reactions in a wide range of the markets and industries and in the economy in general.  The continued uncertainty in Afghanistan, Pakistan and the Middle East also continues to create uncertainties and could cause adverse reactions in the oil and energy markets and in the markets and economy in general.

None of the above factors or occurrences can be controlled by Lincolnway Energy, and it will be impossible to always accurately predict or identify which factors are relevant or are likely to occur.

Also, even if Lincolnway Energy were somehow able to have fully current and correct information as to all factors, prices would still not always react as predicted or as would seem likely given the information.  For example, there have been many occasions where the movements of the futures markets have seemed totally unrelated to actual supply and demand and other more tangible factors.  The latter fact may be caused, in part, because of the substantial speculative trading that occurs in the futures markets.

The Use Of The Futures Markets By Lincolnway Energy Could Be Unsuccessful And Result In Substantial Losses.  Lincolnway Energy will likely attempt to minimize the effects of the volatility of corn, coal, ethanol, distiller's grains and other prices by entering into forward pricing contracts and taking positions in the futures markets.  The primary intent of those positions will be to attempt to protect the supply of, and the price at which Lincolnway Energy can buy, corn, coal or other inputs and the price at which Lincolnway Energy can sell its ethanol, but not all of the positions may be able to be properly categorized as being for hedging purposes.  Any attempt by Lincolnway Energy to use the futures markets, whether in the form of hedging strategies or for more speculative trading purposes, may be unsuccessful, and in fact could result in substantial losses because price movements in futures contracts and options are highly volatile and speculative, and are influenced by many factors which are beyond the control of anyone.  Some of those factors include those noted above in "Market Prices And Futures Prices For Ethanol And For Corn, Coal And Other Inputs Are Very Difficult To Predict Because They Are Speculative And Volatile."  Lincolnway Energy will likely vary the amount of forward pricing, hedging and other risk mitigation strategies Lincolnway Energy may undertake, and Lincolnway Energy may at times choose not to engage in any such transactions.  As a result, Lincolnway Energy's results of operations and financial position may be adversely affected by increases in the price of corn or coal or decreases in the price of ethanol or unleaded gasoline.

 
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Futures markets will also sometimes be illiquid, and Lincolnway Energy may not be able to execute a buy or sell order at the desired price, or to close out an open position in a timely manner.  The inability to close out an open position in a timely manner may result in substantial losses to Lincolnway Energy.  Lincolnway Energy's potential losses and liabilities for any futures or options positions are not limited to margin amounts or to the amount held in or the value of Lincolnway Energy's trading account, and in the event of a deficiency in Lincolnway Energy's trading account due to a margin call made to the trading account, a loss exceeding the value of the trading account, or otherwise, Lincolnway Energy will be responsible for the full amount of the deficiency.  Given the volatility of futures trading, margin calls can occur frequently and the amount of a margin call can be significant.

Losses from trades in the futures markets, coupled with the volatility in the corn markets and record high corn prices, are factors that have caused some ethanol companies to incur significant losses and, in some cases, to seek bankruptcy protection.

There Are Many Factors Important To The Success Of An Ethanol Plant And The Operation Of An Ethanol Plant Which Are Beyond The Control Of Lincolnway Energy.  Lincolnway Energy's ability to successfully operate its ethanol plant and to market the ethanol, distiller's grains and corn oil produced at the plant are subject to numerous factors and risks which are beyond the control of Lincolnway Energy.  Those factors include the following:

 
·
The ability to retain qualified employees and other personnel, and on favorable terms;
 
·
Labor disputes or other employee issues;
 
·
Increases in the price of corn, coal, electricity, labor, gas or fuel, and in truck and rail transportation costs;
 
·
Railcar and truck shortages or strikes within those industries;
 
·
The price of oil and gas;
 
·
The demand for and consumption of petroleum products generally and ethanol specifically;
 
·
Environmental and other regulations which impact both the demand for ethanol and the operation and cost of operation of the ethanol plant;
 
·
Governmental regulations and incentives; and
 
·
General market fluctuations and economic conditions.

The operation of an ethanol plant is subject to ongoing compliance with all applicable governmental regulations, such as those governing pollution controls, ethanol production, grain purchasing and other matters.  Other regulations will likely arise in the future regarding the operation of ethanol plants, including the possibility of required additional permits and licenses and increased environmental, emissions or wastewater requirements or other regulatory compliance.  There could be difficulty in obtaining any such additional permits or licenses or in meeting any additional environmental, emissions, wastewater or other compliance requirements.

 
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Lincolnway Energy's Operations Are Subject To Substantial And Extensive Governmental Laws And Regulations Which Restrict And Increase The Costs Of Lincolnway Energy's Business.  Lincolnway Energy's ethanol operations are subject to substantial and extensive governmental laws and regulations, including those relating to the discharge of materials into the air, water or ground, and the generation, storage, handling, use, transportation and disposal of hazardous materials.  Some of those laws and regulations require Lincolnway Energy to maintain various permits and other approvals in order to continue ongoing operations.  Lincolnway Energy will need to meet the various requirements and conditions necessary to the issuance and maintenance of those permits and approvals.  The requirements and conditions may include that the ethanol plant facilities and operations meet various specifications regarding air quality, discharge, water and waste treatment, and various other operational matters.  Lincolnway Energy's compliance with all necessary permits, approvals and laws and regulations will increase Lincolnway Energy's costs and expenses.  Lincolnway Energy's failure to comply with those requirements or to maintain those permits and approvals may result in fines or penalties, the loss of the right to continue operations or claims by third parties.

For example, as discussed in Item 3 of this annual report, Lincolnway Energy was subject to regulatory proceedings by the Iowa Department of Natural Resources and the Iowa Attorney General at the time of the preparation of this annual report concerning various alleged environmental law violations relating to wastewater releases, exceedences of iron and total suspended solid limits in Lincolnway Energy's NPDES wastewater discharge permit, air permitting, emissions exceedences, stack testing, monitoring and reporting.  Lincolnway Energy hopes to reach a settlement on all of the alleged violations, but Lincolnway Energy cannot definitely predict at this time the outcome of any settlement or other proceedings that may arise out of the allegations.

Lincolnway Energy also anticipates that there will be changes in the approval requirements and other laws and regulations over time, and that those changes will increase the regulatory oversight and costs and expenses of Lincolnway Energy.  For example, the regulation of the environment, including the use of water, wastewater, storm water and air emissions, is a constantly changing area of the law, and it is likely that more stringent federal or state environmental laws, rules or regulations, or interpretation or enforcement of existing laws, rules or regulations, could be adopted which would require Lincolnway Energy to make substantial capital expenditures and/or increase Lincolnway Energy's operating costs and expenses.  New laws, rules and regulations may be advanced based upon claims related to global warming and climate change.  It is also possible that federal or state environmental laws, rules or regulations could be adopted which have an adverse effect on the use of ethanol, such as changes in the regulations regarding the required oxygen content of automobile fumes.  The new laws, rules or regulations could also arise or become necessary because of currently unknown conditions or problems arising from the production or use of ethanol, similar to what have occurred with methyl tertiary-butyl ether (MTBE) because of the adverse environmental and health issues now known to be caused by MTBE.  There has also been increased attention by the Environmental Protection Agency and other regulators to the wastewater and air emissions released as a result of the process of producing ethanol, and it is possible that additional environmental or other regulatory requirements or conditions may be applied to the wastewater and air emissions released as part of the process of producing ethanol.

 
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Lincolnway Energy believes that increased regulation of plants powered by coal, such as Lincolnway Energy's ethanol plant, is particularly likely.  Lincolnway Energy also foresees the possibility of increased regulation of ethanol plants arising from carbon footprint and land use change type analysis by regulators.  For example, as required by the 2007 energy bill, the U.S. Environmental Protection Agency is establishing a methodology for determining the life cycle greenhouse gas emissions from the production of biofuels, including life cycle greenhouse gas emissions from indirect land use changes arising from the production of ethanol.

Lincolnway Energy May Become Subject To Various Environmental And Health And Safety And Property Damage Type Claims And Liabilities.  The nature of Lincolnway Energy's operations will expose it to the risk of environmental and health and safety claims and property damage claims.  For example, if any of Lincolnway Energy's operations are found to have polluted the air or surface water or ground water, such as through an ethanol spill, Lincolnway Energy could become liable for substantial investigation, clean-up and remediation costs, both for its own property and for the property of others which may have been affected by the pollution or spill.  Those types of claims could also be made against Lincolnway Energy based upon the acts or omissions of other persons, including persons transporting or handling ethanol or who are responsible for any locations where Lincolnway Energy disposes of any hazardous substances.  Environmental and property damages claims and issues can also arise due to spills, losses or other occurrences arising from events outside of Lincolnway Energy's control and which are possible in Lincolnway Energy's business, such as fire, explosions or blowouts.  A serious environmental violation or repeated environmental violation could result in Lincolnway Energy being unable to construct or operate any additional ethanol plants and the loss of defenses to nuisance suits.  Lincolnway Energy may also be unable to obtain financing or necessary permits if Lincolnway Energy is subject to any pending administrative or legal action regarding environmental matters.  Any of those types of events could have a material adverse effect on Lincolnway Energy's financial condition and future prospects.

There Is Continuing, And In Some Cases Growing, Negative Press And Public Sentiment Against The Ethanol Industry Which Could Lead To Reduced Governmental And Public Support For The Use Of Ethanol.  There continues to be negative press and public sentiment against the ethanol industry based upon claims that the use of corn to produce ethanol drives up grain prices, which hurts livestock farmers and also consumers due to increased food prices.  The claims also include environmental type allegations, including that burning ethanol in gasoline causes air pollution and that increased corn acreage and ethanol production could strain water supplies and worsen pollution in rivers and streams.  The criticisms also now include that ethanol production is leading to land use changes, including the clearing of rain forests and other native lands for purposes of growing corn or other crops to be used for the production of ethanol or to replace land which is now used to produce crops for ethanol, which in turn releases carbon into the atmosphere that has been stored in the soil.  The continuing and growing criticism has come from, among others, environmental groups, the National Academy of Sciences, the American Lung Association and through the United Nations.

 
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The criticism of the ethanol industry could lead to reduced governmental supports for the industry and reduced public support and use of ethanol.  The current criticisms are based primarily on the production of ethanol from corn, and could accelerate the development of other economical sources for the production of ethanol.  Lincolnway Energy's plant can only produce ethanol from corn.

Loss Of Current Governmental Support And Incentives For Ethanol Would Reduce The Use Of Ethanol And Materially And Adversely Affect Lincolnway Energy's Results Of Operations And Financial Position.  There are various federal and state laws and regulations and programs which have lead to the increasing use of ethanol, including various subsidies, tax exemptions and other forms of financial incentives.  Some of the laws provide economic incentives to produce or use ethanol and some of the laws mandate the use of ethanol.  No guarantee can be given that any of those laws, regulations or programs will be continued, and the revocation or amendment of any one or more of those laws, regulations or programs could adversely affect the future use and price of ethanol in a material way.  Governmental support of the ethanol industry may decrease due to governmental budget issues.  The current governmental support of the ethanol industry may also decrease as the ethanol industry matures and advances, or in the event of any adverse environmental or other occurrences in the ethanol industry.

The actions of certain states, such as California and New York, with respect to ethanol supports and environmental matters have more effect on the ethanol industry than the actions of other states because states like California and New York have higher populations, which results in the use of greater numbers of gallons of ethanol and gas.  Any adverse actions by states such as California and New York could therefore have adverse effects on Lincolnway Energy and the ethanol industry.

As noted above, the biofuels industry has received substantial negative press as of late regarding the possible negative effects and side effects of ethanol production.  Any negative public sentiment could lead to decreases in governmental support of the ethanol industry.

The ethanol industry would be particularly negatively affected by any reductions in or loss of the renewable fuels standard mandates and any further reductions in the excise tax credit that is available to blenders and sellers of ethanol.  The credit was previously reduced from $.54 per gallon to $.51 per gallon, and was further reduced to $.45 per gallon on January 1, 2009.

Lincolnway Energy Currently Has No Expansion Plans And Any Expansion Plans That May Be Developed May Not Be Able To Be Implemented By Lincolnway Energy.  Although Lincolnway Energy may determine to expand its ethanol plant, or to construct or acquire additional ethanol plants in the future, Lincolnway Energy currently does not have any definite plans for any expansion of its existing ethanol plant or for the construction or acquisition of an additional ethanol plant.  Lincolnway Energy therefore may not ever be a company which has multiple ethanol plants or that will produce significant volumes of ethanol.

 
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Any expansion plans that may be developed by Lincolnway Energy may not be able to be implemented for numerous reasons.  For example, Lincolnway Energy will need to be able to identify, and to acquire on acceptable terms, suitable real estate in an area which already has, or can feasibly and economically develop, the natural gas, electric, water and other physical infrastructure necessary to support the plant and which also has both sufficient supplies of natural gas, electricity, water, corn and other inputs and adequate rail and other transportation access.  Given the number of existing ethanol plants, it is becoming increasingly more difficult to identify suitable locations for an ethanol plant.  As other examples, Lincolnway Energy might not be able to obtain the necessary debt or equity financing or the various lender and governmental approvals and permits that would be necessary in order to construct and operate new or expanded facilities.  Lincolnway Energy believes that the current equity and lending market is adverse to the ethanol industry.  The construction costs could also increase to levels that would make the expansion of Lincolnway Energy's existing plant or the construction of a new facility too expensive or unprofitable to operate.  There currently are a limited number of contractors with significant experience in building ethanol plants in the United States, so it may be difficult to retain a contractor on a timely basis or on acceptable financial or commercial terms.

Any expansion would also likely reduce Lincolnway Energy's earnings and profits for some period of time because of the significant costs and expenses that will be incurred in order to expand or to construct or acquire and start up an additional ethanol plant and operations and the working capital requirements and operating losses that will be incurred during the construction and start up period for the expanded or new ethanol plant.  The costs and expenses of any expansion plan would likely result in net losses to Lincolnway Energy during the expansion period.

The pursuit and implementation of any expansion plans through the acquisition of other ethanol plants would involve numerous risks, including possible dilution to existing members if the acquisition is financed by the issuance of units.  Other risks include difficulties in supporting and transitioning customers and suppliers of the target company, and the general integration of the new plant and related business into Lincolnway Energy's existing business and operations.

Interruptions In The Supply Of Water, Electricity, Coal Or Other Energy Sources Or Other Interruptions In Production Would Have An Adverse Effect On Lincolnway Energy's Ethanol Plant.  Interruptions in the supply of water, electricity, coal or other energy sources at Lincolnway Energy's ethanol plant would have a material adverse impact on operations, and could require Lincolnway Energy to halt production at the ethanol plant.

Interruptions in or the loss of the supply of water, electricity, coal or other energy sources could occur, for example, because of software or other computer problems at the ethanol plant or at the plants of the suppliers of the water, electricity, coal or other energy.  Lincolnway Energy's and any suppliers' use of its software and other computer systems will be subject to attack by computer hackers, and to failure or interruption through equipment failures, viruses, acts of God and other events beyond the control of Lincolnway Energy or a supplier.

 
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Lincolnway Energy's operations are also subject to significant interruption if its ethanol plant experiences a major accident or is damaged by severe weather or other natural disasters.  Lincolnway Energy's operations are also subject to labor disruptions and unscheduled down time, and other operational hazards inherent in the ethanol industry, such as equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents and natural disasters.  Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties against Lincolnway Energy.

Lincolnway Energy's business is dependent upon the continuing availability of railroads, railcars, truck fleets and other infrastructure necessary for the production, transportation and use of ethanol.  Any disruptions or interruptions in that infrastructure could have a material adverse effect on Lincolnway Energy.

Lincolnway Energy may not have insurance covering any of these types of matters or occurrences.  Any insurance Lincolnway Energy may have in place may not be adequate to fully cover the potential losses and hazards, and Lincolnway Energy may not be able to renew the insurance on commercially reasonable terms or at all.

Competition From Other Ethanol Producers Or Energy Sources Will Adversely Affect Lincolnway Energy And Could Reduce Lincolnway Energy's Profitability.  The ethanol industry is competitive and is rapidly becoming increasingly more competitive, in particular given the substantial new construction and expansion that has already occurred and that Lincolnway Energy believes may at some point again occur in the industry.  The competitors include not only regional farmer-owned entities, but also the major oil companies and other large companies.

The U.S. ethanol industry may also face increasing competition from international suppliers of ethanol.  International suppliers produce ethanol from corn and other sources, such as sugar cane.  Some international suppliers may have cost structures that are substantially lower than Lincolnway Energy's and other U.S. based ethanol producers.

Smaller competitors also pose a threat.  Farmer-owned cooperatives and independent companies consisting of groups of individual farmers and investors have been able to compete successfully in the ethanol industry.  These smaller competitors operate smaller facilities which do not affect the local price of corn grown in the proximity to the facility as much as larger facilities do, and some of the smaller competitors are farmer-owned and the farmer-owners either commit, or are incented by their ownership in the facility, to sell corn to the facility.

Any increase in domestic or foreign competition could cause Lincolnway Energy to have to reduce its prices and take other steps to compete effectively, which could adversely affect Lincolnway Energy's results of operations and financial position.

Many competitors will have greater production capacity, greater experience, more access to information and/or greater capital or other financial resources, any of which will make it difficult for Lincolnway Energy to compete with the competitor.  For example, greater ethanol production may allow a competitor to market its ethanol or distiller's grains at lower prices than Lincolnway Energy.  There may be acquisitions and consolidations in the ethanol industry, and those acquisitions and consolidations will likely lead to competitors with greater advantages over Lincolnway Energy.  A competitor may also offer other products or services that are not offered by Lincolnway Energy, which may give the competitor an additional advantage over Lincolnway Energy.

 
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An ethanol plant utilizing corn to produce ethanol will also experience competition from other plants which produce ethanol from other products.   For example, ethanol can be produced from corn stover, rice straw, wheat, cheese whey, potatoes, wheat, oats, barley straw, milo, sorghum, sugar bogasse, rice hulls, various wastes (such as wood and vegetation) and cellulose based biomass.  Various federal incentives have been enacted to encourage and support the development of cellulosic based ethanol production, and the Energy Independence and Security Act of 2007 provides that 16 billion gallons of the 36 billion gallon renewable fuels mandate for 2022 must come from cellulosic biofuel.  Approximately twenty-two companies were developing cellulosic based ethanol plants as of September 24, 2009.  Cellulosic and other ethanol technologies are viewed by many as the "next generation" ethanol technologies, and Lincolnway Energy anticipates that there will be a trend away from corn based ethanol production over the next several years in newly constructed plants.

Although Lincolnway Energy believes there will continue to be a place for corn based ethanol production within the ethanol industry, it is possible that at some point in the future governmental and public support of the ethanol industry may be focused primarily upon, and provide significant advantages or benefits to, cellulosic and other developing ethanol technologies, which could have adverse effects on Lincolnway Energy and corn based ethanol production in general.  The requirements for the use of cellulosic and other advanced biofuels in the 2007 energy act are evidence of the government's support of, and trending to, those types of biofuels.  The public may also eventually support cellulosic and other advanced biofuels because of the perception that those types of biofuels do not have some of the perceived negative effects of corn based ethanol, such as the food versus fuel debate, given that cellulosic and other advanced biofuels are not made from products otherwise used in the food chain and are in some cases produced from "waste" products.

It is also possible that one or more of the other sources of products for ethanol production may from time to time have greater advantages than corn, which would adversely affect an ethanol plant that produces ethanol solely from corn.  For example, a plant using one of those sources may be able to produce ethanol on a more economical basis or on a more efficient or greater scale.  The increased production of ethanol from any of those sources could also adversely affect the price for ethanol generally.  Lincolnway Energy's ethanol plant is designed to produce ethanol only from corn.

Some competitors operate their ethanol plant and produce ethanol using different sources of energy than coal, or using various other sources of energy.  The other sources of energy include natural gas and various forms of waste type products such as wood, tires, construction waste and manure.  Those competitors may have lower production and input costs and/or higher operating efficiencies than Lincolnway Energy, which would allow them to produce and market their ethanol at lower prices than Lincolnway Energy.

Competition from newly developed fuel additives would also reduce the use of ethanol and Lincolnway Energy's profitability.  Although it is difficult to predict if any new fuel additives will be developed, it will likely occur at some point, and it could be in the near future.

 
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Research is also continually being conducted for alternatives to petroleum based fuel products and for additional renewable fuel products.  For example, research is ongoing regarding the use of hydrogen, electric or solar powered vehicles and fuel cells.  A breakthrough or discovery in any research could conceivably occur at any time, and will occur at some point, and could have the effect of greatly reducing the use of ethanol or of even making the use of ethanol obsolete.  There will be increased incentives to develop alternatives to petroleum based fuel products given the recent high gasoline prices and uncertainty in the Middle East.  It is also commonly agreed that the dependence of the U.S. on foreign oil places the U.S. in difficult political and economic circumstances, and the federal government will likely assist in the development of alternatives to petroleum based fuel products given the issues that arise from the dependence of the U.S. on foreign oil.

Loss Of Rights To Technology Or The Occurrence Of Technological Advances Could Make Lincolnway Energy's Ethanol Plant Obsolete.  Lincolnway Energy obtained its right to use the various software, patents and other technologies necessary to its ethanol plant under license agreements with third parties.  The termination of those license agreements or other loss of the right to use any necessary technology would have material adverse effects on the ethanol plant and on Lincolnway Energy.

Technological advances in the processes and procedures for producing ethanol are continually occurring, and further ongoing advances should be expected.  It is possible that those advances could make the processes and procedures that are utilized at Lincolnway Energy's ethanol plant obsolete or inefficient or cause the ethanol and/or other by-products produced at the ethanol plant to not be as high of quality as plants which utilize any new or advanced technology.  Any modifications or changes to Lincolnway Energy's ethanol plant to utilize any new technology could be technologically or cost prohibitive, and will in all events at least initially reduce Lincolnway Energy's profitability.

There Are Potential Conflicts Of Interest In The Structure And Operation Of Lincolnway Energy.  Although Lincolnway Energy does not believe any conflict of interest exists which in practice will be detrimental to Lincolnway Energy, potential conflicts of interest do exist in the structure and operation of Lincolnway Energy and its business.    For example, the directors and officers of Lincolnway Energy are not required to devote their full time or attention to Lincolnway Energy, and they are all involved in other full time businesses and may provide services to others.  Some of the directors or officers might be owners or otherwise interested in other ethanol plants.  The directors and the officers will experience conflicts of interest in allocating their time and services between Lincolnway Energy and their other businesses and interests.

The various companies that provide marketing and other services to Lincolnway Energy are also not required to devote their full time or attention to those services, and they will very likely be involved in other ethanol plants and ethanol related businesses and possibly other businesses or ventures, including having ownership or other interests in other ethanol plants.  The companies will therefore experience conflicts of interest in allocating their time and services between Lincolnway Energy and their various other ethanol plants or business ventures.  The companies providing ethanol and distiller's grains marketing services to Lincolnway Energy will be providing those same services to other ethanol plants, and may experience conflicts of interest in allocating favorable sales and sales when the supply of ethanol or distiller's grains exceeds the demand.

 
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Risks Relating To Lincolnway Energy's Units.

Lincolnway Energy's Units Are Not A Liquid Investment.  No market exists for Lincolnway Energy's units.  A market will not develop for the units because the units are not freely transferable and can only be sold, assigned or otherwise transferred in compliance with the federal and applicable state securities laws and the terms and conditions of the amended and restated operating agreement and unit assignment policy of Lincolnway Energy, which require the prior approval of the board for all sales and assignments of any units.  The restrictions set out in the securities laws, the amended and restated operating agreement and the unit assignment policy may at times preclude the transfer of a unit.  The units are therefore not a liquid investment.

There Is No Guarantee Of Any Distributions From Lincolnway Energy.  Lincolnway Energy is not required to make any distributions to its members.  Lincolnway Energy could also be prohibited, or at least severely limited or restricted, from making any distributions under the terms of Lincolnway Energy's credit and loan agreements.  Lincolnway Energy's financial situation may also not allow it to make any distributions to its members in any event.  The payment of distributions will also always be at the discretion of the board of Lincolnway Energy and will depend on, among other things, the board's analysis of Lincolnway Energy's earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions regarding the payment of distributions and any other considerations that the board deems relevant.  There is therefore no assurance of regular distributions, or any distributions at all, to Lincolnway Energy's members.

The Staggered Terms Of Lincolnway Energy's Board May Delay Or Prevent Lincolnway Energy's Acquisition By A Third Party.  Lincolnway Energy's amended and restated operating agreement provides for three classes of directors, based upon the term of office, with each director holding a three year term.  Some view that type of provision as making more difficult, or as deterring, a merger, tender offer or acquisition involving Lincolnway Energy that might result in the members receiving a premium for their units.

Taxation And Other Risks.

Members Will Owe Taxes On Lincolnway Energy's Profits But May Never Receive Any Distributions From Lincolnway Energy.  Lincolnway Energy is not required to make any distributions, and it is possible that no distributions will be made by Lincolnway Energy, even if Lincolnway Energy has profits.

Any Lincolnway Energy profits will be taxable to its members in accordance with the members' respective percentage ownership of the units, whether or not the profits have been distributed.  Even if distributions are made, the distributions may not equal the taxes payable by a member on the member's share of Lincolnway Energy's profits.

 
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Lincolnway Energy could also sustain losses offsetting the profits of a prior tax period, so a member might never receive a distribution or be able to sell the member's units for an amount equal to the taxes which have already been paid by the member.

The Internal Revenue Service Could Challenge Allocations And Audit Lincolnway Energy's Tax Returns.  The amended and restated operating agreement of Lincolnway Energy provides for the allocation of profits, losses and credits among the members.  The Internal Revenue Service might challenge those allocations and reallocate various items in a manner which reduces deductions or increases income to the members, both of which would result in additional tax liability for members.

The Internal Revenue Service might also audit Lincolnway Energy's returns, and adjustments might be required as a result of an audit.  If an audit results in an adjustment, members could be required to file amended returns and to pay back taxes, plus interest and possibly penalties.  The members' tax returns might also be audited.

The Tax Laws May Change To The Detriment Of Lincolnway Energy And Its Members.  It is possible that the current federal and/or state tax treatment given to an investment in the units or to Lincolnway Energy may be changed by subsequent legislative, administrative or judicial action.  Any such changes could significantly alter the tax consequences and decrease the after tax rate of return on investment in the units.

For example, although Lincolnway Energy anticipates being treated as a partnership for tax purposes, if for some reason Lincolnway Energy was classified or treated as a corporation, or Lincolnway Energy's board determined that it would be beneficial for Lincolnway Energy and its members for Lincolnway Energy to become taxed as a corporation, Lincolnway Energy would pay corporate income tax and no profits or losses would flow through to the members.  The payment of taxes by Lincolnway Energy would lower the cash available for distribution to the members, and any distributions would be taxed to the members as dividends.

Software Problems And Computer Viruses May Have A Materially Adverse Effect Upon Lincolnway Energy.  Lincolnway Energy will utilize various software applications in connection with its ethanol operation.  There is no assurance that the operation of any software or other computer systems will be uninterrupted or error free or will otherwise be successful.  There is also no assurance or guarantee that the software will continue to be available to Lincolnway Energy or that the software will be able to be maintained and updated as necessary from time to time.

Lincolnway Energy 's use of its software and other computer systems will be subject to attack by computer hackers and to failure or interruption through viruses or acts of God or other occurrences beyond the control of Lincolnway Energy, such as computer failure, communications line failure, power failure, mechanical failure, equipment malfunction or failure, and lightning.

The refiners, suppliers and other persons who Lincolnway Energy has business relationships with are also subject to the same software and computer system risks, and may affect their ability to do business with Lincolnway Energy.

 
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Any problems with any software or other computer systems might have material adverse effects on Lincolnway Energy.

Item 1B. 
Unresolved Staff Comments.

This Item is not applicable to Lincolnway Energy because Lincolnway Energy is not an accelerated filer, a large accelerated filer or a well-known seasoned issuer, as those terms are defined in the rules of the Securities and Exchange Commission.

Item 2. 
Properties.

Lincolnway Energy's office and its ethanol plant are located on approximately 160 acres in Story County, Iowa, near Nevada. Iowa.  Lincolnway Energy owns the real estate and its office and ethanol plant, but all of those properties are subject to a first mortgage and security interest held by Lincolnway Energy's primary lender, CoBank, and to other mortgages and security interests held by the Iowa Department of Economic Development, the Iowa Department of Transportation, and Fagen, Inc.

Lincolnway Energy's office building has approximately 1,400 square feet.  Lincolnway Energy utilizes the office building for office space for Lincolnway Energy's management and other staff.  Lincolnway Energy was utilizing approximately 90% of the available office space as of the date of this annual report, with the remaining 10% being available to accommodate any expansion of Lincolnway Energy's staff.  The office building also includes grain receiving facilities.

Lincolnway Energy's ethanol plant and related facilities include the following material buildings and related fixtures and equipment:

 
·
process building containing lab, offices and control room;
 
·
maintenance building containing offices, storage and a welding shop;
 
·
administration building containing furniture and fixtures, office equipment, computers, telephone system, board room and grain receiving; and
 
·
rail tracks and rail spur, paved access roads, dryers, evaporators, fermenters, grain bins and storage facilities for ethanol and distiller's grains.

Lincolnway Energy's ethanol plant has a nameplate capacity of 50,000,000 gallons of ethanol per year, and at that capacity will generate approximately 136,000 tons of distiller's grains per year.  The ethanol plant became operational in May 2006, and the first full month of production at full capacity was July of 2006.  Lincolnway Energy has attempted to operate the plant at full capacity since that time, subject to normal shutdown and other maintenance related days and matters.

Lincolnway Energy also owns approximately 118 acres of real estate which is adjacent to the 160 acre parcel noted above.  Lincolnway Energy purchased this real estate primarily for possible use in the construction of additional railroad spur tracks, but the real estate could also be used as part of any future expansion of Lincolnway Energy's business.  Lincolnway Energy does not, however, have any definite plans for the use of the real estate in Lincolnway Energy's ethanol operations, and the real estate will likely be custom farmed during 2010.

 
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Lincolnway Energy also leases 90 rail cars which are used for transporting distiller's grains.  The lease has a 5 year term which is scheduled to expire on March 25, 2011.

Lincolnway Energy was assigned a lease from RPMG, Lincolnway Energy’s previous ethanol marketer on September 21, 2009 to lease 100 tank rail cars for the purpose of transporting ethanol.  The lease has a scheduled maturity date of September 2016.

Lincolnway Energy also leases various miscellaneous office equipment and equipment utilized in the operation of the ethanol plant.

Item 3. 
Legal Proceedings.

Except as noted in the following paragraphs, as of the date of this annual report, Lincolnway Energy was not aware of any material pending legal proceeding to which Lincolnway Energy was a party or of which any of Lincolnway Energy's property was the subject, other than ordinary routine litigation, if any, that was incidental to Lincolnway Energy's business. Except as noted in the following paragraphs, as of the date of this annual report, Lincolnway Energy was not aware that any governmental authority was contemplating any material proceeding against Lincolnway Energy or any of Lincolnway Energy's property.

On December 4, 2007, the Iowa Environmental Protection Commission referred alleged environmental law violations by Lincolnway Energy to the Iowa Attorney General's office for enforcement action.  The referred allegations concern wastewater releases relating to construction activities and exceedences of iron and total suspended solid limits in Lincolnway Energy's NPDES wastewater discharge permit and also air permitting, emissions limit exceedences, stack testing, monitoring and reporting.

Lincolnway Energy believes that it will be able to reach a settlement of all of the allegations of the Iowa Environmental Protection Commission by the first calendar quarter of 2010 on terms that will not have a material adverse effect on Lincolnway Energy's business or financial condition.  Lincolnway Energy still cannot, however, definitively predict at this time the outcome of any settlement or other proceedings that may arise out of the allegations.  Lincolnway Energy was therefore unable at the time of the preparation of this annual report to definitively determine what effect the proceedings of the Iowa Attorney General will have on Lincolnway Energy; although, as noted above, based on the negotiations to date, Lincolnway Energy believes it will be able to settle all of the allegations on terms that will not have a material adverse effect on Lincolnway Energy's business or financial condition.

 
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As part of the process of attempting to negotiate a settlement of the allegations regarding emissions limit exceedences and to otherwise comply with air emissions requirements, Lincolnway Energy filed an application with the Iowa Department of Natural Resources on August 28, 2008 for Lincolnway Energy to obtain a new air quality permit under the 250 ton rules which were adopted in late 2007.  Lincolnway Energy believes that its current levels of emissions would comply with the conditions of that air quality permit.  There is not, however, any assurance that the air quality permit will be issued to Lincolnway Energy or that Lincolnway Energy will be issued a permit which would allow emissions to the full level that would otherwise be permitted under the 250 ton rules.  Lincolnway Energy may also be subject to higher ongoing compliance and operating costs under the new air quality permit.

Item 4. 
Submission of Matters to a Vote of Security Holders.

No matter was submitted to a vote of the members of Lincolnway Energy, through the solicitation of proxies or otherwise, during the period of July 1, 2009 through September 30, 2009.

PART II

Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Lincolnway Energy is authorized to issue an unlimited number of units, but member approval is required in order to issue more than 45,608 units.  Lincolnway Energy had 42,049 outstanding units as of November 30, 2009, which were held of record by 969 different members.  The determination of the number of members is based upon the number of record holders of the units as reflected in Lincolnway Energy's internal unit records.

Lincolnway Energy did not issue any units during the fiscal year ended September 30, 2009.

Lincolnway Energy's units are not listed on any exchange, and there is no public trading market for Lincolnway Energy's units.  An investment in Lincolnway Energy's units is not a liquid investment because the amended and restated operating agreement of Lincolnway Energy establishes various conditions on the issuance of additional units and various restrictions on the sale, assignment or other transfer of units.

The amended and restated operating agreement of Lincolnway Energy provides that the board of Lincolnway Energy may not issue any units for a consideration or value of less than $500 per unit, issue more than an aggregate of 45,608 units, or issue any units to any director or officer of Lincolnway Energy in their capacity as such, without the vote of the members holding at least a majority of the outstanding units represented at a meeting at which a quorum of the members is present.  The members holding at least 25% of the outstanding units constitute a quorum at any meeting of the members.

The amended and restated operating agreement of Lincolnway Energy also provides that no member shall, directly or indirectly, own, hold or control more than 49% of the outstanding units at any time, unless the member exceeds that percentage by reason of Lincolnway Energy purchasing units.  The amended and restated operating agreement provides that for this purpose a member will be deemed to indirectly own, hold and control all units which are owned by the member's spouse or any of the member's parents or minor children and by any entity of which any one or more of the member or any of those relatives owns at least 10% of the outstanding voting equity of the entity.

 
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The amended and restated operating agreement of Lincolnway Energy also establishes restrictions on the sale, assignment or other transfer of units.

The amended and restated operating agreement provides that a member may not sell, transfer, assign or otherwise dispose of or convey any units, whether voluntarily or involuntarily, or grant a security interest in any units, except with the prior approval of the board of Lincolnway Energy and in compliance and accordance with the policies and procedures as may be adopted from time to time by the board.  The board is authorized to adopt and implement those policies and procedures for any reasonable purpose, as determined by the board.  A reasonable purpose includes prohibiting, restricting, limiting, delaying or placing conditions on any assignment which, alone or together with any other past or contemplated assignments, would or might reasonably be determined to:

 
·
Violate or cause Lincolnway Energy to violate or to otherwise be in noncompliance with any law, rule, regulation or order, including any securities law, rule, regulation or order;

 
·
Cause Lincolnway Energy to be taxed as a corporation for tax purposes, including by reason of Section 7704 of the Internal Revenue Code of 1986;

 
·
Result in the termination of Lincolnway Energy or Lincolnway Energy's tax year for tax purposes, including under Section 708 of the Internal Revenue Code of 1986, or cause the application to Lincolnway Energy of Sections 168(g)(1)(B) or 168(h) of the Internal Revenue Code of 1986 or similar or analogous rules;

 
·
Violate any term or condition of the amended and restated operating agreement, including the 49% ownership limitation noted above;

 
·
Violate or cause Lincolnway Energy to violate or to otherwise be in noncompliance with any law, rule, regulation or order applicable to Lincolnway Energy's selection or use of its then current fiscal year, including Section 444 of the Internal Revenue Code of 1986;

 
·
Require Lincolnway Energy to become licensed, registered or regulated as an investment company, a broker-dealer or any other form of regulated entity under any law, rule, regulation or order; or

 
·
Create or result in any fractional units.

The policies and procedures adopted by the board regarding the assignment of units are referred to as the unit assignment policy.  Lincolnway Energy's current unit assignment policy mirrors the terms of the amended and restated operating agreement and provides that all assignments require the prior approval of the board, and that the board may prohibit, restrict, limit, delay or place conditions on any assignment which might have any of the effects described in the preceding subparagraphs.  Several of those potential effects could be applicable to Lincolnway Energy at any given time.

 
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One example that will be applicable to Lincolnway Energy on an ongoing basis arises from the fact that Lincolnway Energy is taxable as a partnership for income tax purposes.  There are various statutes and regulations that Lincolnway Energy must comply with in order to maintain that tax classification.  One applicable statute and related regulation is Section 7704 of the Internal Revenue Code of 1986 and Section 1.7704-1 of the Treasury Regulations.  Section 7704 provides, in general, that a partnership which becomes a publicly traded partnership under Section 7704 will be taxed as a corporation.  Section 7704 provides that a publicly traded partnership is a partnership whose interests either are traded on an established securities market or are readily tradable on a secondary market or the substantial equivalent.  Section 1.7704-1 sets forth some rules for making a determination of whether a partnership is readily tradable on a secondary market or the substantial equivalent for that purpose, and establishes some specified processes and procedures as "safe harbors" under the publicly traded partnership rules.  The safe harbors include a limited matching service and a limited repurchase option.

The general rule under the publicly traded partnership rules is that no more than 2% of a partnership's outstanding units may be transferred during any taxable year, unless the partnership has established one of the safe harbors that are available under the publicly traded partnership rules.  As noted above, the safe harbors include a limited matching service and a limited repurchase option.  If one or both of those processes have been established, a partnership may permit the transfer of up to an aggregate of 10% of the partnership's outstanding units during any taxable year, so long as no more than 2% of the transfers occur outside of the matching service or the repurchase option and all of the other transfers are made in accordance with the terms of the matching service or the repurchase option.

Lincolnway Energy has established a qualified matching service on Lincolnway Energy's website, and the amended and restated operating agreement of Lincolnway Energy includes a repurchase provision which complies with the safe harbor for a repurchase option under the publicly traded partnership rules.  There are numerous conditions and requirements in both the qualified matching service and the repurchase option, so neither provides any significant liquidity for Lincolnway Energy's units.  Also, Lincolnway Energy has no obligation to purchase any units under the repurchase provisions in the amended and restated operating agreement.

Lincolnway Energy has not made any repurchases of its units pursuant to the repurchase provisions set forth in the amended and restated operating agreement.

There have been some sales of units pursuant to Lincolnway Energy's qualified matching service.  The purchase price and other terms of any transactions pursuant to Lincolnway Energy's qualified matching service are negotiated and established solely by the seller and the buyer.  Lincolnway Energy does not endorse or recommend any sale of units and is not responsible for the fairness of the purchase price paid in any transactions made pursuant to the qualified matching service, or for the payment or other terms of any transaction.  Lincolnway Energy therefore does not represent or guarantee in any way that any of the prices paid pursuant to the qualified matching service are fair or accurately reflect the value of Lincolnway Energy's units, and Lincolnway Energy does not endorse or recommend any sales of units at any of the prices listed by a member in the qualified matching service or on the same or similar terms.

 
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The publicly traded partnership rules exclude some types of transfers from the 2% and 10% limitations.  As an example, a gift of units by a member to certain family members of the member is not counted towards the 2% and 10% limitations.

Another example of a transfer limitation that currently will be applicable to Lincolnway Energy on an ongoing basis arises from the fact that Lincolnway Energy has elected to utilize a September 30 fiscal year end.  Given that fact, no more than 5% of Lincolnway Energy's units can be owned by pass-through type entities, such as Subchapter S corporations, limited liability companies or partnerships.  At the time of the preparation of this annual report, Lincolnway Energy was at the 5% maximum amount, so no transfers of any units to a pass-through type entity were permitted.

The amended and restated operating agreement and the unit assignment policy both contemplate that a member desiring to assign any units must present Lincolnway Energy with a unit assignment application and any other information requested by the board.  The board is not required to act on a unit assignment application until the next regularly scheduled meeting of the board which follows the date on which Lincolnway Energy receives the completed and executed unit assignment application.

An assignment of a unit which is approved by the board will be effective for all purposes, including for purposes of allocations and distributions, only as of the date determined by the board, but the date must be within 32 days of the date of the approval of the assignment by the board.  Lincolnway Energy believes that approach is necessary in order to provide a uniform effective date for assignments of units.

The unit assignment policy also provides that Lincolnway Energy may require the assigning member or the assignee to provide a legal opinion to Lincolnway Energy regarding the assignment, and that Lincolnway Energy may require that Lincolnway Energy be paid or reimbursed for all of its fees, costs and expenses incurred in connection with any assignment, including legal and accounting fees.

As of the date of this annual report, Lincolnway Energy did not have any equity compensation plans (including any individual equity compensation arrangements) in place for any directors, officers, employees or other persons.

As of the date of this annual report, Lincolnway Energy had no plans to, and had not agreed to register any of its units under any federal or state securities laws.

There were no outstanding warrants, options or other rights to purchase any units of Lincolnway Energy as of the date of this annual report, and there were no outstanding securities which were convertible or exchangeable into or for any units of Lincolnway Energy.  Lincolnway Energy's units are not convertible into any other securities.

 
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The payment of distributions to members by Lincolnway Energy is within the discretion of the board of Lincolnway Energy, and there is no assurance of any distributions from Lincolnway Energy.  The payment of distributions is also subject to Lincolnway Energy's compliance with the various covenants and requirements of Lincolnway Energy's credit and loan agreements, and it is possible that those covenants and requirements will at times prevent Lincolnway Energy from paying a distribution to its members.

Lincolnway Energy has declared four distributions since Lincolnway Energy was organized in May 2004.  The first distribution was declared in November 2006 and was in the amount of $150 per unit, resulting in an aggregate distribution of $6,428,850.  The second distribution was declared in May 2007, and was in the amount of $200 per unit, resulting in an aggregate distribution of $8,409,800.  The third distribution was declared in November 2007, and was in the amount of $125 per unit, resulting in an aggregate distribution of $5,256,125.  The fourth distribution was declared in May 2008, and was in the amount of $75 per unit, resulting in an aggregate distribution of $3,153,675.

Lincolnway Energy does not contemplate being able to establish a definite or regular distribution policy or history because the determination of whether a distribution can or should be made by Lincolnway Energy will need to be made by the board of Lincolnway Energy based upon the then existing facts and circumstances of Lincolnway Energy, which could change materially from time to time.  For example, although a distribution was declared in November of both 2006 and 2007 and in May of both 2007 and 2008, the board of Lincolnway Energy determined that no distribution should be made by Lincolnway Energy during November 2008 or in May, 2009, given the generally unfavorable economic outlook and the prevailing conditions in the ethanol industry.  Lincolnway Energy also did not declare a distribution to the members in November, 2009.  Although no firm decision has been made, it is possible that no, or perhaps reduced, distributions will be declared and paid by Lincolnway Energy during the fiscal year ending September 30, 2010.

None of Lincolnway Energy's units were purchased by or on behalf of Lincolnway Energy or any affiliated purchaser (as defined in Rule 10b-18(a)(3) of the Securities Exchange Act of 1934) of Lincolnway Energy during the period of July 1, 2009 to September 30, 2009.  As of the date of this annual report, Lincolnway Energy did not have any publicly announced plans or programs with respect to purchases of its units.

Item 6. 
Selected Financial Data.

The following information is summary selected financial data for Lincolnway Energy for the fiscal years ended September 30, 2009, 2008, 2007, 2006 and 2005 with respect to the statements of operations data, and as of September 30, 2009, 2008, 2007, 2006 and 2005 with respect to the balance sheet data.  The data is qualified by, and must be read in conjunction with, Item 1A of this annual report, "Risk Factors", Item 7 of this annual report, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and with the financial statements and supplementary data included in Item 8 of this annual report.

 
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Statements of Operations Data:
 
2009
   
2008
   
2007
   
2006
   
2005
 
                               
Revenues
  $ 110,223,531     $ 147,040,911     $ 118,783,540     $ 44,883,457     $ -  
Cost of goods sold
    113,576,938       138,309,541       94,233,456       25,886,144       -  
Gross profit(loss)
    (3,353,407 )     8,731,370       24,550,084       18,997,313       -  
General and administrative expense
    2,366,638       2,647,368       2,903,436       2,082,597       427,478  
Operating income (loss)
    (5,720,045 )     6,084,002       21,646,648       16,914,716       (427,478 )
Interest expense
    (860,303 )     (1,430,469 )     (2,228,179 )     (1,281,287 )     -  
Other income-interest and grant
    165,007       181,895       536,897       274,292       625,679  
Net income (loss)
  $ (6,415,341 )   $ 4,835,428     $ 19,955,366     $ 15,907,721     $ 198,201  
Weighted average units outstanding
    42,049       42,049       42,519       42,293       32,816  
Net income (loss) per unit - basic  and diluted
  $ (152.57 )   $ 115.00     $ 469.33     $ 376.13     $ 6.04  
Cash distributions per unit
  $ -     $ 200.00     $ 350.00     $ -     $ -  

Balance Sheet Data:
 
2009
   
2008
   
2007
   
2006
   
2005
 
Working Capital
  $ 6,670,560     $ 10,216,873     $ 11,845,308     $ 6,548,336     $ 4,212,119  
Net Property Plant & Equipment
    57,293,563       65,010,487       71,617,762       78,170,697       35,125,192  
Total Assets
    71,092,101       90,516,722       88,820,957       93,027,237       43,084,240  
Long-Term Obligations
    14,938,584       19,998,369       24,743,372       29,548,706       1,100,000  
Members' Equity
    49,979,252       56,394,593       59,968,965       55,662,249       38,640,778  
Book Value per Member Unit
    1,189       1,341       1,426       1,299       919  
 
Lincolnway Energy's ethanol plant became operational during May 2006.

Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.

Except for the historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties, and which speak only as of the date of this annual report.  No one should place strong or undue reliance on any forward looking statements.  Lincolnway Energy's actual results or actions may differ materially from these forward-looking statements for many reasons, including the risks described in Item 1A and elsewhere in this annual report.  This Item should be read in conjunction with the financial statements and related notes and with the understanding that Lincolnway Energy's actual future results may be materially different from what is currently expected or projected by Lincolnway Energy.

 
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Overview

Lincolnway Energy is an Iowa limited liability company that was formed on May 19, 2004 for the purpose of constructing and operating a dry mill, coal fired ethanol plant. Lincolnway Energy has been engaged in the production of ethanol and distillers grains since May 22, 2006, and the plant became fully operational on June 22, 2006.  The ethanol plant produced 52,465,534 gallons of ethanol during the fiscal year ended September 30, 2009.  The nameplate capacity of the plant is 50,000,000 gallons of ethanol per year.  Lincolnway Energy had a planned shut down during the months of November 2008 and May 2009 to complete routine maintenance work.

Lincolnway Energy's revenues for the fiscal year ended September 30, 2009 were derived from the sale of Lincolnway Energy's ethanol to RPMG, Inc. (RPMG), the sale of its distiller's grains to Hawkeye Gold, LLC, and the sale of its corn oil to FEC Solutions, LLC (FECS).

Lincolnway Energy's ethanol was sold pursuant to an ethanol marketing agreement between Lincolnway Energy and RPMG.  Lincolnway Energy's ethanol was pooled with the ethanol of other ethanol producers whose ethanol was marketed by RPMG.  Lincolnway Energy paid RPMG a marketing fee of $.01 per gallon, and RPMG paid Lincolnway Energy a netback price per gallon that is based upon the difference between the pooled average delivered ethanol selling price and the pooled average distribution expense.  These averages were calculated based upon each pool participant's selling price and expense averaged in direct proportion to the volume of ethanol supplied by each participant to the pool.

Lincolnway Energy believes that the ethanol market structure has changed since Lincolnway Energy entered into its ethanol marketing agreement with RPMG, and in particular during the past one to two years.  Lincolnway Energy determined, in light of those changes, that the pool marketing arrangement used by RPMG is no longer an effective arrangement under the current market structure and circumstances. Lincolnway Energy accordingly notified RPMG on August 12, 2009 that the ethanol marketing agreement would be terminated effective September 30, 2009.
 
Lincolnway Energy also entered into a new ethanol marketing agreement with Green Plains Trade Group LLC (GPTG) on September 25, 2009.  Under the agreement, GPTG has the exclusive right to market all of the ethanol which is produced by Lincolnway Energy, except that the agreement permits Lincolnway Energy to close out any outstanding purchase orders under Lincolnway Energy's agreement with RPMG, Inc. and that Lincolnway Energy may market some of its ethanol in certain limited circumstances, such as ethanol which is the subject of any purchase order which was submitted by GPTG but was rejected by Lincolnway Energy.  Lincolnway Energy may reject any purchase orders submitted by GPTG, in Lincolnway Energy's sole discretion.  GPTG is required to submit purchase orders to Lincolnway Energy on such a periodic basis as is necessary to permit Lincolnway Energy to operate at and maintain the ethanol production schedules which Lincolnway Energy must submit to GPTG.  GPTG must also use commercially reasonable and diligent efforts to obtain the best price for all of Lincolnway Energy's ethanol and commercially reasonable efforts to market all of Lincolnway Energy's ethanol.  GPTG will be responsible for the scheduling of all shipments of the ethanol and have sole responsibility and liability for the collection of all GPTG accounts and any delinquencies in any of GPTG's accounts will not affect GPTG's payment obligations to Lincolnway Energy.  The purchase price payable to Lincolnway Energy will be GPTG's contract selling price for the ethanol in question, less various costs and a fee to GPTG, but the ethanol marketing agreement includes a minimum purchase price.  The agreement may be terminated during its term for breach, for certain specified actions or types of misconduct, and for the bankruptcy or insolvency of a party.  Lincolnway Energy is dependent upon its agreement with GPTG for the marketing and sale of Lincolnway Energy's ethanol, and Lincolnway Energy's loss of the agreement could have material adverse effects on Lincolnway Energy.

 
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Lincolnway Energy's output of distiller's grains is sold to Hawkeye Gold, LLC under a Distiller's Grains Marketing Agreement that became effective on October 1, 2007.  Lincolnway Energy pays Hawkeye Gold, LLC a marketing fee for dried distiller's grains equal to the greater of 2% of the FOB plant price for the dried distiller's grains in question or a per-ton fee of $1.30 for the dried distiller's grains.  The marketing fee for wet distiller's grains is the greater of 3% of the FOB plant price for the wet distiller's grains in question or a per-ton fee of $1.00 for the wet distiller's grains.  The Distiller's Grains Marketing Agreement can be terminated by Lincolnway Energy or Hawkeye Gold, LLC on 90 days written notice.  Lincolnway Energy is dependent upon its agreement with Hawkeye Gold, LLC for the marketing and sale of Lincolnway Energy's distiller's grains, and Lincolnway Energy's loss of the agreement could have material adverse effects on Lincolnway Energy.

Lincolnway Energy purchased a corn extraction oil system from FECS, which was put into operation in April, 2008.  The system extracts corn oil from the syrup which is generated in the production of ethanol.  Lincolnway Energy produced corn oil on a trial basis from April, 2008 until approximately September, 2008, and FECS purchased all of the corn oil produced by Lincolnway Energy during that time period.  Lincolnway Energy entered into an agreement with FECS on October 13, 2008 under which FECS purchases all of Lincolnway Energy's output of corn oil for resale by FECS.  Lincolnway Energy pays FECS a marketing and technical assistance fee of 5% of the FOB sales price of the corn oil.  The agreement has an initial term of 36 months, commencing from October 13, 2008, and can renew for successive 36 month terms unless Lincolnway Energy or FECS elects to terminate the agreement at the end of the then current 36 month term.

Plan of Operations for the Next 12 Months

During the next 12 months, Lincolnway Energy plans to focus on five operational areas. The areas Lincolnway Energy plans to concentrate on each hold potential for reducing operating costs, improving the quality of the products Lincolnway Energy produces and the environment in which they exist.
 
 
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Depending on the year, the cost of corn makes up between sixty and seventy percent of cost of goods sold at Lincolnway Energy. Because corn cost is a major portion of the cost of producing ethanol, it is important that Lincolnway Energy is able to accurately measure corn quality and component quantity. Over the next year Lincolnway Energy plans to evaluate what parameters of corn should be tested prior to receiving and how to best test those parameters quickly and accurately. Lincolnway Energy anticipates that at the conclusion of this work it will be able to begin tracking what quality characteristics have the greatest impact on ethanol production.

Steam is another operational area Lincolnway Energy plans to study during this coming year. Improving steam efficiency and quality benefits Lincolnway Energy environmentally as well as financially. Producing high quality, low moisture steam makes for faster and more efficient heat transfer. Producing high quality steam uses less water than the production of lower quality high moisture steam. Today Lincolnway Energy produces steam that is of modestly high quality and it is recycled many times through numerous plant processes. If Lincolnway Energy can cost effectively raise the quality of its steam, Lincolnway Energy could use that steam in additional processes which can reduce water and energy usage through additional recycling of steam.

Lincolnway Energy also plans to evaluate the effectiveness of the current emissions monitoring system in preparation for possible green house gas emissions regulatory changes. Being able to monitor emissions more effectively could lead to further reductions in emissions which would lead to lower fees. Reductions in emissions can make Lincolnway Energy a better environmental company. By attempting to adjust to possible upcoming regulatory changes, Lincolnway Energy hopes to be better positioned to take advantage of the changes from the beginning. Lincolnway Energy believes that all companies will be faced with higher fees for future emissions based on recent federal legislative proposals.

Lincolnway Energy also intends to study the role biomass might play as a source of fuel for Lincolnway Energy's steam system. Lincolnway Energy recently completed a feasibility study that shows there is sufficient biomass available in central Iowa to supply Lincolnway Energy with its biomass fuel needs, but further study and cost analysis is needed in order to determine if biomass is a viable energy source for Lincolnway Energy. Lincolnway Energy plans to evaluate what biomass supply problems might be encountered if a switch to biomass was made. Another very important aspect of switching to biomass is determining the affect new proposed legislation may have on the cost of using a fossil fuel, such as coal, compared to using biomass. There is a reason there are a limited number of  utilities or large manufacturers using biomass as an energy source today, and Lincolnway Energy needs to determine what changes need to occur in order to make biomass feasible in the future.

Co-product optimization is an area that has recently seen a lot of renewed interest for some of the wrong reasons. Recent concerns have surfaced for corn that may contain high levels of mycotoxins or other diseases of corn.  Lincolnway Energy manufactures three co-products in addition to ethanol, those being distiller's grains, non-edible corn oil and syrup from non-fermented liquids. The product quality of all these products can be affected by the quality of incoming corn and the way the corn is processed. Lincolnway Energy plans to evaluate its processing techniques to assure that they are producing efficiently and cost effectively, while still producing a high quality product.
 
 
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By focusing on these areas, Lincolnway Energy hopes to add value to its products and decrease operating costs, while striving to conserve the environment through decreased use of natural resources.

Air and Water Permit Compliance

Lincolnway Energy needs to maintain various permits to be able to maintain and continue its operations.  The permits include water and air permits from the Iowa Department of Natural Resources.  Lincolnway Energy has obtained these permits, but on December 4, 2007, the Iowa Environmental Protection Commission referred alleged environmental law violations by Lincolnway Energy to the Iowa Attorney General's office for enforcement action.  The referred allegations concern wastewater releases relating to construction activities and exceedences of iron and total suspended solid limits in Lincolnway Energy's NPDES wastewater discharge permit, and concern air permitting, emission limit exceedences, stack testing, monitoring and reporting.

Lincolnway Energy believes that it will be able to reach a settlement of all of the allegations of the Iowa Environmental Protection Commission by the first calendar quarter of 2010 on terms that will not have a material adverse effect on Lincolnway Energy's business or financial condition.  Lincolnway Energy still cannot, however, definitively predict at this time the outcome of any settlement or other proceedings that might still arise out of the allegations.  Lincolnway Energy was therefore unable at the time of the preparation of this annual report to definitively determine what effect the proceedings of the Iowa Attorney General will have on Lincolnway Energy; although, as noted above, based on the negotiations to date, Lincolnway Energy believes that it will reach a settlement of all of the allegations on terms that will not have a material adverse effect on Lincolnway Energy's business or financial condition.

Air Quality Permit Application

Lincolnway Energy submitted an application for a 250 ton per year air quality permit to the Iowa Department of Natural Resources (IDNR) on August 28, 2008. The IDNR is currently in the process of reviewing the application. The review process is very thorough and often times can take in excess of a year.

Lincolnway Energy believes that its current levels of emissions will comply with the conditions that need to be met in order to obtain the new permit.  There is not, however, any assurance that the air quality permit will be issued to Lincolnway Energy or that Lincolnway Energy will be issued a permit which would allow emissions to the full level that would otherwise be permitted under the 250 ton rules.  Lincolnway Energy is hopeful, however, that the new permit will be issued if the allegations with the Iowa Attorney General's office are settled as is currently contemplated.  If the new permit is issued, Lincolnway Energy may be subject to higher ongoing compliance and operating costs under the new air quality permit.

 
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Comparison of Fiscal Years Ended September 30, 2009 and 2008

Statements of Operations Data:
 
2009
   
2008
 
   
Amount
   
%
   
Amount
   
%
 
Revenues
  $ 110,223,531       100.0     $ 147,040,911       100.0  
Cost of goods sold
    113,576,938       103.0       138,309,541       94.1  
Gross profit(loss)
    (3,353,407 )     (3.0 )     8,731,370       5.9  
General and administrative expense
    2,366,638       2.1       2,647,368       1.8  
Operating income(loss)
    (5,720,045 )     (5.1 )     6,084,002       4.1  
Interest expense
    (860,303 )     (0.8 )     (1,430,469 )     (0.9 )
Other income-interest and grant
    165,007       0.1       181,895       0.1  
Net income(loss)
  $ (6,415,341 )     (5.8 )   $ 4,835,428       3.3  

Revenues from operations for the fiscal year ended September 30, 2009 were approximately $110.0 million, consisting of $88.2 million of ethanol sales (80%), $20.7 million in distiller's grains sales (19%) and $1.2 million of corn oil sales (1%).  Revenues decreased in fiscal year 2009 by approximately 25%, when compared to the fiscal year 2008. Lincolnway Energy sold approximately 52.8 million gallons of ethanol at an average gross price of $1.67 per gallon, 128,771 tons of dried distillers grains at an average gross price of $155.00 per ton, and 17,279 tons of wet distillers grains at an average gross price of $47.00 per ton during the fiscal year ended September 30, 2009.  Lincolnway Energy also sold approximately 3,139 tons of corn oil at an average gross price of $387.00 per ton during the 2009 fiscal year.  The decrease in revenues for the fiscal year ended September 30, 2009 resulted from a 2.8% decrease in sales volume and a 26% decrease in price for ethanol, and a 2% decrease in the sales volume and a 15.3% decrease in sales price for  dried distiller's grains, all as compared to the previous fiscal year. The decrease in sales volume is due to a maintenance shutdown that lasted longer than expected, in May 2009.  When the plant was shut down in May 2009, a thorough inspection revealed that the combustion chamber of the boiler required extensive repair work to the cement refractory surface inside the combustor.  Because the combustor repair work required the plant to be shut down for longer than planned, maintenance was able to complete additional unplanned repairs.  The revenues for the year ended September 30, 2009 include a combined unrealized and realized net gain on derivative ethanol contracts of $10,440, compared to a $2.2 million loss for the year ended September 30, 2008.

Management believes that the decrease in the price of ethanol is due to surplus supply of ethanol in fiscal year 2009. The ethanol industry has reacted to the oversupply by curtailing production and this has allowed for the price of ethanol to begin to recover near the end of Lincolnway Energy’s fiscal year 2009.  However, much of this idled capacity could come back into production within the first calendar quarter of 2010, which could negatively impact ethanol prices. Management believes that the ethanol industry must continue to grow demand in order to increase or sustain current ethanol prices. See additional market information below in the Risks, Trends and Factors that May Affect Future Operating Results section of this Item.
 
 
47

 

The average price Lincolnway Energy received for its dried distiller's grains decreased to $155.00 per ton in fiscal year 2009, from $183.00 per ton in fiscal year 2008.    Management believes the decrease in the price for distiller's grains is a result of the decrease in the price of corn because decreased corn prices affects the price of distiller's grains because animal feeding operations substitute distiller's grains as animal feed in place of corn.  Management expects that distiller's grains prices could decrease slightly in the foreseeable future as the supply of distiller's grains increases as a result of increased ethanol production.

Lincolnway Energy anticipates that its results of operations for the remainder of calendar year 2009 and for 2010 will continue to be affected by a surplus of ethanol and volatility in the commodity markets.

Lincolnway Energy's cost of goods sold for the fiscal year ended September 30, 2009 totaled approximately $113.6 million, which was a decrease of 18% when compared to fiscal year 2008.  The decrease in cost of goods sold for the 2009 fiscal year is primarily due to a 3% decrease in ethanol production and a 26% decrease in the average cost of corn per bushel for fiscal year 2009.   Cost of goods sold major components are: corn costs, energy costs, ingredient costs, production labor, repairs and maintenance, process depreciation, and ethanol and distiller's grain freight expense and marketing fees.  Cost of goods sold for fiscal year 2009 also includes a combined unrealized and realized net loss of $3.9 million from derivative instruments, which is recognized in corn costs, compared to a $3.4 million combined unrealized and realized net gain for fiscal year 2008.

Corn costs for the fiscal year ended September 30, 2009 totaled approximately $70.4 million, compared to $98.0 million for fiscal year 2008. Approximately 18.8 million bushels of corn was ground during fiscal year 2009 at an average cost of $3.70 per bushel, compared to 19.5 million bushels at an average cost of $4.99 for fiscal year 2008. The decrease in bushels ground was due to a decrease in production during fiscal year 2009.  Corn costs, including the combined unrealized and realized net loss from derivative instruments, represented 64.6% of cost of goods sold for the fiscal year ended September 30, 2009, compared to 69.4% of costs of goods sold for fiscal year 2008.

Lincolnway Energy enters into future purchase contracts for corn and these contracts are evaluated for potential losses.  As of September 30, 2008, Lincolnway Energy had various corn fixed and basis contracts for approximately 3,564,000 bushels.  Due to rapidly falling corn prices, at September 30, 2008, Lincolnway Energy recorded a loss  of approximately $.72 on 1,413,571 bushels of fixed price contracts and $.06 on 2,150,000 bushels of basis contracts, totaling approximately a $1.1 million unrealized loss.  As of September 30, 2009, there were no losses to record as the outstanding contracts were at or below market.

Lincolnway Energy anticipates continued volatility in Lincolnway Energy's corn costs due to the timing of the change in value of the derivative instruments relative to the cost and use of the corn being hedged.
 
 
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Energy costs for the fiscal year ended September 30, 2009 totaled approximately $8.1 million, or 7% of cost of goods sold, compared to $8.2 million, or 6% of cost of goods sold, for the 2008 fiscal year.  Energy costs consist of coal costs and electricity and propane costs.  For the fiscal year ended September 30, 2009, Lincolnway Energy purchased approximately 95,000 tons of coal at an approximate total cost of $5.6 million.  Electricity and propane costs amounted to approximately $2.3 million and $.2 million of sand and lime cost to add to the combustor with the coal.

Ingredient costs for the fiscal year ended September 30, 2009 totaled approximately $5.3 million, or 5% of cost of goods sold, compared to $6.8 million, or 5% of cost of goods sold, for the 2008 fiscal year.  Ingredient costs were lower for the fiscal year 2009 due to a decrease in ethanol production from the previous fiscal year.   Ingredient costs consist of denaturant, enzymes and process chemicals.

Production labor, repairs and maintenance and other plant costs totaled approximately $4.8 million, or 4.2% of cost of goods sold, for the fiscal year ended September 30, 2009, compared to $5.3 million, or 3.8% of cost of goods sold, for fiscal year 2008.

Depreciation totaled approximately $7.7 million, or 7% of cost of goods sold, for the fiscal year ended September 30, 2009, compared to $7.4 million, or 5% of cost of goods sold, for fiscal year 2008.

Ethanol and distiller's grain freight expense and marketing fees totaled approximately $13.8 million, or 12% of cost of goods sold, during the fiscal year ended September 30, 2009, compared to $14.2 million, or 10% of cost of goods sold, for fiscal year 2008.  A decrease in sales for the 2009 fiscal year drove these costs down for the 2009 fiscal year.

General and administrative expenses totaled approximately $2.4 million during the fiscal year ended September 30, 2009, compared to $2.6 million for fiscal year 2008. The decrease of $.2 million is due to a reduction of professional fees and business promotions.

Other income and expense totaled approximately $.7 million net expense during the fiscal year ended September 30, 2009, compared to $1.2 million net expense for fiscal year 2008. The decrease in net expense is due to a decrease in interest expense for the fiscal year ended September 30, 2009. Long-term debt and interest rates decreased for fiscal year 2009 compared to fiscal year 2008.

 
49

 

Comparison of Fiscal Years Ended September 30, 2008 and 2007
 
Statements of Operations Data:
 
2008
   
2007
 
   
Amount
   
%
   
Amount
   
%
 
Revenues
  $ 147,040,911       100.0     $ 118,783,540       100.0  
Cost of goods sold
    138,309,541       94.1       94,233,456       79.3  
Gross Profit
    8,731,370       5.9       24,550,084       20.7  
General and administrative expense
    2,647,368       1.8       2,903,436       2.4  
Operating income
    6,084,002       4.1       21,646,648       18.3  
Interest expense
    (1,430,469 )     (0.9 )     (2,228,179 )     (1.9 )
Other income-interest and grant
    181,895       0.1       536,897       0.4  
Net income
  $ 4,835,428       3.3     $ 19,955,366       16.8  
 
Revenues from operations for the fiscal year ended September 30, 2008 were approximately $147.0 million, consisting of $122.3 million of ethanol sales (83%) and $25.5 million in distiller's grains sales (17%).  Revenues increased in fiscal year 2008 by approximately 24%, when compared to the fiscal year 2007. Lincolnway Energy sold approximately 54.3 million gallons of ethanol at an average price of $2.25 per gallon, 131,000 tons of dried distiller's grains at an average price of $183.00 per ton and 33,000 tons of wet distiller's grains at an average price of $49.00 per ton during the fiscal year ended September 30, 2008.  Lincolnway Energy also sold approximately $1.4 million of syrup and corn oil during the 2008 fiscal year.  The increase in revenues for the fiscal year ended September 30, 2008 resulted from an 8% increase in sales volume and a 10% increase in price for ethanol, and a 66% increase in the sales price for distiller's grains, all as compared to the previous fiscal year. The increase in ethanol sales volume is due to Lincolnway Energy's increase in production over the nameplate of 50 million gallons per year. In April 2007, Lincolnway Energy started entering into derivative contracts to hedge its exposure to price risk as it relates to ethanol sales. The revenues for the year ended September 30, 2008 include a combined unrealized and realized net loss on derivative contracts of $2.2 million, compared to a $514,464 gain for the year ended September 30, 2007.

The average price Lincolnway Energy received for its dried distiller's grains increased to $183.00 per ton in fiscal year 2008, from $110.00 per ton in fiscal year 2007.  The higher prices received for distiller's grains helped offset the higher price which was paid by Lincolnway Energy for corn.  Management believes the increase in the price for distiller's grains is a result of the increase in the price of corn because increased corn prices positively affects the price of distiller's grains because animal feeding operations substitute distiller's grains as animal feed in place of corn.  This increase in demand for distiller's grains as a substitute for corn is offset, however, by an increase in the supply of distiller's grains resulting from increased ethanol production in fiscal year 2008 as compared to 2007.  Management expects that distiller's grains prices could decrease slightly in the foreseeable future as the supply of distiller's grains increases as a result of increased ethanol production.
 
 
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Lincolnway Energy's cost of goods sold for the fiscal year ended September 30, 2008 totaled approximately $138.3 million, which was an increase of 47% when compared to fiscal year 2007.  The increase in cost of goods sold for the 2008 fiscal year is primarily due to a 7% increase in ethanol production and a 46% increase in the average cost of corn per bushel for fiscal year 2008.   Cost of goods sold major components are: corn costs, energy costs, ingredient costs, production labor, repairs and maintenance, process depreciation, and ethanol and distiller's grain freight expense and marketing fees.  Cost of goods sold for fiscal year 2008 also includes a combined unrealized and realized net gain of $3.4 million from derivative instruments, and a $1.1 million unrealized loss on firm purchase commitments, which is recognized in corn costs, compared to a $2.7 million combined unrealized and realized net gain and no loss on firm purchase commitments for fiscal year 2007.

Corn costs for the fiscal year ended September 30, 2008 totaled approximately $98.0 million, compared to $59.7 for fiscal year 2007. Approximately 19.5 million bushels of corn was ground during fiscal year 2008 at an average cost of $4.99 per bushel, compared to 17.5 million bushels at an average cost of $3.42 for fiscal year 2007. The increase in bushels ground was due to the increase in production during fiscal year 2008.  Corn costs, including the combined unrealized and realized net gain from derivative instruments and a unrealized loss on firm purchase commitments, represented 69% of cost of goods sold for the fiscal year ended September 30, 2008, compared to 61% of costs of goods sold for fiscal year 2007.

Lincolnway Energy enters into future purchase contracts for corn and these contracts are evaluated for potential losses.  As of September 30, 2008, Lincolnway Energy had various corn fixed and basis contracts for approximately 3,564,000 bushels.  Due to rapidly falling corn prices, at September 30, 2008, Lincolnway Energy recorded a loss  of approximately $.72 on 1,413,571 bushels of fixed price contracts and $.06 on 1,040,000 bushels of basis contracts, totaling approximately a $1.1 million unrealized loss.

Lincolnway Energy anticipates continued volatility in Lincolnway Energy's corn costs due to the timing of the change in value of the derivative instruments relative to the cost and use of the corn being hedged.

Energy costs for the fiscal year ended September 30, 2008 totaled approximately $8.2 million, or 6% of cost of goods sold, compared to $6.7 million, or 8% of cost of goods sold, for the 2007 fiscal year.  Energy costs consist of coal costs and electricity and propane costs.  For the fiscal year ended September 30, 2008, Lincolnway Energy purchased approximately 98,000 tons of coal at an approximate total cost of $5.8 million.  Electricity and propane costs amounted to approximately $2.3 million. Electricity costs decreased as a percentage of cost of goods sold for the fiscal year 2008 due to the installation of two capacitors to the existing system.

Ingredient costs for the fiscal year ended September 30, 2008 totaled approximately $6.8 million, or 5% of cost of goods sold, compared to $6.0 million, or 6% of cost of goods sold, for the 2007 fiscal year.  Ingredients were a smaller percentage of cost of goods sold for fiscal year 2008 due to corn costs representing a larger percentage for the year.   Ingredient costs consist of denaturant, enzymes and process chemicals.
 
 
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Production labor, repairs and maintenance and other plant costs totaled approximately $5.3 million, or 4% of cost of goods sold, for the fiscal year ended September 30, 2008, compared to $4.7 million, or 5% of cost of goods sold, for fiscal year 2007.

Depreciation totaled approximately $7.4 million, or 5% of cost of goods sold, for the fiscal year ended September 30, 2008, compared to $7.3 million, or 8% of cost of goods sold, for fiscal year 2007.

Ethanol and distiller's grain freight expense and marketing fees totaled approximately $14.2 million, or 10% of cost of goods sold, during the fiscal year ended September 30, 2008, compared to $11.8 million, or 12% of cost of goods sold, for fiscal year 2007.  An increase in sales for the 2008 fiscal year drove these costs up for the 2008 fiscal year.

General and administrative expenses totaled approximately $2.6 million during the fiscal year ended September 30, 2008, compared to $2.9 million for fiscal year 2007. The decrease of $.3 million is due to a reduction of professional fees and business promotions.

Other income and expense totaled approximately $1.2 million net expense during the fiscal year ended September 30, 2008, compared to $1.7 million net expense for fiscal year 2007. The decrease in net expense is due to a decrease in interest expense for the fiscal year ended September 30, 2008. Long-term debt and interest rates decreased for fiscal year 2008 compared to fiscal year 2007.

Risks, Trends and Factors that May Affect Future Operating Results

Corn

Corn prices for the fiscal year ended September 30, 2009 somewhat stabilized, relative to the historic volatility and high prices experienced in the prior fiscal year.  The chart below shows the delivery month corn futures (CBOT) had a slight downward trajectory but fluctuated mainly $.70 either side of $3.80.  Although still a large price range in which to manage the risk, it did mark a decrease in volatility from the 2008 fiscal year.  The high mark in futures values was made on the first day of the fiscal year at $4.84 (December 08 futures month).  The low was made near the end of the fiscal year on September 4, 2009 at $3.06 (December 09 futures month).

 
52

 

Source: Chicago Board of Trade

Management believes much of the decrease in corn values and price versus the 2008 fiscal year can be attributed to a decrease in liquidity following the late 2008 recession.  Much of the speculative money that had driven the boom in the 2008 fiscal year was taken out of play in the fiscal year ended September 30, 2009.

Going forward into fiscal year 2010, corn usage is expected to jump back up to levels seen in fiscal year 2008 (12.7-12.9 billion bushels).  However, yields on the new crop are currently predicted at 162.9 bushels per acre, over 12 bushels per acre above the 07/08 crop year.

These higher yield expectations of the current crop are expected to maintain prices below the $5.00 mark.  However, it does serve to highlight the main risk factor to ethanol profitability, crop yields.  Regardless of whether it's world-wide drought effecting wheat, or a widespread crop disease in the US affecting corn or soybeans, crop yields are an inherent risk.  In a shortage situation, the market will attempt to ration usage through higher prices, and likely lower profits in the ethanol production industry.

Lincolnway Energy attempts to offset or hedge some of the risk involved with the changing corn price through the trading of futures and options on the Chicago Board of Trade (CME Group), as well as the purchase of physical delivery contracts from suppliers.  Lincolnway Energy continues to monitor and attempt to manage risks involved with corn production in order to attempt to ensure adequate supply and protection against rapid price increases.  Lincolnway Energy believes that option strategies currently offer the greatest flexibility for Lincolnway Energy's purposes.
 
 
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Ethanol

Ethanol prices correlated strongly with corn prices in the fiscal year ended September 30, 2009, much like the 2008 fiscal year.  The chart below shows that, for the most part, ethanol futures traded $.18 either side of $1.62.  The high futures price for the fiscal year was made at $2.0925 on October 1, 2008.  The low was made toward the end of the fiscal year on July 10, 2009 at $1.4675.

Source: Chicago Board of Trade

Even though ethanol values were less volatile than the 2008 fiscal year, they did stay well below the cost of production for a majority of the 2009 fiscal year.  This was due mainly to the gross oversupply of production capacity that had been built through 2007 and realized by the market in 2008.  Much of this production had to be idled because the demand picture was one that couldn't keep pace.  In calendar year 2009, the industry was known to have approximately 13.1 billion gallons of production capacity and only 10.8 billion gallons of demand, resulting in an overcapacity of 2.3 billion gallons.  In calendar year 2008 the overcapacity was in place as well, but was much less, at 1.4 billion gallons of overcapacity.  Calendar year 2010 is expected to show an overcapacity of about 1.7 billion gallons, as demand increases.  Moving forward, overcapacity will continue to be a risk to the profitability of Lincolnway Energy, but management expects the risk to decrease somewhat with time if demand increases as currently projected.  Also, the balance sheets of most ethanol plants will require several years to recover, making the likelihood of widespread expansion limited.  New construction should also slow or be limited to those currently underway, as capital inflows into the ethanol industry have stopped and been somewhat soured after poorer returns in the past two years.
 
 
54

 

Government policy continues to be an ongoing factor to be monitored with regard to ethanol profitability.  Greenhouse gas legislation, E10 increases, and the Volumetric Ethanol Excise Tax Credit (VEETC) are all critical components of the ethanol profitability structure and are all under the control of federal and state governments.

The Volumetric Ethanol Excise Tax Credit (VEETC) is a law that is continually scrutinized by the government.  This law, enacted in 2004, originally allowed a 54 cent per gallon tax credit to blenders and sellers of ethanol.  The credit was reduced to 51 cents effective in January 2005, and further reduced to 45 cents on January 1, 2009.  Further reductions in the VEETC tax credit present a potential risk for the ethanol industry and Lincolnway Energy.

Lincolnway Energy believes that the E10 "blend wall" is one of the most critical governmental policies currently facing the ethanol industry.  The issue is comprised of a couple of components.  First, the Renewable Fuels Standards (RFS) dictates a continuing increase in the amount of ethanol blended into the national gasoline supply.  Second, the Environmental Protection Agency (EPA) mandates a limit of 10% ethanol inclusion in non-flex fuel vehicles, and the E85 vehicle marketplace is struggling to grow due to lacking infrastructure.  Total gasoline usage by the U.S. is currently around 138 billion gallons, and is expected to decrease to less than 130 billion gallons over the next 5 years as fuel mileage standards are changed.  The RFS dictates an increasing amount of ethanol blending:  13.95 billion gallons in 2011, 15.2 billion gallons in 2012, all the way to 36 billion gallons by 2022.  To reach the standard as dictated by the RFS in 2011, assuming 135 billion gallons of total gasoline usage nationally, we would have to blend every single gallon of fuel with greater than 10% ethanol.  The EPA policy of 10% and the RFS increasing blend rate are at odds, which is sometimes referred to as the blend wall.  One industry group has petitioned the EPA for a waiver of the E10 law and an increase to E15.  The EPA has currently postponed the expected December decision.  This issue is a major risk to the ethanol industry.

U.S. and international recession also continues to create a potential risk factor for ethanol prices.  There has been a dramatic decrease in overall oil and gasoline demand as the high prices last year, along with tightening economic conditions, have driven consumers to use less energy. 

 
55

 

Crush Margin

The gross crush margin represents the biggest factor affecting the future results of Lincolnway Energy.  This margin figure represents the gross profit or loss of buying a bushel of corn and converting it into gallons of marketable denatured ethanol.  All of the fundamental factors that influence the corn or ethanol markets are ultimately expressed in the crush margin.  The values of corn and ethanol have been strongly correlated for the fiscal year ended September 30, 2009, which is the main contributing factor in the stability of the gross crush margin.  Lincolnway Energy expects this trend to continue through the fiscal year ending September 30, 2010. Major factors that could change the crush margin, thereby affecting future profitability results of Lincolnway Energy, include weather affecting corn production, changes in governmental policy, and international economic changes.


Source: Chicago Board of Trade

 
56

 

Critical Accounting Estimates and Accounting Policies

Lincolnway Energy's financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which Lincolnway Energy operates.  This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes.  These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements.  Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported.  Management believes the following policies are both important to the portrayal of Lincolnway Energy's financial condition and results of operations and require subjective or complex judgments; therefore, management considers the following to be critical accounting policies.

Off-Balance Sheet Arrangements

Lincolnway Energy currently does not have any off-balance sheet arrangements.

Revenue Recognition

Revenue from the sale of Lincolnway Energy's ethanol and distiller's grains is recognized at the time title and all risks of ownership transfer to the customers.  This generally occurs upon the loading of the product.  For ethanol, title passes from Lincolnway Energy at the time the product crosses the loading flange in either a railcar or truck. For distiller's grains, title passes upon the loading of distiller's grains into trucks.  For railcar shipments, this takes place when the railcar is filled and the marketer receives written notice that they have been loaded and are available for billing.  Shipping and handling costs incurred by Lincolnway Energy for the sale of ethanol and distiller's grain are included in costs of goods sold.

Lincolnway Energy's ethanol was sold pursuant to an ethanol marketing agreement between Lincolnway Energy and RPMG until approximately September 30, 2009, at which time Lincolnway Energy began selling its ethanol production to Green Plains Trade Group LLC, as is discussed above in the "Overview" section of this Item.  Under the agreement with RPMG, Lincolnway Energy's ethanol was pooled with the ethanol of other ethanol producers whose ethanol was marketed by RPMG.  Lincolnway Energy paid RPMG a marketing fee of $.01 per gallon, and RPMG paid Lincolnway Energy a netback price per gallon that is based upon the difference between the pooled average delivered ethanol selling price and the pooled average distribution expense.  These averages were calculated based upon each pool participant's selling price and expense averaged in direct proportion to the volume of ethanol supplied by each participant to the pool.
 
 
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Lincolnway Energy's distiller's grain production is sold to Hawkeye Gold, LLC.  Lincolnway Energy pays Hawkeye Gold, LLC a marketing fee for dried distiller's grains equal to the greater of 2% of the FOB plant price for the dried distiller's grain or a per-ton fee of $1.30 for the dried distiller's grain.  The marketing fee for wet distiller's grains is the greater of 3% of the FOB plant price for the wet distiller's grains or a per-ton fee of $1.00 for the wet distiller's grains.

Lincolnway Energy's corn oil production is sold to FEC Solutions, LLC (FECS). For corn oil, title passes upon the loading of the corn oil into the trucks. The purchase price payable by FECS for each shipment of corn oil is the FOB sales price less a marketing and technical assistance fee in an amount equal to 5% of the FOB sales price.

Derivative Instruments

Lincolnway Energy enters into derivative contracts to hedge its exposure to price risk related to forecasted corn needs, forward corn purchase contracts and ethanol sales.   Lincolnway Energy does not typically enter into derivative instruments other than for hedging purposes.  All the derivative contracts are recognized on the September 30, 2009, 2008 and 2007 balance sheets at fair value.  Although Lincolnway Energy believes Lincolnway Energy's derivative positions are economic hedges, none has been designated as a hedge for accounting purposes.  Accordingly, any realized or unrealized gain or loss related to these derivative instruments is recorded in the statement of operations as a component of cost of goods sold in the case of corn contracts and as a component of revenue in the case of ethanol sales.

The effects on operating income from derivatives is as follows for the years ending September 30, 2009, 2008 and 2007:
 
   
2009
   
2008
   
2007
 
                   
Increase (decrease) in revenue due to derivatives related to ethanol sales:
                 
Realized
  $ 10,440     $ (2,174,662 )   $ -  
Unrealized
    -       (28,492 )     514,464  
Total effect on revenue
    10,440       (2,203,154 )     514,464  
                         
(Increase) decrease in cost of goods sold due to derivates related to corn costs:
                       
Realized
    (3,783,088 )     6,280,771       4,131,488  
Unrealized
    (72,350 )     (2,836,100 )     (1,428,563 )
Total effect on cost of goods sold
    (3,855,438 )     3,444,671       2,702,925  
                         
Total (decrease) increase  to operating income due to derivative activities
  $ (3,844,998 )   $ 1,241,517     $ 3,217,389  
 
Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed "normal purchases and normal sales", and therefore are not marked to market in Lincolnway Energy's financial statements, but are subject to a lower of cost or market assessment.

 
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Firm Purchase Commitments for Corn

To ensure an adequate supply of corn to operate the plant, Lincolnway Energy enters into contracts to purchase corn from local farmers and elevators. As of September 30, 2009, Lincolnway Energy had various fixed and basis contracts for approximately 362,293 bushels.  Of the 362,293 bushels under contract, approximately 262,293 had a fixed price at an weighted average of $3.39 per bushel and approximately 100,000 had basis contracts at an average basis of $.10 per bushel as of September 30, 2009.  The cost of these contracts were lower than replacement cost, so no liability has been recorded as of September 30, 2009.  As of September 30, 2008, Lincolnway Energy recorded an unrealized loss of $1,065,000 on firm purchase commitments for corn.  No unrealized losses were recorded for the year ended September 30, 2007.

Liquidity and Capital Resources

The following table shows cash flows for the fiscal years ended September 30, 2009 and 2008:

   
Year ended September 30,
 
   
2009
   
2008
 
Net cash provided by operating activities
  $ 1,551,841     $ 14,190,197  
Net cash (used in) investing activities
    (611,078 )     (1,100,344 )
Net cash (used in) financing activities
    (3,826,864 )     (12,235,713 )

For the fiscal year ended September 30, 2009, cash provided by operating activities was $1.6 million, compared to cash provided by operating activities of $14.2 million for the fiscal year ended September 30, 2008. The $12.6 million decrease is primarily due to a decrease in net income for fiscal year 2009 of $11.3 million.  This decrease in net income is primarily the result of a 26% decrease in ethanol prices, a 15.3% decrease in dried distillers grain price, and other negative market factors that the ethanol industry experienced in the fiscal year 2009.

Cash flows from investing activities reflect the impact of property and equipment acquired for the ethanol plant.  Net cash used in investing activities decreased by $.5 million for the fiscal year ended September 30, 2009, when compared to the fiscal year ended September 30, 2008.  The decrease is primarily due to a reduction of capital expenditures for the fiscal year 2009.

Cash flows from financing activities include transactions and events whereby cash is obtained or paid back to or from depositors, creditors or investors.  Net cash used in financing activities decreased by $8.4 million for the fiscal year ended September 30, 2009, when compared to the fiscal year ended September 30, 2008.  The decrease is due to a decrease in distribution payments to the members for the 2009 fiscal year.

 
59

 
Management believes that margins will improve for the first quarter in fiscal year 2010, and if demand for ethanol continues to grow and corn prices stay stable, Lincolnway Energy could see improved margins throughout the fiscal year.  Lincolnway Energy anticipates to continue to keep cash balances at a low but acceptable level that will meet covenants.  If Lincolnway Energy should get in a negative cash position, Lincolnway Energy anticipates having access to its $10 million line of credit.

As of September 30, 2009, Lincolnway Energy was not in compliance with the minimum debt service coverage ratio covenant in its loan agreements with Co-Bank.  On October 5, 2009, Lincolnway Energy received a letter from Co-Bank waiving any action on the noncompliance for fiscal year 2009.  Lincolnway Energy anticipates being in compliance with this covenant and all other loan covenants during fiscal year 2010.
 
The following table shows cash flows for the fiscal years ended September 30, 2008 and 2007:

   
Year ended September 30,
 
   
2008
   
2007
 
Net cash provided by operating activities
  $ 14,190,197     $ 30,319,132  
Net cash (used in) investing activities
    (1,100,344 )     (2,882,841 )
Net cash (used in) financing activities
    (12,235,713 )     (24,311,256 )
 
For the fiscal year ended September 30, 2008, cash provided by operating activities was $14.2 million, compared to cash provided by operating activities of $30.3 million for the fiscal year ended September 30, 2007. The decrease was due to a decrease in net income for fiscal year 2008.  The decrease in net income was primarily the result of increased corn prices that increased Lincolnway Energy's cost of goods sold.

Cash flows from investing activities reflect the impact of property and equipment acquired for the ethanol plant.  Net cash used in investing activities decreased by $1.8 million for the fiscal year ended September 30, 2008, when compared to the fiscal year ended September 30, 2007.  The decrease was primarily due to a reduction of capital expenditures for the fiscal year 2008.

Cash flows from financing activities include transactions and events whereby cash is obtained or paid back to or from depositors, creditors or investors.  Net cash used in financing activities decreased by $12.1 million for the fiscal year ended September 30, 2008, when compared to the fiscal year ended September 30, 2007.  The decrease was due to a decrease in distribution payments to the members for the year and a decrease in payments on long term borrowing.  Lincolnway Energy made payments on its term loan of $3,750,000 during fiscal year 2008, compared to payments of $8,750,000 in fiscal year 2007.

60

 
Loans and Agreements

Lincolnway Energy has a construction and term loan with Co-Bank.  The interest rate under the term loan was a variable interest rate based on the agent base rate less .05%.  The loan requires 30 principal payments of $1,250,000 per quarter.  The quarterly payments commenced in December 2006 and will continue through March 2013.  In order to alleviate some of the interest rate risk, on July 25, 2008 Lincolnway Energy fixed $7,750,000 of the $19,000,000 loan outstanding at an interest rate of 6.62%, through July 2011.  Upon maturity the fixed portion of the loan will revert back to a variable rate, and the same payment amortization schedule will apply.  The borrowings under the loan are collateralized by substantially all of Lincolnway Energy's assets.

The loan requires the maintenance of certain financial and nonfinancial covenants.  As of September 30, 2009, Lincolnway Energy was not in compliance with the minimum debt service coverage ratio covenant.  On October 5, 2009, however, Lincolnway Energy received a letter from Co-Bank waiving any action on the noncompliance.

On October 6, 2009, an amendment was made to the construction and term loan variable interest rate.  The variable interest rate will now be based on the one-month LIBOR index rate plus 3.30%.  The interest rate will be reset automatically without notice to Lincolnway Energy, on the first "US Banking Day" of each succeeding week, and each change shall be applicable to all outstanding balances as of that date.

As of September 30, 2009, Lincolnway Energy has made principal payments of $23,750,000 since the inception of the loan.  The balance remaining on the loan as of September 30, 2009 is $15,250,000.  The next scheduled payment is due in March, 2010.

Lincolnway Energy also has a $10,000,000 construction/revolving term credit facility with Co-Bank.  The interest rate under the credit facility agreement was a variable interest rate based on the agent base rate less .05%.  Borrowings are subject to borrowing base restrictions as defined in the agreement.  The credit facility requires the maintenance of certain financial and nonfinancial covenants.  The borrowings under the agreement are collateralized by substantially all of Lincolnway Energy's assets.  On October 6, 2009 an amendment was made to the construction/revolving term credit facility variable interest rate.  The variable interest rate now will be based on the one-month LIBOR index rate plus 3.30%.  The interest rate will be reset automatically without notice to Lincolnway Energy, on the first "US Banking Day" of each succeeding week, and each change shall be applicable to all outstanding balances as of that date.  The construction/revolving term credit facility has a commitment fee on the average daily unused portion of the commitment at a rate of ½ of 1% per annum, payable monthly.  The agreement also includes certain prepayment penalties.  There was no balance outstanding on this credit facility as of September 30, 2009.

Lincolnway Energy executed a mortgage and security interest in favor of Co-Bank creating a first lien on substantially all of its assets, including the real estate and ethanol plant and all personal property located on its property for the loan and credit agreements discussed above.

61

 
Lincolnway Energy also has subordinated debt financing which includes a subordinated note of $1,250,000 payable to Fagen, Inc., with an interest rate of 4%, and a $1,216,781 note payable to Fagen, Inc., with an interest rate of 5% per annum.  Principal is due in full under both of those notes at maturity on May 22, 2021 and November 17, 2014, respectively.
 
Lincolnway Energy also entered into a $500,000 loan agreement with the Iowa Department of Transportation in February 2005.  Under the agreement, the loan proceeds were disbursed upon submission of paid invoices and interest at 2.11% per annum began to accrue on January 1, 2007.  Payments began on July 1, 2007.  Lincolnway Energy also has a $300,000 loan agreement and a $100,000 forgivable loan agreement with the Iowa Department of Economic Development.  The $300,000 loan does not impose any interest, and the $100,000 loan is forgivable upon the completion of Lincolnway Energy's ethanol plant and the production of at least 50 million gallons of ethanol before the project completion date of October 31, 2008.  The Iowa Department of Economic Development determined those conditions to forgiveness of the $100,000 loan were met, and the loan was forgiven on January 22, 2009.  As of December 15, 2009, Lincolnway Energy had made payments totaling $95,000 on the Iowa Department of Economic Development $300,000 loan agreement and $115,340 on the Iowa Department of Transportation agreement.

Lincolnway Energy entered into an agreement with an unrelated entity on March 3, 2007 to lease railcars.  The 5 year term of the agreement will end in March 2011.  The agreement required a $351,000 letter of credit facility as partial security for Lincolnway Energy's obligations under the agreement.  The letter of credit facility was initially funded through a $4,000,000 revolving credit agreement with Co-Bank.  On April 11, 2008, the $4,000,000 revolving credit agreement was reduced to $351,000, the amount of the above mentioned letter of credit.  The $351,000 revolving credit agreement was cancelled on July 3, 2007, because an amendment was made to the railcar lease agreement on June 19, 2007 that allowed Lincolnway Energy to purchase a certificate of deposit for $351,000 in lieu of the letter of credit. The certificate of deposit will mature on January 20, 2010 and will be automatically renewed.  Interest is paid to Lincolnway Energy on the certificate of deposit on a quarterly basis.

Lincolnway Energy terminated its ethanol marketing agreement with RPMG, Inc. effective October 1, 2009, and as part of that process, Lincolnway Energy was assigned a railcar lease between RPMG, Inc. and Trinity Industries Leasing Company.  The lease includes 100 tank rail cars used for transporting ethanol.  The lease calls for monthly payments of $52,500 plus applicable taxes, beginning October 1, 2009.  There is also an additional usage rental of 3 cents per mile for each car that exceeds 35,000 miles.  The lease has a scheduled maturity date of September 2016.
 
62

 
Contractual Obligations Table

In addition to long-term debt obligations, Lincolnway Energy has certain other contractual cash obligations and commitments.  The following tables provide information regarding Lincolnway Energy's contractual obligations and commitments as of September 30, 2009:

         
Payment Due By Period
 
         
Less than
   
Two to
   
Four to
   
More than
 
Contractual Obligations
 
Total
   
One Year
   
Three Years
   
Five Years
   
Five Years
 
Long-Term Debt Obligations
  $ 18,313,941     $ 3,825,357     $ 10,131,282     $ 1,755,517     $ 2,601,785  
Interest Obligation of Long-Term Debt
    2,590,705       897,588       992,180       273,745       427,192  
Operating Lease Obligations
    5,453,534       1,370,621       1,562,913       1,260,000       1,260,000  
Purchase Obligations
                                       
Coal Supplier Commitment
    15,054,855       5,272,455       9,782,400       -       -  
Corn Supplier Commitment
    890,093       890,093       -       -       -  
Denaturant Commitment
    313,500       313,500       -       -       -  
Total
  $ 42,616,628     $ 12,569,614     $ 22,468,775     $ 3,289,262     $ 4,288,977  
 
Employees

As of December 15, 2009, Lincolnway had 45 employees in the following general positions:

Position
 
# Employed
President and Chief Executive Officer
 
1
Chief Financial Officer
 
1
Plant Manager
 
1
Environmental/Human Resource and Safety Manager
 
1
Merchandising/Logistics  Manager
 
1
Controller
 
1
Lab Supervisor
 
1
Production Manager
 
1
Maintenance Manager
 
1
Logistics Supervisor
 
1
Admin/Clerical
 
5
Shift Supervisors
 
4
Maint/Instrument Technicians
 
8
Lab Technicians
 
1
Plant Operators
 
17
Total
  
45
 
63

 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.

In addition to risks inherent in Lincolnway Energy's operation, Lincolnway Energy is exposed to various market risks.  The primary market risks arise as a result of possible changes in interest rates and certain commodity prices.
 
 
Interest Rate Risk

 
Lincolnway Energy has various outstanding loan agreements and promissory notes which expose Lincolnway Energy to market risk related to changes in the interest rate imposed under those loan agreements and promissory notes.

 
Lincolnway Energy has loan agreements and/or promissory notes with the following entities, and with the principal balance and interest rates indicated:

   
Principal Balance
       
Lender
 
As of September 30, 2009
   
Rate
 
Co-Bank
  $ 7,750,000       6.62 %
Co-Bank
    7,500,000       3.70 %
IA Department Economic Development
    212,500       0.00 %
IA Department of Transportation
    384,660       2.11 %
Fagen, Inc
    1,216,781       5.00 %
Fagen, Inc
    1,250,000       4.00 %
    $ 18,313,941          
 
 
The interest rate under all of the loan agreements and promissory notes, other than with respect to $7,500,000 of the CoBank loan, are fixed at the interest rates specified above.  The interest rate with respect to $7,500,000 of the CoBank loan is at the agent base rate, less .05%, and was at 3.70% per annum as of September 30, 2009.

 
A hypothetical increase of 1% in the interest rates under the CoBank loan agreements would result in additional interest expense of approximately $75,000 based upon the year ending September 30, 2009 balance on the variable interest rate portion of the Co-Bank loan of $7,500,000.
 
64

 
 
Commodity Price Risk

 
Lincolnway Energy is also exposed to market risk with respect to the price of ethanol, Lincolnway Energy's principal product, and the price and availability of corn, the principal commodity used by Lincolnway Energy to produce ethanol.  The other primary product of Lincolnway Energy is distiller's grains, and Lincolnway Energy is also subject to market risk with respect to the price for distillers grains.

 
In general, rising ethanol and distillers grains prices result in higher profit margins, and therefore represent favorable market conditions.  Ethanol and distillers grains prices are, however, influenced by various factors beyond the control of Lincolnway Energy's management, including the supply and demand for gasoline, the availability of substitutes and the effect of laws and regulations.
 
 
In general, rising corn prices result in lower profit margins and, accordingly, represent unfavorable market conditions.  Lincolnway Energy will generally not be able to pass along increased corn costs to its ethanol customers.  The availability and price of corn is subject to wide fluctuations due to various unpredictable factors which are beyond the control of Lincolnway Energy's management, including weather conditions, farmer planting decisions, governmental policies with respect to agriculture and local, regional, national and international trade, demand and supply. For example, if corn costs were to increase $.10 cents per bushel from one year to the next, the impact on cost of goods sold would be approximately $1.98 million for the year.  Lincolnway Energy's average corn costs for the fiscal years ended September 30, 2009 and September 30, 2008 was approximately $3.70 per bushel and $4.99 per bushel, respectively.

 
Although Lincolnway Energy believes that its futures and option positions accomplish an economic hedge against Lincolnway Energy's future purchases of corn or future sales of ethanol, Lincolnway Energy has chosen not to use hedge accounting for those positions, which would match the gain or loss on the positions to the specific commodity purchase being hedged.  Lincolnway Energy is instead using fair value accounting for the positions, which generally means that as the current market price of the positions changes, the realized or unrealized gains and losses are immediately recognized in Lincolnway Energy's costs of goods sold in the statement of operations for corn positions or as a component of revenue in the statement of operations for ethanol positions.  The immediate recognition of gains and losses on those positions can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the positions relative to the cost and use of the commodity being hedged.  For example, Lincolnway Energy's corn position gain and (loss) that was included in its earnings for the fiscal year ended September 30, 2009 was a loss of $(3,855,438), as opposed to a gain of $3,444,671 for the fiscal year ended September 30, 2008.

 
Another important raw material for the production of Lincolnway Energy's ethanol is coal.  Lincolnway Energy's cost per ton for coal under its current coal supply agreement is subject to various fixed and periodic adjustments based on factors which are outside of the control of Lincolnway Energy's management, including based upon changes in certain inflation type indices, increases in transportation costs and the quality of the coal.  Lincolnway Energy's coal costs will therefore vary, and the variations could be material.  Coal costs represented approximately 5% of Lincolnway Energy's total cost of goods sold for the fiscal year ended September 30, 2009, compared to 4% for the comparable 2008 year.
 
65

 
 
The extent to which Lincolnway Energy may enter into arrangements with respect to its ethanol or corn during the year may vary substantially from time to time based on a number of factors, including supply and demand factors affecting the needs of customers or suppliers to purchase ethanol or sell Lincolnway Energy raw materials on a fixed basis, Lincolnway Energy's views as to future market trends, seasonable factors and the cost of futures contracts.
 
[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
 
 
66

 
 
Item 8.               Financial Statements and Supplementary Data.
 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Members
Lincolnway Energy, LLC

We have audited the accompanying  balance sheets of Lincolnway Energy, LLC as of September 30, 2009 and 2008, and the related  statements of operations, members' equity, and cash flows for each of the three years in the period ended September 30, 2009.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the  financial statements referred to above present fairly, in all material respects, the financial position of Lincolnway Energy, LLC as of September 30 , 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended September 30 , 2009, in conformity with U.S. generally accepted accounting principles.

 We were not engaged to examine management's assessment of the effectiveness of Lincolnway Energy, LLC's internal control over financial reporting as of September 30, 2009, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.
 
Des Moines, Iowa

December 22, 2009
 
67

 
Lincolnway Energy, LLC

Balance Sheets
September 30, 2009 and 2008

   
2009
   
2008
 
             
ASSETS (Note 4)
           
             
CURRENT ASSETS
           
Cash and cash equivalents
  $ 5,824,947     $ 8,711,048  
Due from broker
    565,276       7,926,204  
Trade and other accounts receivable (Note 8)
    3,772,183       3,625,594  
Inventories (Note 3)
    2,485,372       3,994,022  
Prepaid expenses and other
    197,047       83,765  
Total current assets
    12,844,825       24,340,633  
                 
PROPERTY AND EQUIPMENT
               
Land and land improvements
    7,580,868       6,991,822  
Buildings and improvements
    1,604,305       1,604,305  
Plant and process equipment
    74,853,995       74,833,725  
Construction in progress
    -       11,652  
Office furniture and equipment
    355,654       346,441  
      84,394,822       83,787,945  
Accumulated depreciation
    (27,101,259 )     (18,777,458 )
      57,293,563       65,010,487  
                 
OTHER ASSETS
               
Restricted cash (Note 4)
    351,000       351,000  
Financing costs, net of amortization of $166,260 and $123,354
    305,702       348,608  
Deposit
    151,036       463,994  
Investments
    145,975       2,000  
      953,713       1,165,602  
                 
    $ 71,092,101     $ 90,516,722  
 
See Notes to Financial Statements.

68


   
2009
   
2008
 
             
LIABILITIES AND MEMBERS’ EQUITY
           
             
CURRENT LIABILITIES
           
Accounts payable
  $ 877,216     $ 2,131,287  
Accounts payable, related party (Note 7)
    298,533       1,109,612  
Current maturities of long-term debt (Note 4)
    3,825,357       2,574,363  
Accrued expenses
    948,309       577,993  
Accrued loss on firm purchase commitments (Note 6)
    -       1,065,000  
Derivative financial instruments (Note 9)
    224,850       6,665,505  
Total current liabilities
    6,174,265       14,123,760  
                 
NONCURRENT LIABILITIES
               
 Long-term debt, less current maturities (Note 4)
    14,488,584       19,666,442  
Other
    450,000       331,927  
Total noncurrent liabilities
    14,938,584       19,998,369  
                 
COMMITMENTS AND CONTINGENCY (Notes 5, 8 and 11)
               
                 
MEMBERS’ EQUITY
               
Member contributions, 42,049
               
 units issued and outstanding
    38,990,105       38,990,105  
Retained earnings
    10,989,147       17,404,488  
      49,979,252       56,394,593  
                 
    $ 71,092,101     $ 90,516,722  
 
 
 
69

 
 
Lincolnway Energy, LLC

Statements of Operations
Years Ended September 30, 2009, 2008 and 2007

   
2009
   
2008
   
2007
 
                   
Revenues (Note 8)
  $ 110,223,531     $ 147,040,911     $ 118,783,540  
                         
Cost of goods sold (Note 7)
    113,576,938       138,309,541       94,233,456  
                         
Gross profit (loss)
    (3,353,407 )     8,731,370       24,550,084  
                         
General and administrative expenses
    2,366,638       2,647,368       2,903,436  
                         
Operating income (loss)
    (5,720,045 )     6,084,002       21,646,648  
                         
Other income (expense):
                       
Interest income
    39,743       181,895       445,703  
Interest expense
    (860,303 )     (1,430,469 )     (2,228,179 )
Other
    125,264       -       91,194  
      (695,296 )     (1,248,574 )     (1,691,282 )
                         
Net income (loss)
  $ (6,415,341 )   $ 4,835,428     $ 19,955,366  
                         
Weighted average units outstanding
    42,049       42,049       42,519  
                         
Net income (loss) per unit - basic and diluted
  $ (152.57 )   $ 115.00     $ 469.33  

See Notes to Financial Statements.
 
 
70

 

Lincolnway Energy, LLC

Statements of Members' Equity
Years Ended September 30, 2009, 2008 and 2007
 
   
Member
   
Retained
       
   
Contributions
   
Earnings
   
Total
 
                   
Balance, September 30, 2006
  $ 39,800,105     $ 15,862,144     $ 55,662,249  
Repurchase of 810 membership units (Note 2)
    (810,000 )     -       (810,000 )
Distributions ($350 per unit)
    -       (14,838,650 )     (14,838,650 )
Net income
    -       19,955,366       19,955,366  
Balance, September 30, 2007
    38,990,105       20,978,860       59,968,965  
Distributions ($200 per unit)
    -       (8,409,800 )     (8,409,800 )
Net income
    -       4,835,428       4,835,428  
Balance, September 30, 2008
    38,990,105       17,404,488       56,394,593  
Net loss
            (6,415,341 )     (6,415,341 )
Balance, September 30, 2009
  $ 38,990,105     $ 10,989,147     $ 49,979,252  
 
See Notes to Financial Statements.
 
 
71

 

Lincolnway Energy, LLC

Statements of Cash Flows
Years Ended September 30, 2009, 2008 and 2007
 
   
2009
   
2008
   
2007
 
                   
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net income (loss)
  $ (6,415,341 )   $ 4,835,428     $ 19,955,366  
Adjustments to reconcile net income (loss) to net cash provided by
                       
 operating activities:
                       
Depreciation and amortization
    8,367,309       8,151,084       8,053,101  
Loss on disposal of property and equipment
    3,599       27,491       121,786  
Forgiven loan
    (100,000 )     -       -  
(Increase) in investments
    (143,975 )     -       -  
Changes in working capital components:
                       
Decrease (increase) in due from broker
    7,360,928       (7,081,035 )     (143,721 )
(Increase) decrease in trade and other accounts receivable
    (146,589 )     (1,150,001 )     1,996,645  
Decrease (increase) in inventories
    1,508,650       (322,493 )     (682,735 )
(Increase) decrease in prepaid expenses and other
    (113,282 )     78,450       (5,162 )
 Decrease (increase) in deposits
    312,958       40,759       (449,250 )
(Decrease) increase in accounts payable
    (1,254,071 )     358,584       718,849  
(Decrease) increase in accounts payable, related party
    (811,079 )     940,524       6,049  
Increase (decrease) in accrued expenses
    370,316       (148,015 )     (168,019 )
(Decrease) increase in accrued loss on firm commitments
    (1,065,000 )     1,065,000       -  
(Decrease) increase in derivative financial instruments
    (6,440,655 )     7,062,494       916,223  
Increase in noncurrent other liabilities
    118,073       331,927       -  
Net cash provided by operating activities
    1,551,841       14,190,197       30,319,132  
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Purchase of property and equipment
    (611,078 )     (1,530,183 )     (2,103,791 )
Proceeds from redemption of certificate of deposit
    -