Attached files
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EX-31.2 - EXHIBIT 31.2 - SOUTHWEST IOWA RENEWABLE ENERGY, LLC | form10kexh312_122309.htm |
EX-31.1 - EXHIBIT 31.1 - SOUTHWEST IOWA RENEWABLE ENERGY, LLC | form10kexh311_122309.htm |
EX-32.1 - EXHIBIT 32.1 - SOUTHWEST IOWA RENEWABLE ENERGY, LLC | form10kexh321_122309.htm |
EX-32.2 - EXHIBIT 32.2 - SOUTHWEST IOWA RENEWABLE ENERGY, LLC | form10kexh322_122309.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
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Form
10-K
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(Mark one)
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R
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended September 30, 2009
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£
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from _________ to __________
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Commission
file number 000-53041
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SOUTHWEST
IOWA RENEWABLE ENERGY, LLC
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(Exact
name of registrant as specified in its charter)
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Iowa
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20-2735046
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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10868 189th Street, Council Bluffs,
Iowa
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51503
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(Address
of principal executive offices)
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(Zip
Code)
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Issuer’s
telephone number (712) 366-0392
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Securities
registered under Section 12(b) of the Exchange Act:
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None.
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Title
of each class
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Name
of each exchange on which registered
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Securities
registered under Section 12(g) of the Exchange Act:
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Series A Membership
Units
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(Title
of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes £ No
R
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Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or 15(d) of the Exchange Act. Yes £ No
R
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Indicate
by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the 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 R No
£
Indicate
by check mark whether the registrant has submitted electronically on its
corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
£ No
£
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Indicate
by check mark if disclosure of delinquent filers in response to Item 405
of Regulation S-K (§ 229.405 of this chapter) 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. R
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Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated
filer
£ Accelerated
filer £ Non-accelerated
filer £ Smaller
reporting company R
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes £ No
R
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Our
membership units are not publicly traded; therefore, our public float is
not measureable.
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As
of September 30, 2009, the Company had 8,805 Series A, 3,334 Series B and
1,000 Series C Membership Units outstanding.
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DOCUMENTS
INCORPORATED BY REFERENCE—None
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TABLE
OF CONTENTS
PART
I
Item
Number
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Item
Matter
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Page
Number
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Item
1.
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Business.
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1
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Item
1A.
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Risk
Factors.
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10
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Item
2.
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Properties.
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21
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Item
3.
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Legal
Proceedings.
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21
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Item
4.
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Submission
of Matters to a Vote of Security Holders.
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21
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Member Matters, and Issuer
Purchases of Equity Securities.
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21
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Item
6.
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Selected
Financial Data.
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21
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operation.
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21
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk.
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27
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Item
8.
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Financial
Statements and Supplementary Data.
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28
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure.
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44
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Item
9A(T).
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Controls
and Procedures.
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44
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Item
9B.
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Other
Information.
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44
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance.
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45
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Item
11.
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Executive
Compensation.
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47
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related Member
Matters.
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50
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence.
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50
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Item
14.
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Principal
Accountant Fees and Services.
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53
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules.
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54
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Signatures
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59 | |
i
CAUTIONARY
STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K of Southwest Iowa Renewable Energy, LLC (the “Company,” “we,” or “us”) contains
historical information, as well as forward-looking statements that involve known
and unknown risks and relate to future events, our future financial performance,
or our expected future operations and actions. In some cases, you can
identify forward-looking statements by terminology such as “may,” “will”,
“should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,”
“intend,” “could,” “hope,” “predict,” “target,” “potential,” or
“continue” or the negative of these terms or other similar
expressions. These forward-looking statements are only our
predictions based on current information and involve numerous assumptions, risks
and uncertainties. Our actual results or actions may differ
materially from these forward-looking statements for many reasons, including the
reasons described in this report. While it is impossible to identify
all such factors, factors that could cause actual results to differ materially
from those estimated by us include:
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·
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Changes
in the availability and price of corn, natural gas, and
steam;
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·
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Our
inability to comply with our credit agreements required to continue our
operations;
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·
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Negative
impacts that our hedging activities may have on our
operations;
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·
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Decreases
in the market prices of ethanol and distillers
grains;
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·
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Ethanol
supply exceeding demand; and corresponding ethanol price
reductions;
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·
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Changes
in the environmental regulations that apply to our plant
operations;
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·
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Changes
in plant production capacity or technical difficulties in operating the
plant;
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·
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Changes
in general economic conditions or the occurrence of certain events causing
an economic impact in the agriculture, oil or automobile
industries;
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·
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Changes
in federal and/or state laws (including the elimination of any federal
and/or state ethanol tax
incentives);
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·
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Changes
and advances in ethanol production
technology;
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·
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Additional
ethanol plants built in close proximity to our ethanol facility
in southwest Iowa;
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·
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Competition
from alternative fuel additives;
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·
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Changes
in interest rates and lending conditions of our loan
covenants;
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·
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Our
ability to retain key employees and maintain labor relations;
and
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·
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Volatile
commodity and financial markets.
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These
forward-looking statements are based on management’s estimates, projections and
assumptions as of the date hereof and include the assumptions that underlie such
statements. Any expectations based on these forward-looking
statements are subject to risks and uncertainties and other important factors,
including those discussed below and in the section titled “Risk Factors.” Other
risks and uncertainties are disclosed in the Company’s prior Securities and
Exchange Commission (“SEC”) filings. These
and many other factors could affect the Company’s future financial condition and
operating results and could cause actual results to differ materially from
expectations based on forward-looking statements made in this document or
elsewhere by Company or on its behalf. The Company undertakes no
obligation to revise or update any forward-looking statements. The
forward-looking statements contained in this Form 10-K are excluded from the
safe harbor protection provided by Section 27A of the Securities Ac of 1933, as
amended (the “1933
Act”) and Section 21E of the Securities Exchange Act of 1934, as amended
(the “Exchange
Act”).
AVAILABLE
INFORMATION
Information
about us is also available at our website at www.sireethanol.com, under
“SEC Compliance,” which includes links to reports we have filed with the
Securities and Exchange Commission. The contents of our website are
not incorporated by reference in this Annual Report on Form 10-K.
ii
Item
1. Business.
The
Company is an Iowa limited liability company, located in Council Bluffs, Iowa,
was formed in March, 2005 to construct and operate a 110 million gallon capacity
ethanol plant. We began producing ethanol in February, 2009 and sell
our ethanol, modified wet distillers grains with solubles, and corn syrup in the
continental United States. We sell our dried distillers grains with
solubles in the continental United States, Mexico, and the Pacific
Rim.
Our
production facility (the “Facility”) is located
in Pottawattamie County in southwestern Iowa. It is near two major interstate
highways, within a half a mile of the Missouri River and has access to five
major rail carriers. This location is in close proximity to raw materials and
product market access. The Facility receives corn and chemical deliveries
primarily by truck but is able to utilize rail delivery if
necessary. Finished products are shipped by rail and
truck. The site has access to water from ground wells and from the
Missouri river. In addition to close proximity to the Facility’s primary energy
source, steam, there are two natural gas providers available, both with
infrastructure immediately accessible.
Financial
Information
Please
refer to “Item 7-Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
for information about our revenue, profit and loss measurements and total assets
and liabilities, and “Item 8 –
Financial Statements and Supplementary Data” for our financial statements
and supplementary data.
Rail
Access
We own a
six mile loop railroad track for rail service to our Facility. Our
track comes off the Council Bluffs Energy Center line where interstate I-29
crosses and proceeds south along the east side of Pony Creek. The
track terminates in a loop-track south of the Facility, which accommodates 100
car trains. On June 18, 2008, we executed an Industrial Track
Agreement with CBEC Railway, Inc. (the “Track Agreement”),
which governs our use of the loop railroad and requires, among other things,
that we maintain the loop track.
On June
25, 2007, we entered into a Railcar Sublease Agreement (“Railcar Sublease
Agreement”) with Bunge North America, Inc. (“Bunge”) for the
sub-lease of 320 ethanol cars and 300 distillers dried grains with Solubles
(“DDGS”) cars
to be used in the delivery and marketing of ethanol and DDGS. We are
responsible for all maintenance and mileage charges as well as the monthly lease
expense and certain railcar modification expenses. The Railcar
Sublease Agreement will terminate upon the expiration of all railcar
leases. In 2009, we agreed to lease back 100 DDGS cars to Bunge with
an initial lease term of three years under the agreement.
On June
26, 2009, the Company executed an Amended and Restated Railcar Lease Agreement
(“Railcar
Agreement”) with Bunge for the lease of 325 ethanol cars and 300 hopper
cars which will be used for the delivery and marketing of the Company’s ethanol
and distillers grains. Under the Railcar Agreement, the Company will
lease railcars for terms lasting 120 months and continuing on a month to month
basis thereafter. The Railcar Agreement will terminate upon the expiration of
all railcar leases. The Railcar Agreement reflects changes as a
result of Bunge’s purchase and sale/leaseback of railcars from a new railcar
equipment lessor other than contemplated in the 2007 Railcar Sublease Agreement
between the Company and Bunge. The Railcar Agreement provides that
the Company is a lessee rather than a sublessee as under the Railcar Sublease
Agreement and that Bunge is the lessor rather than the lessee as under the
Railcar Sublease Agreement.
Employees
We had 63
full time employees as of September 30, 2009. We are not subject to
any collective bargaining agreements and we have not experienced any work
stoppages. Our management considers our employee relationships to be
favorable.
Principal
Products
The
principal products we produce are ethanol and distillers
grains.
1
Ethanol
Ethanol
is ethyl alcohol, a fuel component made primarily from corn and various other
grains, which can be used as: (i) an octane enhancer in fuels; (ii) an
oxygenated fuel additive for the purpose of reducing ozone and carbon monoxide
vehicle emissions; and (iii) a non-petroleum-based gasoline
substitute. More than 99% of all ethanol produced in the United
States is used in its primary form for blending with unleaded gasoline and other
fuel products. The principal purchasers of ethanol are generally
wholesale gasoline marketers or blenders.
We
produced 55.7 million gallons of ethanol for the year ended September 30, 2009
(“Fiscal
2009”), and approximately 83% of our revenue was derived from the sale of
ethanol in Fiscal 2009.
Distillers
Grains
The
principal co-product of the ethanol production process is distillers grains, a
high protein, high-energy animal feed supplement primarily marketed to the dairy
and beef industry. Distillers grains contain by-pass protein that is
superior to other protein supplements such as cottonseed meal and soybean
meal. By-pass proteins are more digestible to the animal, thus
generating greater lactation in milk cows and greater weight gain in beef
cattle. We produce two forms of distillers grains at our dry mill
ethanol facility: wet distillers grains (“WDGS”) and
DDGS. WDGS are processed corn mash that has been dried to
approximately 50% moisture. WDGS have a shelf life of approximately
seven days and are often sold to nearby markets. DDGS are processed
corn mash that has been dried to approximately 10% to 12%
moisture. It has a longer shelf life and may be sold and shipped to
any market regardless of its location in relation to our ethanol
plant.
We sold
156,600 tons of dried distillers grains in Fiscal 2009. Approximately
17% of our revenue was derived from the sale of distillers grains in Fiscal
2009.
Principal
Product Markets
As
described below in “Distribution Methods”, we
market and distribute all of our ethanol and distillers grains through
professional third party marketers. Our ethanol and distillers grains
marketers make all decisions with regard to where our products are
marketed. Our ethanol and distillers grains are primarily sold in the
domestic market, however, as United States production of ethanol and distillers
grains continue to expand, we anticipate increased international sales of our
products. Currently, approximately 25% of our distillers grains are
exported outside of the continental United States. Management
anticipates that demand for distillers grains in the Asian market may increase
demand for distillers grains in the future. As distillers grains
become more accepted as an animal feed substitute throughout the world,
distillers grains exporting may increase.
Distribution
Methods
We
entered into an Ethanol Merchandising Agreement (“Lansing Agreement”)
with Lansing Ethanol Services, LLC (“Lansing”), under
which we agreed to sell to and Lansing agreed to buy all ethanol produced at our
Facility for the first six months of our operations. We exercised our
contractual right under the Lansing Agreement on February 19, 2009 to terminate
this agreement. Effective August 19, 2009, Bunge, a significant
equity holder in the Company, became the exclusive purchaser of our ethanol
pursuant to an Ethanol Purchase Agreement dated December 15, 2008 (the “Ethanol
Agreement”). Bunge markets our ethanol in national, regional
and local markets. Under the Ethanol Agreement, we sell Bunge all of
the ethanol produced at the Facility, and Bunge purchases the same, up to the
Facility’s nameplate capacity of 110,000,000 gallons a year. We pay
Bunge a per-gallon fee for ethanol sold by Bunge under the Ethanol Agreement,
subject to a minimum annual fee of $750,000 and adjustments according to
specified indexes after three years. The initial term of the Ethanol
Agreement, effective on August 19, 2009, is three years and it will
automatically renew for successive three-year terms unless one party provides
the other notice of their election to terminate 180 days prior to the end of the
term.
We
entered into a Distillers Grain Purchase Agreement dated October 13, 2006
(“DG
Agreement”) with Bunge, under which Bunge is obligated to purchase from
us and we are obligated to sell to Bunge all distillers grains produced at our
Facility. If we find another purchaser for distillers grains offering
a better price for the same grade,
2
quality,
quantity, and delivery period, we can ask Bunge to either market directly to the
other purchaser or market to another purchaser on the same terms and
pricing.
The
initial term of the DG Agreement began February 1, 2009 and lasts for ten
years. The DG Agreement automatically renews for additional three
year terms unless one party provides the other party with notice of election to
not renew 180 days or more prior to expiration. Under the DG
Agreement, Bunge pays us a purchase price equal to the sales price minus the
marketing fee and transportation costs. The sales price is the price
received by Bunge in a contract consistent with the DG Marketing Policy or the
spot price agreed to between Bunge and us. Bunge receives a marketing
fee consisting of a percentage of the net sales price, subject to a minimum
yearly payment of $150,000. Net sales price is the sales price less
the transportation costs and rail lease charges. The transportation
costs are all freight charges, fuel surcharges, and other accessorial charges
applicable to delivery of distillers grains. Rail lease charges are
the monthly lease payment for rail cars along with all administrative and tax
filing fees for such leased rail cars.
Description
of Dry Mill Process
Our
Facility produces ethanol by processing corn. The corn is received by
semitrailer truck (or railcar if needed), and is weighed and stored in a
receiving building. It is then transported to a scalper to remove rocks and
debris before being conveyed to storage bins. Thereafter, the corn is
transported to a hammer mill or grinder where it is ground into a mash and
conveyed into a tank for processing. We add water, heat and enzymes
to break the ground corn into a fine liquid. This liquid is heat
sterilized and pumped to a tank where other enzymes are added to convert the
starches into glucose sugars. Next, the liquid is pumped into
fermenters, where yeast is added, to begin a 55 to 60 hour batch fermentation
process. A distillation process divides the alcohol from the corn
mash. The alcohol which exits the distillation process is then
partially dried. The resulting 200 proof alcohol is pumped into
storage tanks. Corn mash from the distillation process is then pumped
into one of several centrifuges. Water from the centrifuges is dried
into a thick syrup. The solids that exit the centrifuge or
evaporators are called wet cake and are conveyed to dryers. Corn mash is added
to the wet cake as it enters the dryer, where moisture is
removed. This process produces distillers grains.
Raw
Materials
Corn
Requirements
Ethanol
can be produced from a number of different types of grains and waste
products. However, approximately 90% of ethanol in the United
States today is produced from corn. The cost of corn is affected
primarily by supply and demand factors such as crop production, carryout,
exports, government policies and programs, risk management and
weather. With the volatility of the commodity markets, we cannot
predict the future price of corn.
Our
Facility needs approximately 39.3 million bushels of corn per year, or
approximately 108,000 bushels per day, as the feedstock for its dry milling
process. During the Fiscal 2009, we purchased 19.4 million bushels of
corn, which was obtained primarily from local markets. To assist in
our securing the necessary quantities of grain for our plant, we entered into a
Grain Feedstock Supply Agreement dated December 15, 2008 (the “Supply Agreement”)
with AGRI-Bunge, LLC (“AB”), an entity
affiliated with significant equity holder, Bunge. Under the Supply
Agreement, AB agreed to provide us with all of the corn we need to operate our
ethanol plant, and we have agreed to only purchase corn from AB. AB
provides grain originators who work at the Facility for purposes of fulfilling
its obligations under the Supply Agreement. The Company pays AB a
per-bushel fee for corn procured by AB for the Company under the Supply
Agreement, subject to a minimum annual fee of $675,000 and adjustments according
to specified indexes after three years. The term of the Supply
Agreement is ten years, subject to earlier termination upon specified
events. The Supply Agreement suspends the operation of the Agency
Agreement entered into by us and AB on October 13, 2006, as amended December 15,
2008 (the “Agency
Agreement”). While we have not applied for a grain dealer’s
license, if we do, the operation of the Supply Agreement will terminate and the
Agency Agreement will be reinstated.
The price
and availability of corn are subject to significant fluctuations depending upon
a number of factors which affect commodity prices in general, including crop
conditions, weather, governmental programs and foreign
purchases.
3
Energy
Requirements
The
production of ethanol is a very energy intensive process which uses significant
amounts of electricity and a supply of a heat source. Presently,
about 34,000 BTUs of energy are required to produce a gallon of ethanol when we
dry 100% of our distillers grains. Additionally, water supply and
quality are important considerations.
Steam
Unlike
most ethanol producers in the United States which use natural gas as their
primary energy source, our primary energy source is steam. Utilizing
steam makes us more competitive, as it is anticipated that under certain energy
market conditions our energy costs will be lower than natural gas fired
plants. We have entered into an Executed Steam Service Contract
(“Steam
Contract”) with MidAmerican Energy Company (“MidAm”), under which
MidAm agreed to provide the steam required by us, up to 475,000 pounds per
hour. The Steam Contract remains in effect until February 1,
2019. During Fiscal 2009, we purchased approximately 619,445 MMBTUs
of steam.
Natural
Gas
Although
steam is our primary energy source and accounts for around 85% of our energy
usage, we have installed two natural gas back-up boilers for use when our steam
service is temporarily unavailable. Natural gas is also needed for
incidental purposes. Natural gas prices fluctuate with the energy
complex in general. Natural gas prices have trended lower this fiscal
year as a result of the drop in crude oil prices and based on anticipated
increases in supply relative to demand. We do not expect natural gas
prices to remain steady in the near future and are trending higher into the
winter months of 2009-2010 as seasonal demand for natural gas increases due to
heating needs in the colder weather. We have entered into a natural
gas supply agreement with Constellation Energy for our long term natural gas
needs. During the Fiscal 2009, we purchased 1,081,016 MMBTUs of
natural gas. During the Fiscal 2009, we used more natural gas than
steam because MidAm went through their biannual shutdown during the spring of
2009, and we were forced to use natural gas.
Electricity
Our
Facility requires a large continuous supply of electrical energy. We
have purchased 71,419 Kilowatts of electricity through September 30,
2009 from MidAm under an Electric Service Contract (“Electric Contract”)
dated December 15, 2006. We agreed to pay (i) a per meter service
charge, (ii) a demand charge which has a rate for the Summer and a different
rate for the Winter (iii) a reactive demand charge at a per kVAR rate of
reactive demand in excess of 50% of billing demand, (iv) an energy charge
ranging from $0.03647 to $0.01837 per kilowatt hour, depending on the amount of
usage and season, (v) tax adjustments, (vi) AEP and energy efficiency cost
recovery adjustments, and (vii) a CNS capital additions
tracker. These rates only apply to the primary voltage electric
service provided under the Electric Contract. The electric service
will continue at these prices for up to 60 months, but in any event will
terminate on June 30, 2012.
Water
We
require a significant supply of water. Much of the water used in an
ethanol plant is recycled back into the process. There are, however, certain
areas of production where fresh water is needed. Those areas include
boiler makeup water and cooling tower water. Boiler makeup water is
treated on-site to minimize all elements that will harm the boiler and recycled
water cannot be used for this process. Cooling tower water is deemed
non-contact water (it does not come in contact with the mash) and, therefore,
can be regenerated back into the cooling tower process. The makeup
water requirements for the cooling tower are primarily a result of
evaporation. Much of the water is recycled back into the process,
which minimizes the effluent. Our Facility’s fresh water requirements
are approximately 1,000,000 gallons per day. Our water requirements
are supplied through three ground wells which are permitted to produce up to
2,000,000 gallons of water per day, and we can access water from the Missouri
River.
4
Patents,
Trademarks, Licenses, Franchises and Concessions
SIRETM, our
logos, trade names and service marks of the Company mentioned in this report are
our property. We were granted a license by ICM, Inc. (“ICM”) to use certain
ethanol production technology necessary to operate our Facility.
Hedging
Transactions
In order
to protect the price of our inputs, namely corn, we enter into hedging
transactions that are designed to limit our exposure to increases in the price
of corn and manage ethanol price fluctuations. We will continue to
monitor our hedging transactions during the upcoming year.
Dependence
on One or a Few Major Customers
As
discussed above, we have marketing agreements with Bunge, a significant equity
holder, for the purpose of marketing and distributing our principal
products. We rely on Bunge for the sale and distribution of all of
our products and are highly dependent on Bunge for the successful marketing of
our products. We do not currently have the ability to market our
ethanol and distillers grains internally should Bunge be unable to market these
products at acceptable prices. We anticipate that we would be able to
secure alternate marketers should Bunge fail, however, a loss of the marketer
could significantly harm our financial performance.
Principal
Supply & Demand Factors
Ethanol
Generally
Ethanol
prices have decreased during the three months ending September 30, 2009 as a
direct response to falling corn prices. Management currently expects
ethanol prices will continue to be directly related to the price of
corn. Management believes the industry will need to grow both product
delivery infrastructure and demand for ethanol in order to increase production
margins in the near and long term. According to Ethanol Producer
Magazine, there were 184 ethanol plants in operation in the United States with
the capacity to produce 11.8 billion gallons of ethanol annually as of October
21, 2009. An additional 12 plants are under construction or
expanding, which could add an additional estimated 1.1 billion gallons of annual
production capacity. Approximately 23 plants were not producing which
could add an additional estimated 1.3 billion gallons of annual production
capacity if all plants were online. Unless the new supply of ethanol
is equally met with ethanol demand, downward pressure on ethanol prices could
continue.
Management
believes that it is important that ethanol blending capabilities of the gasoline
market be expanded in order to increase demand for ethanol. Recently,
there has been increased awareness of the need to expand ethanol distribution
and blending infrastructure, which would allow the ethanol industry to supply
ethanol to markets in the United States that are not currently blending
ethanol.
VEETC
The
profitability of the ethanol industry is impacted by federal ethanol supports
and tax incentives, such as the Volumetric Ethanol Excise Tax Credit (“VEETC”) blending
credit. VEETC is a volumetric ethanol excise tax credit, which
gasoline distributors apply for. Based on volume, the VEETC allows
greater refinery flexibility in blending ethanol since it makes the tax credit
available on all ethanol blended with gasoline, diesel and ethyl tertiary butyl
ether, including ethanol in E85. Under provisions of the Food,
Conservation and Energy Act of 2008 (the “2008 Farm Bill”), the
tax credit under VEETC has dropped to 45 cents per gallon of pure ethanol and 38
cents per gallon of E85. The VEETC is scheduled to expire on December
31, 2010. A number of bills have been introduced in the Congress to extend
ethanol tax credits, including some bills that would make the ethanol tax
credits permanent. There can be no assurance, however, that such legislation
will be enacted.
5
RFS
Significant
federal legislation which impacts ethanol demand is the Energy Policy Act of
2005 (the “2005
Act”) and the Energy Independence and Security Act of 2007 (“2007 Act”). Most
notably, the 2005 Act created the Renewable Fuels Standard (“RFS”), which was
designed to favorably impact the ethanol industry by enhancing both the
production and use of ethanol. The RFS is a national program that does not
require that any renewable fuels be used in any particular area or state,
allowing refiners to use renewable fuel blends in those areas where it is most
cost-effective.
The 2007 Act amended several components
of the RFS. The RFS requires (i) the fuel refining industry as a
whole (including refiners, blenders and importers) to use 15.2 billion gallons
of renewable fuels by 2012 and 36 billion gallons by 2022; (ii) advanced biofuel
(renewable fuel derived from corn starch other than ethanol and encompassing
cellulosic biofuel and biomass-based diesel), cellulosic biofuel and
biomass-based diesel to be used in addition to conventional biofuel (ethanol);
(iii) in 2012, the use of 13.2 billion gallons of ethanol, two billion gallons
of advanced biofuel, 0.5 billion gallons of cellulosic biofuel, and one billion
gallons of biomass-based diesel, for a total of 15.2 billion gallons of
renewable fuel; and (v) by 2015, usage of 15 billion gallons of ethanol,
excluding advanced biofuel.
The 2007
Act also requires facilities beginning operations after its enactment to operate
with at least a 20% reduction in lifecycle greenhouse gas emissions compared to
gasoline. In the event the Environmental Protection Agency (“EPA”) determines this
size of reduction is not feasible, it may reduce the required reduction, but in
no event will a new plant be allowed to operate at less than a 10% reduction in
lifecycle greenhouse gas emissions. We believe that our use of steam
as our primary energy source reduces our emissions, as compared to other ethanol
plants which utilize natural gas or coal as their primary heat
source.
The
ethanol industry’s rapid expansion could yield more ethanol than the RFS
requirements depending on how quickly idle capacity is brought back online, when
under construction capacity begins producing and other factors. This means the
ethanol industry must continue to generate demand for ethanol beyond the minimum
floor set by the RFS in order to support current ethanol prices. We are
dependent on Bunge’s ability to market the ethanol in this competitive
environment.
State
Initiatives
In 2006,
Iowa passed legislation promoting the use of renewable fuels in
Iowa. One of the most significant provisions of the Iowa renewable
fuels legislation is a renewable fuels standard encouraging 10% of the gasoline
sold in Iowa to consist of renewable fuels. This renewable fuels
standard increases incrementally to 25% of the gasoline sold in Iowa by
2019. Additionally, certain plants located in Nebraska that were in
production on June 30, 2004 are eligible for state incentives, which authorize a
producer to receive up to $2.8 million of tax credits per year for up to eight
years. While we cannot qualify for these incentives, they do provide
an economic advantage to some of our competitors.
E85
Demand
for ethanol has been affected by moderately increased consumption of E85 fuel.
E85 fuel is a blend of 85% ethanol and 15% gasoline. According to the Energy
Information Administration, E85 consumption is projected to increase from a
national total of 11 million gallons in 2003 to 65.9 billion gallons in 2025.
E85 can be used as an aviation fuel, as reported by the National Corn Growers
Association, and as a hydrogen source for fuel cells. According to the Renewable
Fuels Association, there are currently more than seven million flexible fuel
vehicles capable of operating on E85 in the United States and automakers such as
Ford and General Motors have indicated plans to produce several million more
flexible fuel vehicles per year. The National Ethanol Vehicle Coalition
reports that there were approximately 1,934 retail gasoline stations supplying
E85 as of October 18, 2009. While the number of retail E85 suppliers has
increased each year, this remains a relatively small percentage of the total
number of U.S. retail gasoline stations, which is approximately 170,000.
In order for E85 fuel to increase demand for ethanol, it must be available for
consumers to purchase it. As public awareness of ethanol and E85 increases
along with E85’s increased availability, management anticipates some growth in
demand for ethanol associated with increased E85 consumption.
6
Cellulosic
Ethanol
Discussion
of cellulose-based ethanol has recently increased. Cellulose is the main
component of plant cell walls and is the most common organic compound on
earth. Cellulose is found in wood chips, corn stalks and rice straw, among
other common plants. Cellulosic ethanol is ethanol produced from cellulose, and
currently, production of cellulosic ethanol is in its infancy. It is
technology that is as yet unproven on a commercial scale. However, several
companies and researchers have commenced pilot projects to study the feasibility
of commercially producing cellulosic ethanol. If this technology can
be profitably employed on a commercial scale, it could potentially lead to
ethanol that is less expensive to produce than corn-based ethanol, especially if
corn prices remain high. Cellulosic ethanol may also capture more
government subsidies and assistance than corn-based
ethanol. Provisions of the RFS are intended to accelerate
production of cellulosic ethanol. This could decrease demand for our
product or result in competitive disadvantages for our ethanol production
process.
Recent
legislation, such as the American Recovery and Reinvestment Act of 2009 and the
2007 Act, provide numerous funding opportunities in support of cellulosic
ethanol. In addition, the amended RFS mandates an increasing level of production
of biofuels which are not derived from corn. These policies suggest an
increasing policy preference away from corn ethanol and toward cellulosic
ethanol. The profitability of ethanol production depends heavily on federal
incentives. The loss or reduction of incentives from the federal government in
favor of corn-based ethanol production may reduce our
profitability.
Local
Production
Because
we are located on the border of Iowa and Nebraska, and because ethanol producers
generally compete primarily with local and regional producers, the ethanol
producers located in Iowa and Nebraska presently constitute our primary
competition. According to the Iowa Renewable Fuels Association, in
2009, Iowa had 41 ethanol refineries in production, producing 3.3 billion
gallons of ethanol. There was one additional ethanol refinery under
construction or expansion in Iowa as of October, 2009. If this plant
is completed, it is anticipated it will add 300,000 gallons of new ethanol
production capacity annually in Iowa. According to the Nebraska
Ethanol Board, there are currently 23 existing ethanol plants in Nebraska, and
one plant under construction. Additionally, certain plants located in
Nebraska are eligible for state incentives, which authorize a producer to
receive up to $2.8 million of tax credits per year for up to eight
years. Those producers qualifying for this incentive have a
competitive advantage over us.
Distillers
Grains
Management
expects that distillers grains prices will continue to decrease slightly in the
foreseeable future as the supply increases (the result of increased ethanol
production), with the poor state of the economy and lower corn
prices. Management believes DDGSs will trade with a 75% to 80% value
to corn.
Regulatory
Environment
Governmental
Approvals
Ethanol
production involves the emission of various airborne pollutants, including
particulate matters, carbon monoxide, oxides of nitrogen, volatile organic
compounds and sulfur dioxide. Ethanol production also requires the
use of significant volumes of water, a portion of which is treated and
discharged into the environment. We are required to maintain various
environmental and operating permits, as discussed below. Even though
we have successfully acquired the permits necessary for our operations, any
retroactive change in environmental regulations, either at the federal or state
level, could require us to obtain additional or new permits or spend
considerable resources on complying with such regulations. In
addition, although we do not presently intend to do so, if we sought to expand
the Facility’s capacity in the future, we would likely be required to acquire
additional regulatory permits and could also be required to install additional
pollution control equipment. We are in the process of applying for a
minor permit which will be less restrictive on our operations when switching
from steam to natural gas.
7
Our
failure to obtain and maintain the permits discussed below or other similar
permits which may be required in the future could force us to make material
changes to our Facility or to shut down altogether. The following are
summaries of the various governmental approvals we have obtained to operate our
Facility.
Environmental
Regulations and Permits
We are
subject to regulations on emissions from the Iowa Department of Natural
Resources (“IDNR”) as authorized
by the U.S. Environmental Protection Agency (“EPA”). The
EPA and IDNR environmental regulations are subject to change and often such
changes may have an economic impact on our industry. Consequently,
environmental compliance and permit adherence is an ongoing commitment that
requires vigilance on the part of the Facility employees as well as financial
support of the various programs and permit requirements. The ongoing
expenses associated with maintaining and complying with permit requirements are
included in our operations budget.
Air
Pollution Construction and Operation Permits
Based on
calculated emissions, our Facility is considered a “minor source” of regulated
air pollutants, but due to our agreements with MidAm for rail easement and steam
supply, we are currently classified as a “major source” under Title V of the
Clean Air Act (“Title
V”) and subject to PSD (prevention of significant determination)
regulations and requirements. The Facility has completed all of the
initial emission testing and has been issued an operating permit. The
air permit allows us to operate our Facility within certain requirements
detailed in that permit. The Air Permit for operations also requires annual
emission testing to demonstrate compliance and is required to be renewed every
five years.
As a
result of the major source classification under Title V, we have accepted
operational limitations on the total amount of natural gas we can consume on a
twelve month rolling average. This is required in order to stay below
the threshold limits for a major source modification under PSD.
We are
required to collect and keep information outlining our annual pollution
emissions. Every year we must provide an account of the actual
pollution generated by the Facility to the EPA and IDNR in order to maintain our
status as a Conditionally Exempt Small Quantity Generator and our Air Permit for
operating. This account is the basis for the Air Permit fees,
discussed above.
New
Source Performance Standards
The
Facility is subject
to the EPA’s New
Source Performance Standards (“NSPS”) for both its
grain and distillation processes as well as the storage of volatile organic
compounds used in the denaturing process. Duties imposed by the
NSPS include initial notification, emission limits, compliance and monitoring
requirements and recordkeeping requirements.
Endangered
Species
We have
received direction from the United States Fish and Wildlife Service (“USFWS”) and IDNR to
reduce any potential impact on certain endangered species, and accordingly
restrict rail line maintenance and or service activities to certain times of the
year.
Rail
Line Matters
The
Facility’s railroad line is a dedicated, controlled access line, which only
serves the Facility. As a result, we believe the line should be
considered an exempt “industry lead track” or “spur track” under applicable rail
transportation regulations. The United State Surface Transportation
Board (“STB”),
which regulates the construction of new railroad lines, has not required any
environmental assessment of the site.
Waste
Water Discharge Permit
We use
water to cool our closed circuit systems in the Facility and we generate reverse
osmosis blowdown water. In order to maintain a high quality of water
for the cooling system, the water is continuously replaced with
8
make-up
water. As a result, our Facility discharges non-contact cooling water
from the cooling towers. We received a Wastewater Discharge Permit
from the IDNR to discharge non-contact water into the Missouri
River. Under the Wastewater Discharge Permit, we are required to
periodically test and report our discharge activity to the IDNR.
Storm
Water Discharge Permit
We have
obtained the required Storm Water Discharge Permit (“SWDP”) from the IDNR.
This permit required preparation of a Storm Water Pollution Prevention Plan
(“SWPPP”),
which outlines various measures we plan to implement to prevent storm water
pollution during plant operations.
High
Capacity Well Permit
The
Facility does not use municipal water, gray sewage treatment water, or Missouri
river water. We received a High Capacity Well Permit from
Pottawattamie County, Iowa, authorizing us to drill three high capacity wells to
meet our water needs. This permit allows us to draw to 2,000,000
gallons of water a day through these wells, though the Facility requires only
1,000,000 gallons of water daily. The three wells have been tested
and commissioned and are operating at expected levels.
Top
Screen Analysis
The
Department of Homeland Security (“DHS”) requires any
facility that possesses certain chemicals above a threshold to submit a Top
Screen Analysis. We do possess chemicals subject to the Top Screen
Analysis requirement and are required to complete the Top Screen Analysis on an
on-going basis. The Top Screen Analysis requires us to provide
information such as the chemicals we store on site, where the chemicals are
stored, and the risks associated with such chemicals. DHS requires us
to complete the Top Screen Analysis within 60 days of receiving any listed
chemicals.
On-Going
Activities and Reporting
We are
required to provide emergency response groups with a Tier II Initial Reporting,
containing a listing of the hazardous chemicals stored on-site, within 90 days
of commencing operations. The initial reporting has been
completed. The Tier II Initial Report is used to provide local
emergency response and fire department officials with a list of the hazardous
materials we store on site. Thereafter, we will provide theses groups
with annual Tier II reports of the hazardous materials we store on site,
officials of such hazardous substances. We have purchased a reporting package
from ICM to complete the required reporting.
We are
also required to submit Form R, a Toxic Release Inventory report, to the
EPA. Form R is required for facilities processing or using certain
listed chemicals above a regulated quantity. Our annual form R will
include documentation of our release of those certain chemicals into the
environment within the previous year. Every five years we will be
required to submit a Form U Report under the Toxic Substances Control Act
(“TSCA”) to the
EPA. In the Form U, we are required to report on manufacturing
thresholds that were exceeded for any of the chemicals listed in the TSCA during
the reporting period. Under the Emergency Planning and Right to Know
Act, we are required to report our receipt of certain regulated chemicals to
community and state officials within 60 days. This act requires local
emergency planning communities to prepare a comprehensive emergency response
plan. The local emergency planning agencies have been notified and are
collaborating with us to complete a comprehensive ERS (Emergency Response
System, a network of chains of contacts in the event of an emergency to provide
an orderly and systematic response to the given situation) plan.
Nuisance
Ethanol
production has been known to produce an odor to which surrounding residents
could object. Ethanol production may also increase dust in the area
due to operations and the transportation of grain to the Facility and ethanol
and distillers grains from the Facility. Such activities may subject
us to nuisance, trespass, or similar claims by employees or property owners or
residents in the vicinity of the Facility. To help minimize the risk
of nuisance claims based on odors related to the production of ethanol and its
co-products, and as required by the EPS PSD
9
BACT
determination discussed previously, we have installed a reverse thermal
oxidizers and flare technology in the Facility. We are not currently
involved in any litigation involving nuisance claims.
Operational
Safety Regulations
We are
also subject to federal and state laws regarding operational
safety. Safety is a top priority for the Facility and we are a member
of the ERI (Ethanol Risk and Insurance Solutions, which offers a service of
conducting Risk assessments and facility safety audits aimed at improving the
overall safety and risk of the Facility) safety group which provides quarterly
inspections of the Facility and information on various Occupational Safety and
Health Administration (“OSHA”)
programs. We also focus daily attention to safety by conducting job
hazards analysis and developing standard operating procedures. We
employ a full time safety, health and environmental Manager to ensure compliance
to various programs and facilitate training for our employees and contract
personal. Nonetheless, the risks of compliance costs and liabilities
are inherent in any large-scale manufacturing process.
Item
1A. Risk
Factors.
The
following risks, together with additional risks and uncertainties not currently
known to us or that we currently deem immaterial, could impair our financial
condition and results of operation.
Risks
Associated With Our Capital Structure
Our Units have no public
trading market and are subject to significant transfer restrictions which could
make it difficult to sell Units and could reduce the value of the
Units.
We do not
expect an active trading market for our limited liability company interests, or
“Units,” to develop. To maintain our partnership tax status, our Units may not
be publicly traded. Within applicable tax regulations, we may utilize
a qualified matching service (“QMS”) to provide a
limited market to our Members, but we will not apply for listing of the Units on
any stock exchange. Finally, applicable securities laws may restrict
the transfer of our Units. As a result, while a limited market for
our Units may develop through the QMS, Members may not sell Units readily, and
use of the QMS is subject to a variety of conditions and
limitations. The transfer of our Units is also restricted by our
Third Amended and Restated Operating Agreement dated July 17, 2009 (the “Operating
Agreement”). Transfers without the approval of our Board of Directors
(the “Board” or
“Board of
Directors”) are not permitted and are invalid. Furthermore, the Board
will not approve transfer requests which would cause the Company to be
characterized as a publicly traded partnership under the regulations adopted
under the Internal Revenue Code of 1986, as amended (the “Code”). The
value of our Units will likely be lower because they are illiquid. Members are
required to bear the economic risks associated with an investment in us for an
indefinite period of time.
Members may not receive cash
distributions which could result in an investor receiving little or no return on
his or her investment.
Distributions
are payable at the sole discretion of our Board, subject to the provisions of
the Iowa Limited Liability Company Act (the “Act”), our Operating
Agreement and our loan agreements. Cash distributions are not
assured, and we may never be in a financial position to make
distributions. Our Board may elect to retain future profits to
provide operational financing for the Facility, debt retirement and possible
plant expansion. In addition, our loan agreements restrict our
ability to make distributions. This means that Members may receive
little or no return on their investment and may be unable to liquidate their
investment due to transfer restrictions and lack of a public trading
market. This could result in the loss of a Member’s entire
investment.
Our Units are subordinate to
our debts and other liabilities, resulting in a greater risk of loss for
investors.
The Units
are unsecured equity interests and are subordinate in right of payment to all
our current and future debt as discussed elsewhere in this report. In
the event of our insolvency, liquidation dissolution or other winding up of our
affairs, all of our debts, including winding-up expenses, must be paid in full
before any payment is made to the holders of the Units. In the event
of our bankruptcy, liquidation, or reorganization, all Units will be
paid
10
ratably
with all of our other equity holders as provided under the Operating Agreement,
and there is no assurance that there would be any remaining funds after the
payment of all our debts for any distribution to Members. In
addition, it is possible that in order to refinance our debt, or for capital
needs, we may have to issue additional equity interests in the Company having
preferential treatment in the event we liquidated or reorganized.
Our failure to comply with
our loan covenants could require us to abandon our business.
We have a
$126,000,000 credit agreement (the “Credit Agreement”)
with AgStar Financial Services, PCA (“AgStar”), as agent
for a syndicate group of lenders (the “Lenders”), and had a
bridge loan with an original amount due of $36,000,000 bridge loan (the “Bridge Loan”) with
Commerce Bank, N.A. (the “Bridge
Lender”). As part of the Bridge Loan arrangements, we entered
into certain agreements with our key equity holders and operational partners,
ICM, Bunge, and Bunge N.A. Holdings Inc. (“Holdings”). The
Bridge Loan matures in June 2010, and in connection with it, we have made the
following arrangements: (i) Holdings, as successor to Bunge, has secured the
repayment of a portion of the Bridge Loan, (ii) ICM caused its lender to issue a
letter of credit in favor of the Bridge Lender to secure the repayment of a
portion of the Bridge Loan, (iii) we entered into a Second Amendment to the
Series C Unit Issuance Agreement (“Series C Amendment”)
with ICM under which, among other things, we agreed to issue Series C Units to
ICM for any Bridge Loan payments made by ICM, and (iv) we entered into
Subordinated Term Note (the “Term Note”) and
Subordinated Revolving Credit Note (the “Revolving Note”) in
favor of Holdings effective August 26, 2009 in the amount of $27,106,000 with a
maturity date of August 31, 2014. The Term Note was used to reduce
the Bridge Loan in a corresponding amount and as of September 30, 2009, the
principal balance remaining on the Bridge Loan is approximately
$8,585,000.
Holdings,
at its option, may convert the Term Note to Series U Units of the Company at a
per unit price of $3,000 in satisfaction of any outstanding principal balance
due to Holdings by the Company pursuant to the Term Note. Bunge has
also provided a Revolving Note in the amount of $10,000,000. Holdings
has a commitment subject to certain conditions, to advance up to $3,750,000 at
our request under the Revolving Note; amounts in excess of $3,750,000 may be
advanced by Holdings at its discretion. The Company has drawn
$2,000,000 on the Revolving Note as of September 30, 2009. As a
result of issuance of the Term Note and Revolving Note, a prior agreement with
Bunge whereby Bunge would receive Series E Units in connection with any payments
made to reduce the Bridge Loan on behalf of the Company was
terminated.
If we do
utilize a debt instrument to retire the Bridge Loan, provide working capital or
additional debt financing, such a debt instrument increases the risk that we
will not be able to operate profitably because we will need to make principal
and interest payments on the indebtedness. Debt financing also
exposes our Members to the risk that their entire investment could be lost in
the event of a default on the indebtedness and a foreclosure and sale of the
Facility and its assets for an amount that is less than the outstanding
debt. Our ability to obtain additional debt financing, if required, will
be subject to approval of our lending group, which may not be granted, the
interest rates and the credit environment as well as general economic factors
and other factors over which we have no control.
Our Members will experience
dilution of their equity and voting rights if ICM repays our Bridge Loan and the
Term Note is converted by Holdings.
As
discussed in more detail under Item 7 – Management’s Discussion and Analysis of
Financial Condition and Results of Operation - to the extent ICM repays our
Bridge Loan and Holdings converts its Term Note to Series U Units, additional
equity may be issued by the Company. If (i) we satisfy our
reimbursement obligations in equity to Holdings ($27,106,000) and ICM
($8,585,000) and (ii) the Company did not issue any equity to any other party
(thereby setting the issuance price with Holdings and ICM at $3,000 per Unit),
then the Company would be required to issue 9,035 Series U Units to Holdings and
2,862 Series C Units to ICM. Such issuances would increase the
Company’s total outstanding Units from 13,139 to 25,036. The dilutive
effect of such issuances on a Member holding 100 Units would be to reduce such
Member's percentage interest in the Company from 0.761% to 0.399%.
Furthermore, as discussed under Item 13--Certain Relationships and Related
Transactions, and Director Independence, if we issue 9,035 Series U Units to
Holdings, Holdings would be entitled to appoint two directors, meaning Holdings
and Bunge together would be able then to appoint a total of four directors and
effectively control the Board.
11
Our debt service
requirements and restrictive loan covenants limit our ability to borrow more
money, make cash distributions to our Members and engage in other
activities.
Under the
Credit Agreement, the Bridge Loan, the Term Note and Revolving Note, (the “Current Loans”) we
have made certain customary representations and we are subject to customary
affirmative and negative covenants, including restrictions on our ability to
incur additional debt that is not subordinated, create additional liens,
transfer or dispose of assets, make distributions, make capital expenditures,
consolidate, dissolve or merge, and customary events of default (including
payment defaults, covenant defaults, cross defaults, construction related
defaults and bankruptcy defaults). The Current Loans also contain
financial covenants including a maximum revolving credit availability based on
the borrowing base, minimum working capital amount, minimum tangible net worth,
and a minimum fixed charge coverage ratio, some of which are not effective until
2010. Our obligations to repay principal and interest on the Current
Loans make us vulnerable to economic or market downturns. If we are
unable to service our debt, we may be forced to sell assets, restructure our
indebtedness or seek additional equity capital, which would dilute our Members’
interests. If we default on any covenant, the Lenders, the Bridge Lender, Bunge,
or Holdings (or any subsequent lender) could make the entire debt, once
incurred, immediately due and payable. If this occurs, we might not be able to
repay our debt or borrow sufficient funds to refinance it. Even if new financing
is available, it may not be on terms that are acceptable to us. These events
could cause us to cease operations.
Risks
Associated With Operations
We are dependent on MidAm
for our steam supply and any failure by it may result in a decrease in our
profits or our inability to operate, which may decrease the value of Units or
Members’ investment return.
Under the
Steam Contract, MidAm provides us with steam to operate our Facility until
January 1, 2019. We expect to face periodic interruptions in our
steam supply under the Steam Contract. For this reason, we installed
boilers at the Facility to provide a backup natural gas energy
source. We also have entered into a natural gas supply agreement with
Constellation Energy for our long term natural gas needs, but this does not
assure availability at all times. In addition, our current
environmental permits limit the annual amount of natural gas that we may use in
operating our gas-fired boiler. As with natural gas and other energy
sources, our steam supply can be subject to immediate interruption by weather,
strikes, transportation, and production problems that can cause supply
interruptions or shortages. While we anticipate utilizing natural gas
as a temporary heat source under MidAm’s plant outages, an extended interruption
in the supply of both steam and natural gas backup could cause us to halt or
discontinue our production of ethanol, which would damage our ability to
generate revenues. A decrease in our revenues may lead to a decrease
in the value of Units or Members’ investment return.
We may not be able to
protect ourselves from an increase in the price of steam which may result in a
decrease in profits, causing a decrease in the value of our Units and Members’
investment return.
We are
significantly dependent on the price of steam. The Steam Contract
sets the price of steam until January 1, 2012 and provides for price increases
annually thereafter. The price increases are based upon market forces
over which we have no control. The Steam Contract will protect us
from extreme price changes for the term of the agreement, but upon the
expiration of the Steam Contract, there is no assurance that we will be able to
enter into a similar agreement. Although coal prices and supplies
have historically been more stable than many other forms of energy, this may not
be taken into consideration when we are negotiating a new steam
contract. If higher steam prices are sustained for some time, such
pricing may reduce our profitability due to higher operating
costs. This may cause a decrease in the value of our Units and
Members’ investment returns.
Any site near a major
waterway system presents potential for flooding risk.
While our
site is located in an area designated as above the 100-year flood plain, it does
exist within an area at risk of a 500-year flood. Even though our
site is protected by levee systems, its existence next to a major river and
major creeks present a risk that flooding could occur at some point in the
future. We have procured flood insurance as a means of risk
mitigation; however, there is a chance that such insurance will not cover
certain costs in excess of our insurance associated with flood damage or loss of
income, during a flood period. Our current insurance may not be
adequate to cover the losses that could be incurred in a flood of a 500-year
magnitude. Accordingly, floods could have a material adverse impact
upon Unit value.
12
We may experience delays or
disruption in the operation of our rail line and loop track, which may lead to
decreased revenues.
We have
entered into the Track Agreement to service our track and railroad cars, which
we will be highly dependent on. There may be times when we have to
slow production at our ethanol plant due to our inability to ship all of the
ethanol and distillers grains we produce. If we cannot operate our
plant at full capacity, we may experience decreased revenues which may affect
the profitability of the Facility.
Our operating costs could
increase, which could reduce our profits or create losses, which could decrease
the value of Units or Members’ investment return.
We could
experience cost increases associated with the operation of the Facility caused
by a variety of factors, many of which are beyond our control. Corn prices are
volatile and labor costs could increase over time, particularly if there is a
shortage of persons with the skills necessary to operate the Facility. The
adequacy and cost of electricity, steam and natural gas utilities could also
affect our operating costs. Changes in price, operation and availability of
truck and rail transportation may affect our profitability with respect to the
transportation of ethanol and distillers grains to our customers. In
addition, the operation of the Facility is subject to ongoing compliance with
all applicable governmental regulations, such as those governing pollution
control, ethanol production, grain purchasing and other matters. If any of these
regulations were to change, it could cost us significantly more to comply with
them. We will be subject to all of these regulations whether or not
the operation of the Facility is profitable.
If we cannot retain
competent personnel, we may not be able to operate profitably, which could
decrease the value of Units or Members’ investment return.
Though we
believe we have employed capable management to date, we provide no assurance
that we can manage the Facility effectively or properly staff our operations
going forward.
Our lack of business
diversification could result in the devaluation of our Units if our revenues
from our primary products decrease.
Our
business consists solely of ethanol and distillers grains production and
sales. We have no other lines of business or other sources of
revenue. Our lack of business diversification could cause Members to
lose all or some of their investment if we are unable to generate a profit by
the production and sales of ethanol and distillers grains since we do not expect
to have any other lines of business or alternative revenue sources.
We have a history of losses
and may not ever operate profitably.
From our
inception on March 28, 2005 through September 30, 2009, we incurred an
accumulated net loss of approximately $16,092,000. There is no
assurance that we will be able to operate profitably.
An investment in our Units
may decline in value due to decisions made by our Board and Members’ only
recourse is to replace our Directors, which could take several
years.
Our Board
may make poor decisions regarding actions of the Company, which may cause a
decrease in the value of Units. Our Operating Agreement provides that
each member of the Board serves a four year term, and in all cases until a
successor is elected and qualified. Holders of Series A Units (the
“Series A
Members”) have the right to elect the balance of the directors not
elected by the holders of Series B, Series C Members, (or Series U Members, if
we issue such Units) (presently the Series A Members may elect four Directors);
however, the terms of the directorships elected by the Series A Members are
staggered such that only one Series A Director may be elected each
year. Staggering the terms of the Series A Directors, in addition to
the rights of Bunge (the “Series B Member”) and
ICM (the “Series C
Member”) to elect certain directorships, including Bunge or Holdings’s
rights to elect directorships in the event it is issued additional Units, means
that Series A Members could only change the control of the Company through
electing all four Series A Directors, which would take four years. If
the Facility suffers due to lack of financing or the Board makes poor decisions,
the Series A Members’ only recourse is to
13
replace
the Series A directors through elections at four successive annual meetings or
an amendment to our Operating Agreement, which may be difficult to
accomplish.
Our Operating Agreement
contains restrictions on Members’ rights to participate in corporate governance
of our affairs, which limits their ability to influence management
decisions.
Our
Operating Agreement provides that a Member or Members owning at least 30 percent
of the outstanding Units may call a special meeting of the
Members. This may make it difficult for Members to propose changes to
our Operating Agreement without support from our Board of
Directors. Our directors are elected by holders of the three
outstanding Series of Units.
Our directors have other
business and management responsibilities which may cause conflicts of interest
in the allocation of their time and services to the Company.
Since we
are managed both by our officers and to some extent by the Board, the devotion
of the directors’ time to the project is critical. However, the directors
have other management responsibilities and business interests apart from our
project. Most particularly, our directors who were nominated by Bunge and
ICM have duties and responsibilities to those companies which may conflict with
our interests. As a result, our directors may experience conflicts of
interest in allocating their time and services between us and their other
business responsibilities. No formal procedures have been established to
address or resolve these conflicts of interest.
We may have conflicting
financial interests with Bunge and ICM which could cause them to put their
financial interests ahead of ours.
ICM and
Bunge advise our directors and have been, and are expected to be, involved in
substantially all material aspects of our financing and
operations. We have entered into a number of material commercial
arrangements with Bunge, as described elsewhere in this
report. Consequently, the terms and conditions of our agreements with
ICM and Bunge have not been negotiated at arm’s length. Therefore,
these arrangements may not be as favorable to us as could have been if obtained
from unaffiliated third parties. Most of the cost of our project has
been paid to ICM for the design and construction of the Facility. In
addition, because of the extensive roles that ICM and Bunge had, it may be
difficult or impossible for us to enforce claims that we may have against ICM or
Bunge. Such conflicts of interest may reduce our profitability and
the value of the Units and could result in reduced distributions to
investors.
ICM,
Bunge and Holdings and their respective affiliates may also have conflicts of
interest because ICM, Bunge and Holdings and their respective employees or
agents are involved as owners, creditors and in other capacities with other
ethanol plants in the United States. We cannot require ICM, Bunge or
Holdings to devote their full time or attention to our activities. As a
result, ICM, Bunge and/or Holdings may have, or come to have, a conflict of
interest in allocating personnel, materials and other resources to our
Facility.
From time
to time, our directors may serve in director or leadership roles with trade
associations which could raise a conflict of interest.
A number
of our directors have or continue to serve as directors of local and state
agricultural trade organizations. These organizations may adopt
policies, or engage in political lobbying activities that are in opposition to,
or that conflict with the Company’s business needs. This may require such
a director to abstain from votes or discussion on certain Company-related
business matters.
Risks
Associated With the Ethanol Industry
There have been increasing
questions about the viability of ethanol producers.
We
believe that the competition in the ethanol market may increase in the near term
as the ethanol plants recently sold as part of bankruptcy proceedings return to
production. The Valero Energy Corporation recently purchased seven
idle plants. As these plants come on line, we believe that ethanol
prices will continue to rise
14
through
the end of 2009. In addition, several of our competitors
including certain subsidiaries of Pacific Ethanol, Inc. and Aventine Renewable
Energy Holdings, Inc. have filed to reorganize under federal bankruptcy laws as
a result of margin pressure, inadequate liquidity and other
considerations.
We compete with larger,
better financed entities, which could negatively impact our ability to operate
profitably.
There is
significant competition among ethanol producers with numerous producers and
privately-owned ethanol plants planned and operating throughout the Midwest and
elsewhere in the United States. Our business faces a competitive
challenge from larger plants, from plants that can produce a wider range of
products than we can, and from other plants similar to ours. Large
ethanol producers such as Abengoa Bioenergy Corp., Archer Daniels Midland,
Cargill, Inc., Green Plains Renewable Energy, Inc., POET and Valero, among
others, are capable of producing a significantly greater amount of ethanol than
we produce. Furthermore, ethanol from certain Central American or
Caribbean countries is eligible for tariff reduction or elimination upon
importation to the United States. Ethanol imported from these Caribbean Basin
countries may be a less expensive alternative to domestically-produced
ethanol.
This
competition also means that the supply of domestically-produced ethanol is at an
all-time high. According to Ethanol Producer Magazine, there were 184
ethanol plants in operation in the United States with the capacity to produce
11.8 billion gallons of ethanol annually as of October 21, 2009. An
additional 12 plants were under construction or expanding which could add an
additional estimated 1.1 billion gallons of annual production
capacity. Approximately 23 plants were not producing which could add
an additional estimated 1.3 billion gallons of annual production capacity if all
plants were online. Iowa alone is estimated to produce approximately
3.27 billion gallons of ethanol in 2009. Excess capacity in the
ethanol industry will have an adverse impact on our operations, cash flows and
general financial conditions. If the demand for ethanol does not grow
at the same pace as increases in supply, the price of ethanol will likely
decline. If excess capacity in the ethanol industry continues, the
market price of ethanol may continue to decline to levels that are inadequate to
generate sufficient cash flow to cover our costs. This could
negatively impact our future profitability and decrease the value of our Units
and Members’ investment return.
Changes in the supply,
demand, production and price of corn could make it more expensive to produce
ethanol, which could decrease our profits.
Our
ethanol production requires substantial amounts of corn. A significant reduction
in the quantity of corn harvested due to adverse weather conditions, farmer
planting decisions, domestic and foreign government farm programs and policies,
global demand and supply or other factors could result in increased corn costs
which would increase our cost to produce ethanol. Events that tend to
negatively impact the supply of corn are likely to increase prices and affect
our operating results. The record high corn prices in the spring of
2009 resulted in lower profit margins for the production of ethanol, and market
conditions generally do not allow us to pass along increased corn costs to our
customers. If the demand for corn returned to the levels of spring
2009 and drove corn prices significantly higher we may not be able to acquire
the corn needed to continue operations.
The price
of corn has fluctuated significantly in the past and may fluctuate significantly
in the future. We cannot provide assurances that we will be able to offset any
increase in the price of corn by increasing the price of our
products. Any reduction in the spread between ethanol and corn
prices, whether as a result of further increase in corn price or an additional
decrease in ethanol prices, may adversely affect our results of operations and
financial conditions, leading to a decrease in the value of Units and Members’
investment return.
We have executed an output
contract for the purchase of all of the ethanol we produce, which may result in
lower revenues because of decreased marketing flexibility and inability to
capitalize on temporary or regional price disparities, and could reduce the
value of Units or Members’ investment return.
Bunge is
the exclusive purchaser of our ethanol and markets our ethanol in national,
regional and local markets. We do not plan to build our own sales force or sales
organization to support the sale of ethanol. As a result, we are
dependent on Bunge to sell our principal product. When there are
temporary or regional disparities in ethanol market prices, it could be more
financially advantageous to have the flexibility to sell ethanol ourselves
through our
15
own sales
force. We have decided not to pursue this route. Our
strategy could result in lower revenues and reduce the value of Units if Bunge
does not perform as we plan.
Low ethanol prices and low
gasoline prices could reduce our profitability.
Prices
for ethanol products can vary significantly over time and decreases in price
levels could adversely affect our profitability and viability. The
price for ethanol has some relation to the price for oil and gasoline. The price
of ethanol tends to increase as the price of gasoline increases, and the price
of ethanol tends to decrease as the price of gasoline decreases, although this
may not always be the case. Any lowering of gasoline prices will
likely also lead to lower prices for ethanol and adversely affect our operating
results. Further increased production of ethanol may lead to lower
prices. Any downward change in the price of ethanol may decrease our
prospects for profitability and thus the value of our Units and Members’
investment return.
There is scientific
disagreement about the wisdom of policies encouraging ethanol production, which
could result in changes in governmental policies concerning ethanol and reduce
our profitability.
Some
studies have challenged whether ethanol is an appropriate source of fuel and
fuel additives, because of concerns about energy efficiency, potential health
effects, cost and impact on air quality. Federal energy policy, as set forth in
the 2005 Act and the 2007 Act, supports ethanol production. If a
scientific consensus develops that ethanol production does not enhance our
overall energy policy, our ability to produce and market ethanol could be
materially and adversely affected. In the spring of 2009, the EPA
issued a proposed rule that required ethanol and biodiesel producers meet higher
greenhouse gas emission standards than those for petroleum-based fuels because
of the potential for increased GHG emissions from land clearing for increased
corn and soybean plantings in the U.S and other countries. If this
proposed rule were implemented today, it could impose significant cost on our
operations.
Hedging transactions, which,
are intended to stabilize our corn costs, also involve risks and costs that
could reduce our profitability.
In an
attempt to minimize the effects of the volatility of corn costs on operating
profits, we take hedging positions in corn futures markets, provided we have
sufficient working capital. Hedging means protecting the price at which we
buy corn and the price at which we will sell our products in the
future. It is a way to attempt to reduce the risk caused by price
fluctuation. The effectiveness of hedging activities is dependent
upon, among other things, the cost of corn and our ability to sell sufficient
amounts of ethanol and distillers grains to utilize all of the corn subject to
the futures contracts. Hedging activities result in costs such as
brokers’ commissions and other transaction costs.
Ethanol production is energy
intensive and interruptions in our supply of energy, or volatility in energy
prices, could have a material adverse impact on our
business.
Ethanol
production requires a constant and consistent supply of energy. If
our production is halted for any extended period of time, it will have a
material adverse effect on our business. If we were to suffer
interruptions in our energy supply, our business would be harmed. We
have entered into the Steam Contract for our primary energy
source. We also are able to operate at full capacity using natural
gas-fired boilers, which mitigates the risk of disruption in steam
supply. However, the amount of natural gas we are permitted to use
for this purpose is currently limited and the price of natural gas may be
significantly higher than our steam price. In addition, natural gas
and electricity prices have historically fluctuated significantly. Increases in
the price of steam, natural gas or electricity would harm our business by
increasing our energy costs. The prices which we will be required to
pay for these energy sources will have a direct impact on our costs of producing
ethanol and our financial results.
Our ability to successfully
operate depends on the availability of water.
To
produce ethanol, we need a significant supply of water, and water supply and
quality are important requirements to operate an ethanol plant. Our
water requirements are supplied by our wells, but there are no assurances that
we will continue to have a sufficient supply of water to sustain the Facility in
the future, or that we
16
can
obtain the necessary permits to obtain water directly from the Missouri River as
an alternative to our wells. As a result, our ability to make a
profit may decline.
New
environmental laws could significantly impact our profitability. We
have no current plan to sell the raw carbon dioxide we produce to a third party
processor resulting in the loss of a potential source of revenue.
Congress
is currently discussing the American Clean Energy and Security Act of 2009 which
would create a cap and trade program to reduce greenhouse gas
emissions. The gases covered under the legislation include carbon
dioxide, methane, nitrous oxide, sulfur hexafluoride, hydroflourocarbons (HFCs)
emitted as a byproduct, perfluorcarbons, and nitrogen
triflouride. The bill requires a reduction in emissions from 17%
below 2005 levels by 2020 and 83% percent below 2005 levels by
2050. These additional emission containment measures could be a
prohibitive capital expenditure to us.
Changes and advances in
ethanol production technology could require us to incur costs to update our
Facility or could otherwise hinder our ability to complete in the ethanol
industry or operate profitably.
Advances
and changes in the technology of ethanol production are expected to
occur. Such advances and changes may make the ethanol production
technology installed in our plant less desirable or obsolete. These
advances could also allow our competitors to produce ethanol at a lower cost
than us. If we are unable to adopt or incorporate technological advances,
our ethanol production methods and processes could be less efficient than our
competitors, which could cause our plant to become uncompetitive or completely
obsolete. If our competitors develop, obtain or license technology that is
superior to ours or that makes our technology obsolete, we may be required to
incur significant costs to enhance or acquire new technology so that our ethanol
production remains competitive. Alternatively, we may be required to seek
third-party licenses, which could also result in significant expenditures.
We cannot guarantee or assure that third-party licenses will be available or,
once obtained, will continue to be available on commercially reasonable terms,
if at all. These costs could negatively impact our financial performance
by increasing our operating costs and reducing our net income, all of which
could reduce the value of Members’ investment.
Competition
from the advancement of alternative fuels may decrease the demand for ethanol
and negatively impact our profitability, which could reduce the value of
Members’ investment.
Alternative
fuels, gasoline oxygenates and ethanol production methods are continually under
development. A number of automotive, industrial and power generation
manufacturers are developing alternative clean power systems using fuel cells or
clean burning gaseous fuels. Like ethanol, the emerging fuel cell industry
offers a technological option to address increasing worldwide energy costs, the
long-term availability of petroleum reserves and environmental concerns.
Fuel cells have emerged as a potential alternative to certain existing power
sources because of their higher efficiency, reduced noise and lower
emissions. Fuel cell industry participants are currently targeting the
transportation, stationary power and portable power markets in order to lower
fuel costs, decrease dependence on crude oil and reduce harmful emissions.
If the fuel cell and hydrogen industries continue to expand and gain broad
acceptance, and hydrogen becomes readily available to consumers for motor
vehicle use, we may not be able to compete effectively. This additional
competition could reduce the demand for ethanol, which would negatively impact
our profitability, causing a reduction in the value of Members’
investment.
Corn-based ethanol may
compete with cellulose-based ethanol in the future, which could make it more
difficult for us to produce ethanol on a cost-effective basis and could reduce
the value of Members’ investment.
Most
ethanol producted in the U.S. is currently produced from corn and other raw
grains, such as milo or sorghum - especially in the Midwest. The
current trend in ethanol production research is to develop an efficient method
of producing ethanol from cellulose-based biomass, such as agricultural waste,
forest residue, municipal solid waste and energy crops. This trend is
driven by the fact that cellulose-based biomass is generally cheaper than corn,
and producing ethanol from cellulose-based biomass would create opportunities to
produce ethanol in areas which are unable to grow corn. If an
efficient method of producing ethanol from cellulose-based biomass is developed,
we may not be able to compete effectively. It may not be practical or
cost-effective to convert our Facility into a plant which will use
cellulose-based biomass to produce ethanol. If we are unable to
produce ethanol
17
as
cost-effectively as cellulose-based producers, our ability to generate revenue
will be negatively impacted and Members’ investment could lose
value.
Competition
from ethanol imported from Caribbean basin countries may be a less expensive
alternative to our ethanol, which would cause us to lose market share and reduce
the value of Members’ investment.
Ethanol
produced or processed in certain countries in Central America and the Caribbean
region is eligible for tariff reduction or elimination upon importation to the
United States under a program known as the Caribbean Basin
Initiative. Large ethanol producers, such as Cargill, have expressed
interest in building dehydration plants in participating Caribbean Basin
countries, such as El Salvador, which would convert ethanol into fuel-grade
ethanol for shipment to the United States. Ethanol imported from
Caribbean Basin countries may be a less expensive alternative to domestically
produced ethanol. Various pieces of legislation have been proposed to limit the
number of gallons that may be imported under the Carribbean Basin Initiative
(“CBI”);
however, at this time none have been passed. The CBI’s share of the U.S. market
has stayed relatively stable. Competition from ethanol imported from Caribbean
Basin countries may affect our ability to sell our ethanol profitably, which
would reduce the value of Members’ investment.
Competition from ethanol
imported from Brazil may be a less expensive alternative to our ethanol, which
would cause us to lose market share and reduce the value of Members’
investment.
Brazil is
currently the world’s largest producer and exporter of ethanol. In
Brazil, ethanol is produced primarily from sugarcane, which is also used to
produce food-grade sugar. Ethanol imported from Brazil may be a less
expensive alternative to domestically-produced ethanol, which is primarily made
from corn. Tariffs presently protecting U.S. ethanol producers may be
reduced or eliminated. Competition from ethanol imported from Brazil
may affect our ability to sell our ethanol profitably, which would reduce the
value of Members’ investment.
Risks
Associated With Government Regulation and Subsidization
Federal regulations
concerning tax incentives could expire or change, which could reduce our
revenues.
The
federal government presently encourages ethanol production by taxing it at a
lower rate which indirectly benefits us. Some states and cities
provide additional incentives. The 2005 Act and the 2007 Act effectively
mandated increases in the amount of annual ethanol consumption in the United
States. The result is that the ethanol industry’s economic structure is highly
dependent on governmental policies. Although current policies are
favorable factors, any major change in federal policy, including a decrease in
ethanol production incentives, would have significant adverse effects on our
proposed plan of operations and might make it impossible for us to continue in
the ethanol business.
Nebraska state producer
incentives are unavailable to us, which places us at a competitive
disadvantage.
Neighboring
states such as Nebraska have historically provided incentives to ethanol
producers, and may do so in the future. Presently, we do not qualify
for any state-granted incentives. To the extent that neighboring
states provide economic incentives to our competitors, our ability to
effectively compete with such recipients will be reduced.
We are subject to extensive
environmental regulation and operational safety regulations that impact our
expenses and could reduce our profitability.
Ethanol
production involves the emission of various airborne pollutants, including
particulate matters, carbon monoxide, oxides of nitrogen, volatile organic
compounds and sulfur dioxide. We are subject to regulations on emissions from
the EPA and the IDNR. The EPA’s and IDNR’s environmental regulations are subject
to change and often such changes are not favorable to
industry. Consequently, even if we have the proper permits now, we
may be required to invest or spend considerable resources to comply with future
environmental regulations.
Our
failure to comply or the need to respond to threatened actions involving
environmental laws and regulations may adversely affect our business, operating
results or financial condition. We must follow procedures for
the
18
proper
handling, storage, and transportation of finished products and materials used in
the production process and for the disposal of waste products. In
addition, state or local requirements also restrict our production and
distribution operations. We could incur significant costs to comply with
applicable laws and regulations. Changes to current environmental
rules for the protection of the environment may require us to incur additional
expenditures for equipment or processes.
We could
be subject to environmental nuisance or related claims by employees, property
owners or residents near the Facility arising from air or water
discharges. Ethanol production has been known to produce an odor to
which surrounding residents could object. We believe our plant design
mitigates most odor objections. However, if odors become a problem,
we may be subject to fines and could be forced to take costly curative
measures. Environmental litigation or increased environmental
compliance costs could significantly increase our operating costs.
We are
subject to federal and state laws regarding operational safety. Risks
of substantial compliance costs and liabilities are inherent in ethanol
production. Costs and liabilities related to worker safety may be
incurred. Possible future developments-including stricter safety laws
for workers or others, regulations and enforcement policies and claims for
personal or property damages resulting from our operation could result in
substantial costs and liabilities that could reduce the amount of cash that we
would otherwise have to distribute to Members or use to further enhance our
business.
Carbon dioxide may be
regulated by the EPA in the future as an air pollutant, requiring us to obtain
additional permits and install additional environmental mitigation equipment,
which may adversely affect our financial performance.
Our
Facility emits carbon dioxide as a by-product of the ethanol production
process. The United States Supreme Court has classified carbon
dioxide as an air pollutant under the Clean Air Act in a case seeking to require
the EPA to regulate carbon dioxide in vehicle emissions. Similar
lawsuits have been filed seeking to require the EPA to regulate carbon dioxide
emissions from stationary sources such as our ethanol plant under the Clean Air
Act. While there are currently no regulations applicable to us
concerning carbon dioxide, if Iowa or the federal government, or any appropriate
agency, decides to regulate carbon dioxide emissions by plants such as ours, we
may have to apply for additional permits or we may be required to install carbon
dioxide mitigation equipment or take other steps unknown to us at this time in
order to comply with such law or regulation. Compliance with future
regulation of carbon dioxide, if it occurs, could be costly and may prevent us
from operating the Facility profitably, which may decrease the value of our
Units and Members’ investment return.
Our site borders nesting
areas used by endangered bird species, which could impact our ability to
successfully maintain or renew operating permits. The presence of
these species, or future shifts in its nesting areas, could adversely impact
future operating performance.
The
Piping Plover (Charadrius
melodus) and Least Tern (Sterna antillarum) use the
fly ash ponds of the existing MidAm power plant for their nesting
grounds. The birds are listed on the state and federal threatened and
endangered species lists. The IDNR determined that our rail
operation, within specified but acceptable limits, does not interfere with the
birds’ nesting patterns and behaviors. However, it was necessary for
us to modify our construction schedules, plant site design and track maintenance
schedule to accommodate the birds’ patterns. We cannot foresee or
predict the birds’ future behaviors or status. As such, we cannot say
with certainty that endangered species related issues will not arise in the
future that could negatively effect the plant’s operations, or the valuation of
Units.
We may encounter or discover
unforeseen environmental contaminants at our site.
We
completed a Phase One environmental survey to determine the presence of
hazardous waste on the Facility site. While we believe the historical
use of our site has primarily been bare farmland, a Phase Two environmental
study (to test for the presence of any contaminants that may have permeated the
ground water or leached into the soil as a consequence of any prior disposal or
improper storage by prior occupants or neighboring businesses) was performed and
updated in connection with the closing of our 2006 equity
offering. In the future, should such
19
contaminants
or hazards be discovered, we may be unable to utilize the Facility site as we
intend or we may incur costs for cleanup.
Risks
Related to Tax Issues in a Limited Liability Company
MEMBERS
SHOULD CONSULT THEIR OWN TAX ADVISOR CONCERNING THE IMPACT THAT THEIR OWNERSHIP
IN US MAY HAVE ON THEIR FEDERAL INCOME TAX LIABILITY AND THE APPLICATION OF
STATE AND LOCAL INCOME AND OTHER TAX LAWS TO OWNERSHIP OF UNITS.
IRS classification of us as
a corporation rather than as a partnership would result in higher taxation and
reduced profits, which could reduce the value of an investment in
us.
We are an
Iowa limited liability company that has elected to be taxed as a partnership for
federal and state income tax purposes, with income, gain, loss, deduction and
credit passed through to our Members. However, if for any reason the Internal
Revenue Service (“IRS”) would
successfully determine that we should be taxed as a corporation rather than as a
partnership, we would be taxed on our net income at rates of up to 35 percent
for federal income tax purposes, and all items of our income, gain, loss,
deduction and credit would be reflected only on our tax returns and would not be
passed through to our Members. If we were to be taxed as a corporation for any
reason, distributions we make to our Members will be created as ordinary
dividend income to the extent of our earnings and profits, and the payment of
dividends would not be deductible by us, thus resulting in double taxation of
our earnings and profits. If we pay taxes as a corporation, we will have less
cash to distribute to our Members.
The IRS may classify an
investment in us as passive activity income, resulting in a Member’s inability
to deduct losses associated with an investment in us.
It is
likely that the IRS will classify an interest in us as a passive activity. If a
Member is either an individual or a closely held corporation, and if a Member’s
interest is deemed to be “passive activity,” then such Member’s allocated share
of any loss we incur will be deductible only against income or gains such Member
has earned from other passive activities. Passive activity losses that are
disallowed in any taxable year are suspended and may be carried forward and used
as an offset against passive activity income in future years. These rules could
restrict a Member’s ability to currently deduct any of our losses that are
passed through.
Income allocations assigned
to Units may result in taxable income in excess of cash distributions, which
means a Member may have to pay income tax on our Units with personal
funds.
Members
will pay tax on their allocated shares of our taxable income. Members may
receive allocations of taxable income that result in a tax liability that is in
excess of any cash distributions we may make to the Members. Among other things,
this result might occur due to accounting methodology, lending covenants imposed
by our current loans that restrict our ability to pay cash distributions, or our
decision to retain the cash generated by the business to fund our operating
activities and obligations. Accordingly, Members may be required to pay some or
all of the income tax on their allocated shares of our taxable income with
personal funds.
An IRS audit could result in
adjustments to our allocations of income, gain, loss and deduction causing
additional tax liability to our Members.
The IRS
may audit our income tax returns and may challenge positions taken for tax
purposes and allocations of income, gain, loss and deduction to
Members. If the IRS were successful in challenging our allocations in
a manner that reduces loss or increases income allocable to Members, Members may
have additional tax liabilities. In addition, such an audit could
lead to separate audits of Members’ tax returns, especially if adjustments are
required, which could result in adjustments on Members’ tax
returns. Any of these events could result in additional tax
liabilities, penalties and interest to Members, and the cost of filing amended
tax returns.
20
Item
2.
|
Properties.
|
We own
the Facility site located near Council Bluffs, Iowa, which consists of three
parcels totaling 200 acres. This property is encumbered under the
mortgage agreement with Lenders. The Facility site is suitable for
our production, storage and transportation of our products. We lease
a building on the Facility site to an unrelated third party, and lease 55.202
acres on the south end of the property to an unrelated third party for
farming. In December 2008, we entered into a lease agreement with
Bunge for the lease of property in Council Bluffs, Iowa. The property
contains a storage bin that we use for storing grain to be used at the
Facility. The initial term of the lease is one year, and it may be
extended for additional one-year terms upon mutual agreement. The
Facility site is adequate for our current and future operations at namplate
capacity.
Item
3.
|
Legal
Proceedings.
|
There are
no items to report.
Item
4. Submission
of Matters to a Vote of Security Holders.
On July
17, 2009 the Company held its annual meeting of members (the “Annual
Meeting”). The Series A Members re-elected current Series A
director Karol D. King to serve another four year term on the
Board. Mr. King received 208 votes and four votes
abstained. Those Series A directors who were not due for election and
whose term of office continued after the Annual Meeting are Ted Bauer, Hubert M.
Houser, and Michael K. Guttau. Additionally, the current Series B
Directors, Messrs. Bailey Ragan and Michael Scharf, each voluntarily tendered
their resignations to the Board effective July 17, 2009 not due to any
disagreement with the Board. Pursuant to Section 5.3(b) of the
Operating Agreement, Bunge, the Series B Member, appointed two directors to the
Board Messrs. Eric L. Hakmiller and Tom J. Schmitt to succeed Messrs. Ragan and
Scharf.
PART
II
Item
5.
|
Market
for Registrant’s Common Equity, Related Member Matters, and Issuer
Purchases of Equity Securities.
|
As of
September 30, 2009, the Company had (i) 8,805 Series A Units issued and
outstanding held by 774 persons, (ii) 3,334 Series B Units issued and
outstanding held by Bunge, and (iii) 1,000 Series C Units issued and outstanding
held by ICM. The Company does not have any established trading market
for its Units, nor is one contemplated. To date, the Company has made
no distribution to its Members, and it cannot be certain when it will be able to
make distributions. Further, our ability to make distributions will
be restricted under the terms of the Credit Agreement.
Item
6.
|
Selected
Financial Data.
|
Not
applicable.
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation.
|
Overview, Status and
Recent Developments
Results
of Operations
The
following table shows our unaudited results of operations, stated as a
percentage of revenue. Because we did not begin operating the
Facility until mid-February 2009, we do not have comparable data for the twelve
months ended September 30, 2008. We do, however, have a comparison
for the three months ended September 30, 2009 to the three months ended June 30,
2009.
Three
Months Ended September 30, 2009 (1)
(Unaudited)
|
Three
Months Ended June 30, 2009 (1)
(Unaudited)
|
||||||||||||||
Amounts
|
%
of
Revenues
|
Gallons(2)
|
Amounts
|
%
of
Revenues
|
Gallons(2)
|
Income
Statement Data
|
|||||||||||||||
Revenues
|
$
|
45,548,073
|
100%
|
$
|
1.81
|
$
|
42,512,277
|
100%
|
$
|
1.89
|
|||||
Cost
of Goods Sold
|
44,148,010
|
97%
|
1.76
|
43,682,895
|
103%
|
1.94
|
|||||||||
Gross
Margin
|
1,400,062
|
3%
|
0.05
|
(1,170,618)
|
(3%)
|
(0.05)
|
|||||||||
Selling,
General and
Administrative
Expenses
|
1,400,996
|
3%
|
0.06
|
1,093,179
|
3%
|
0.05
|
|||||||||
Other
(Expense)
|
(1,582,739)
|
(3%)
|
(0.06)
|
(2,142,214)
|
(5%)
|
(0.10)
|
|||||||||
Net
Loss
|
$
|
(1,583,672)
|
(3%)
|
$
|
(0.07)
|
$
|
(4,406,011)
|
(10%)
|
$
|
(0.20)
|
|
(1)
|
We
were operating at a reduced capacity of approximately 84% during the year
ended September 30, 2009 following the commencement of operations in
February 2009. The losses that we incurred are not indicative
of any losses or profits that we might achieve when the plant is running
at full capacity
|
(2)
Includes ethanol and distillers grains converted to gallons.
Revenues
Our
revenue from operations is derived from two primary sources: sales of ethanol
and distillers grains. During the Fiscal 2009, we earned
approximately 82.6% of our revenue from the sale of ethanol and 17.11% of our
revenue from the sale of distillers grains. We sold 54.8 million
gallons of ethanol at an average price of $1.51 a gallon and sold 156,600 tons
of dried distillers grains at an average price of $106 a ton through Fiscal
2009. The increase in revenue from the third quarter to the fourth quarter of
2009 was due to an additional 2.3 million gallons of ethanol sold with the
average price per gallon remaining stable between the two quarters.
Cost
of Goods Sold
Our cost
of goods sold as a percentage of our revenues was 102% for Fiscal
2009. Upon commencing operations, our two primary costs of producing
ethanol and distillers grains are corn and energy, with steam as our primary
energy source and to a lesser extent, natural gas. Our corn prices
varied widely during Fiscal 2009, ranging from $3.18 to $4.07 per
bushel. Our average price of corn ground was approximately $3.69 per
bushel and our average steam and natural gas energy cost was $4.36 per
MMBTU. Because we did not operate at 100% capacity during the period,
our fixed costs per gallon of production were higher than they are anticipated
to be in the future. In addition, cost of goods sold includes a
reduction in our corn costs due to realized and unrealized gains on our hedging
activities of $5.0 million during Fiscal 2009. Our cost of goods sold
increased from the third to the fourth quarter of 2009 as a result of additional
corn and energy used to produce an additional 2.3 million gallons of ethanol
sold.
General
& Administrative Expenses
Our
general and administrative expenses as a percentage of revenues were 5% for
Fiscal 2009. Operating expenses include salaries and benefits of
administrative employees, professional fees and other general administrative
costs. Our selling, general and administrative expenses for Fiscal
2009 were $5,505,160, as compared to $4,008,188 for the year ended September 30,
2008. The increase in selling, general, and administrative expenses
from 2008 to 2009 is due to completion of full staffing as we commenced
operations. We expect our operating expenses to remain flat to
slightly decreasing during the first two quarters of Fiscal 2010.
Other
(Expense)
Our other
expenses for Fiscal 2009 were approximately 4% of our revenues. Our
other expenses for the years ended September 30, 2009 and 2008 were $4,984,482
and $290,588, respectively. The majority of this increase in expenses
was a result of expensing interest as compared to the capitalization of our
construction loan interest in prior periods when we were in the
development stage. In addition, while in the development stage, we recognized an
expense that includes realized and unrealized losses on derivative instruments
of $657,000 in other expenses.
21
Net (Loss)
Our net
loss from operations for the year ended Fiscal 2009 was approximately 13% of our
revenues. Our net loss for Fiscal 2009 was primarily the result of
negative margins, fixed costs, interest expense and the startup of operations
during the year.
Liquidity
and Capital Resources
As of
September 30, 2009, we have drawn approximately $111,273,000 under our Credit
Agreement, and had approximately $8,585,000 of principal and interest
outstanding under the Bridge Loan. We also agreed to pay, beginning
at the end of the June 30, 2010 fiscal quarter, an amount equal to 65% of our
Excess Cash Flow (as defined in the Credit Agreement), up to a total of
$4,000,000 per year, and $16,000,000 over the term of the Credit
Agreement. Effective August 1, 2009, in addition to compliance with
the borrowing base, we are subject to working capital and tangible net worth
covenants under the Credit Agreement.
Under our
$15 million revolving line of credit with AgStar (the “Revolving LOC”), we
have borrowed $10,273,247 as of September 30, 2009, with an additional
$1,426,753 available at September 30, 2009. A letter of credit issued in favor
of our steam provider, MidAm, in the amount of $3,300,000 reduces the
availability under our Revolving LOC. We are also relying on receipt
of our accounts receivable to help fund operations.
Holdings
extended to the Company a Subordinated Term Note (the “Term Note”) in favor
of Holdings effective August 26, 2009 in the amount of approximately
$27,107,000. The Term Note was used to reduce the Bridge Loan in a
corresponding amount.
In
addition, we have entered into the Revolving Note with Holdings providing for
the extension of a maximum of $10,000,000 in revolving credit under the
Revolving Note. Holdings committed, subject to certain conditions, to
advance up to $3,750,000 at our request under the Revolving Note, and amounts in
excess of $3,750,000 may be advanced by Holdings in its
discretion. As of September 30, 2009, we have borrowed $2,000,000
under the Revolving Note. We are required to draw the maximum amount
available under the Credit Agreement to pay any outstanding advances under the
Revolving Note. Interest will accrue at the rate of 7.5 % - 10.5 %
over six-month LIBOR.
As a
result of our Revolving LOC, Term Note and Revolving Note we have a significant
amount of debt, and our existing debt financing agreements contain, and our
future debt financing agreements may contain, restrictive covenants that limit
distributions and impose restrictions on the operation of our business. The
use of debt financing makes it more difficult for us to operate because we must
make principal and interest payments on the indebtedness and abide by covenants
contained in our debt financing agreements. The level of our debt has important
implications on our liquidity and capital resources, including, among other
things: (i) limiting our ability to obtain additional debt or equity financing;
(ii) making us vulnerable to increases in prevailing interest rates; (iii)
placing us at a competitive disadvantage because we may be substantially more
leveraged than some of our competitors; (iv) subjecting all or substantially all
of our assets to liens, which means that there may be no assets left for members
in the event of a liquidation; and (v) limiting our ability to make business and
operational decisions regarding our business, including, among other things,
limiting our ability to pay dividends to our unit holders, make capital
improvements, sell or purchase assets or engage in transactions we deem to be
appropriate and in our best interest.
Because
oil demand has decreased and ethanol prices have remained flat to a slight
decrease, we believe operating margins will be break-even to slightly positive
over the next two to three quarters. We anticipate margins will
remain under pressure for the foreseeable future, as the current economics of
ethanol force a reduction in product supply as more independent plants are
forced to close. In addition, cash flow from operations may not allow
us to make our principal payments under the Credit Agreement which are scheduled
to commence March 1, 2010. In that event, we would request AgStar to delay our
payment of the initial principal payment. If our principal payments
are not delayed, we may be dependent upon our lines of credit to make these
payments. We may use our line of credit to hedge corn, natural gas
and ethanol. The volatility in the commodities markets has resulted
in wide swings in margins for ethanol production.
Primary
Working Capital Needs
Cash
(used in) operations for the years ended September 30, 2009 and 2008 was
($16,930,190) and ($2,436,118), respectively. Cash has been used
primarily to fund operational start-up expenses and for pre-operational and
administrative expenses prior to commencing operations in February,
2009. For the years ended September 30, 2009 and 2008, net cash used
in investing activities was ($31,008,259) and ($88,922,249), respectively,
primarily related to the final construction and start-up of our
plant. For the years ending September 30, 2009 and 2008, cash
provided by financing activities was $48,836,139 and $96,172,821,
respectively. This cash was generated through loan
proceeds.
22
Through
September 30, 2009, we have incurred approximately $147,608,000 for construction
services under our construction contract with ICM (“ICM Contract”),
leaving approximately $700,000 of retainage, which we expect to pay in the first
quarter of fiscal year 2010. During the next quarter, we estimate
that we will require approximately $33,000,000 per quarter for our primary input
of corn and $4,000,000 for our energy sources of steam and natural
gas. We currently have approximately $1,426,753 available under our
Revolving LOC to hedge commodity price fluctuations; in addition, we have up to
$8,000,000 in revolving credit available under the Revolving Note to support our
working capital needs. We cannot estimate the availability of funds
for hedging in the future.
Trends
and Uncertainties Impacting Ethanol Industry and Our Future
Operations
Our
operations are highly dependent on commodity prices, especially prices for corn,
ethanol and distillers grains. As a result of price volatility for these
commodities, our operating results may fluctuate substantially. The price and
availability of corn are subject to significant fluctuations depending upon a
number of factors that affect commodity prices in general, including crop
conditions, weather, governmental programs and foreign purchases. We may
experience increasing costs for corn and natural gas and decreasing prices for
ethanol and distillers grains which could significantly impact our operating
results. Because the market price of ethanol is not directly related to corn
prices, ethanol producers are generally not able to compensate for increases in
the cost of corn feedstock through adjustments in prices charged for
ethanol. We continue to monitor corn and ethanol prices and their
effect on our longer-term profitability.
The price
of corn has been volatile during the last two years. Since December, 2008, the
Chicago Mercantile Exchange (“CME”) near-month corn
price has dropped $0.62 per bushel. As of October 19, 2009, the CME near-month
corn price for October 2009 was $3.60 per bushel. We believe the decrease in
corn prices was primarily due to lower export and feeding demand plus a
normalization of the speculative trend of the spring and fall 2008 markets.
Increasing corn prices will negatively affect our costs of production. However,
we also believe that higher corn prices may, depending on the prices of
alternative crops, encourage farmers to plant more acres of corn in the coming
years and possibly divert land in the Conservation Reserve Program to corn
production. We believe an increase in land devoted to corn production could
reduce the price of corn to some extent in the future.
The
United States Department of Agriculture (“USDA”) has increased
the forecast of the amount of corn to be used for ethanol production during the
current marketing year (2009) by 100 million bushels, to a total of 3.7 billion.
The forecast is 674 million bushels more than used in that category last
year. The USDA cited record ethanol use in December, 2008, continuing
recovery in the production of gasoline blends with ethanol, and more favorable
blender margins as reasons for the increase. In its July 10, 2009 update, the
USDA also increased the projection of U.S. corn exports for the current
marketing year by 40 million bushels, to 1.79 billion bushels. This
projection is 260 million bushels less than the projection of last fall, 696
million less than the record exports of 2007-08, and represents the smallest
exports in six years.
The
USDA report for crop year 2008 (the period of September, 2008 through August,
2009) has projected the season-average farm price of corn at $4.00 to $4.40 per
bushel. This compares with the 2007/08 record of $4.20 per
bushel. We feel that there will continue to be volatility in the corn
market.
In the
past, ethanol prices have tended to track the wholesale price of gasoline.
Ethanol prices can vary from state to state at any given time. For the past two
years as of August, 2009 according to ProExporter, the average U.S. ethanol
price was $1.85 per gallon. For the same time period, the average
U.S. wholesale gasoline price was $2.22 per gallon. During the first
eight months of 2009, the average U.S. ethanol price was $1.51 per gallon. For
the same time period, U.S. wholesale gasoline prices have averaged $1.64 per
gallon, or approximately $.13 per gallon above ethanol prices.
The
Renewable Fuels Standard
The
Energy Improvement & Extension Act of 2008 (the “2008 Act”) included
cellulosic ethanol supports applicable to corn-based ethanol and bolsters those
contained in the 2007 Act. Theses supports have impacted the ethanol
industry by enhancing both the production and use of ethanol. The
2008 Act modified the provisions of the 2005 Act that created the
RFS. The RFS requires that 10.5 billion gallons of corn-based ethanol
be sold or dispensed in 2009, increasing to 15 billion gallons by
2022. We cannot assure that this program’s mandates will continue in
the future. We believe that any reversal in federal policy could have
a profound impact on the ethanol industry.
23
Market
Risks
We are
exposed to market risk from changes in commodity prices and, to the extent we
have working capital available, we engage in hedging transactions which involve
risks that could harm our business. Exposure to commodity price risk
results from our dependence on corn, and to the extent our steam source is not
available, natural gas, in the ethanol production process. We seek to
minimize the risks from fluctuations in the price of corn through the use of
hedging instruments when working capital is available. The effectiveness
of our hedging strategies is dependent upon the cost of commodities and our
ability to sell sufficient products to use all of the commodities for which we
have futures contracts. There is no assurance that our hedging activities will
successfully reduce the risk caused by price fluctuation which may leave us
vulnerable to high prices. Alternatively, we may choose not to engage in hedging
transactions in the future. As a result, our future results of operations and
financial conditions may also be adversely affected during periods in which corn
prices increase. We do not designate these contracts as hedges for accounting
purposes.
In the
event we do not have sufficient working capital to enter into hedging strategies
to manage our risks, we may be forced to purchase our corn and market our
ethanol at spot prices and as a result, we could be further exposed to market
volatility and risk.
We expect
the annual impact on our results of operations due to a $1.00 per bushel
fluctuation in market prices for corn to be approximately $29,900,000, or $0.27
per gallon, assuming our plant operated at 100% name plate capacity (production
of 110,000,000 gallons of ethanol annually). This assumes no increase in the
price of ethanol and assumes a relative increase in the price of distillers
grains.
We have a
significant amount of debt, and our existing debt financing agreements contain,
and our future debt financing agreements may contain, restrictive covenants that
limit distributions and impose restrictions on the operation of our
business. The
use of debt financing makes it more difficult for us to operate because we must
make principal and interest payments on the indebtedness and abide by covenants
contained in our debt financing agreements. The level of our debt has important
implications on our operations, including, among other things: (i) limiting our
ability to obtain additional debt or equity financing; (ii) making us vulnerable
to increases in prevailing interest rates; (iii) placing us at a competitive
disadvantage because we may be substantially more leveraged than some of our
competitors; (iv) subjecting all or substantially all of our assets to liens,
which means that there may be no assets left for members in the event of a
liquidation; and (v) limiting our ability to make business and operational
decisions regarding our business, including, among other things, limiting our
ability to pay dividends to our unit holders, make capital improvements, sell or
purchase assets or engage in transactions we deem to be appropriate and in our
best interest.
Competition
We
believe that the competition in the ethanol market will increase in the near
term as the ethanol plants recently sold by bankruptcy proceedings return to
production. Several of our competitors including certain subsidiaries
of Pacific Ethanol, Inc. and Aventine Renewable Energy Holdings, Inc. have filed
to reorganize under federal bankruptcy laws as a result of margin pressure,
inadequate liquidity and other considerations. The Valero Energy
Corporation purchased seven idle plants. As these plants come online,
we believe that ethanol prices will remain low through the end of
2009.
Summary
of Critical Accounting Policies and Estimates
Note 2 to
our financial statements contains a summary of our significant accounting
policies, many of which require the use of estimates and
assumptions. Accounting estimates are an integral part of the
preparation of financial statements and are based upon management’s current
judgment. We used our knowledge and experience about past events and
certain future assumptions to make estimates and judgments involving matters
that are inherently uncertain and that affect the carrying value of our assets
and liabilities. We believe that of our significant accounting
policies, the following are noteworthy because changes in these estimates or
assumptions could materially affect our financial position and results of
operations.
Revenue
Recognition
We sell
ethanol and related products pursuant to marketing
agreements. Revenues are recognized when the marketing company (the
“customer”) has taken title to the product, prices are fixed or determinable and
collectability is reasonably assured. Our products are generally
shipped FOB loading point. With the conclusion of the Lansing
Agreement, ethanol sales are handled through the Ethanol Agreement with
Bunge. Syrup, distillers grains and solubles, and modified wet
distillers grains with solubles are sold through the DG Agreement
with
24
Bunge,
which sets the price based on the market price to third
parties. Marketing fees and commissions due to the marketers are paid
separately from the settlement for the sale of the ethanol products and
co-products and are included as a component of cost of goods
sold. Shipping and handling costs incurred by us for the sale of
ethanol and co-products are included in cost of goods sold.
Investment
in Commodity Contracts, Derivative Instruments and Hedging
Activities
When we
have sufficient working capital available, we enter into derivative contracts to
hedge our exposure to price risk related to forecasted corn needs. We
use cash, futures and options contracts to hedge changes to the commodity prices
of corn and ethanol. The Company adopted new disclosure requirements,
which require entities to provide greater transparency in interim and annual
financial statements about how and why the entity uses derivative instruments,
how the instruments and related hedged items are accounted for, and how the
instruments and related hedged items affect the financial position, results of
operations, and cash flows of the entity.
We are
exposed to certain risks related to ongoing business operations. The
primary risks that we manage by using forward or derivative instruments are
price risk on anticipated purchases of corn and sales of ethanol.
We are
subject to market risk with respect to the price and availability of corn, the
principal raw material used to produce ethanol and ethanol
by-products. In general, rising corn prices result in lower profit
margins and, therefore, represent unfavorable market conditions. This
is especially true when market conditions do not allow us to pass along
increased corn costs to customers. The availability and price of corn
is subject to wide fluctuations due to unpredictable factors such as weather
conditions, farmer planting decisions, governmental policies with respect to
agriculture and international trade and global demand and supply.
Certain
contracts that literally meet the definition of a derivative may be exempted
from derivative accounting as normal purchases or normal
sales. Normal purchases and normal sales are contracts that provide
for the purchase or sale of something other than a financial instrument or
derivative instrument that will be delivered in quantities expected to be used
or sold over a reasonable period in the normal course of
business. Contracts that meet the requirements of normal purchases or
sales are documented as normal and exempted from the accounting and reporting
requirements of derivative accounting.
We enter
into short-term cash, options and futures contracts as a means of securing corn
for the ethanol plant and managing exposure to changes in commodity
prices. In addition, we enter into derivative contracts to hedge the
exposure to price risk as it relates to ethanol sales. We maintain a
risk management strategy that uses derivative instruments to minimize
significant, unanticipated earnings fluctuations caused by market
fluctuations. Our specific goal is to protect the Company from large
moves in commodity costs. All derivatives will be designated as
non-hedge derivatives and the contracts will be accounted for as mark to
market. Although the contracts will be effective economic hedges of
specified risks, they are not designated as and accounted for as hedging
instruments.
As part
of our trading activity, we use futures and option contracts offered through
regulated commodity exchanges to reduce risk and is exposed to risk of loss in
the market value of inventories. To reduce that risk, we generally
take positions using cash and futures contracts and
options. Accordingly, any realized or unrealized gain or loss related
to these derivative instruments was recorded in the statement of operations as a
component of non-operating income (expense) until the plant was
operational. The gains or losses are included in revenue if the
contracts relate to ethanol and cost of goods sold if the contracts relate to
corn. During Fiscal 2009, we recorded a combined realized and unrealized gain of
$4,966,567 as a component of cost of goods sold and a ($160,677) loss as a
component of revenue. In addition, we recorded a combined realized
and unrealized loss of ($656,973) for the twelve months ended September 30, 2009
as a component of non-operating income. There were no realized or
unrealized gains or losses during the three or twelve months ended September 30,
2008. The derivative financial instruments asset of $263,688 consists
of 1,525,000 bushels of corn at September 30, 2009.
Inventory
Inventory
is stated at the lower of cost or market value using the first-in, first-out
method. Market value is based on current replacement values, except
that it does not exceed net realizable values and it is not less than the net
realizable values reduced by an allowance for normal profit margin.
25
Property
and Equipment
Property
and equipment is stated at cost. Construction in progress is comprised of costs
related to constructing the plant and is depreciated upon completion of the
plant. Depreciation is computed using the straight-line method over
the following estimated useful lives:
Buildings 40
Years
Process
Equipment 10
Years
Office
Equipment 3-7
Years
Maintenance
and repairs are charged to expense as incurred; major improvements are
capitalized.
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be
recoverable. An impairment loss would be recognized when estimated
undiscounted future cash flows from operations are less than the carrying value
of the asset group. An impairment loss would be measured by the
amount by which the carrying value of the asset exceeds the fair value of the
asset. In accordance with our policies, management has evaluated the
plants for possible impairment based on projected future cash flows from
operations. Management has determined that its projected future cash
flows from operations exceed the carrying value of the plant and that no
impairment existed at September 30, 2009.
Off-Balance
Sheet Arrangements
The
Company currently does not have any off balance sheet arrangements.
Relationships
and Related Party Transactions
We
entered into the ICM Contract for a lump-sum contract price of
$118,000,000. As of September 30, 2009 and 2008, we incurred
approximately $147,608,000 and $134,025,000 of construction in
progress, respectively, under the ICM Contract. A total of
approximately $700,000 is included in retainage payable as of September 30,
2009.
We
entered into the DG Agreement under which Bunge pays a sales price less
transportation costs, rail lease charge and a fixed rate marketing fee for the
DDGS produced. The DG Agreement commenced on February 1, 2009 and
continues for ten years, when it will automatically renew for successive
three-year terms unless a 180-day written notice is given of either party’s
election not to renew before the expiration of the initial term or the
then-current renewal term. We are required to pay a minimum annual
marketing fee of $150,000. Beginning on February 1, 2012, the annual
minimum amount and the purchase price may be adjusted. Either party
may terminate the agreement as provided in the DG Agreement. We
have incurred $467,092 of marketing expenses during Fiscal 2009 and there were
no expenses incurred for the year ended September 30, 2008.
In
October, 2006, the Company entered into an agreement with a company in which
Bunge holds a membership interest, AGRI-Bunge, LLC (“AB”), to procure all
grain required for the Company’s ethanol plant. The Agreement with AB
has a term of ten years and automatically renews for successive three-year terms
unless a 180-day written notice is given by either party. We pay an
annual minimum fee of $675,000 under the agreement. Expenses for
Fiscal 2009 were $607,565; $92,714 of this amount is included in accrued
expenses at September 30, 2009. There were no fees incurred for the year ended
September 30, 2008.
On
January 30, 2008, the Company and Bunge entered into a Support Services
Agreement (the “Support Services
Agreement”), under which Bunge agreed to provide engineering support to
the project, provide reports to AgStar and assist us with requests by
AgStar. We paid, in addition to Bunge’s out of pocket expenses, an
hourly fee of $95 for such services. The term of the Support Services
Agreement expired on December 31, 2008, but is being continued on a month to
month basis. Expenses for the years ended September 30, 2009 and 2008
were $38,924 and $101,000, respectively.
In
December, 2008, we and Bunge entered into other various agreements. Under a
Lease Agreement (the “Lease Agreement”), we
leased from Bunge a grain elevator located in Council Bluffs, Iowa, for
approximately $67,000 per month. Expenses for Fiscal 2009 were
$603,474 under the Lease Agreement. There were no expenses incurred
for the year ended September 30, 2008. In connection with the Lease Agreement,
we entered into a grain purchase agreement, under which we agreed to purchase
the grain inventory at the grain elevator and the grain inventory located in our
on-site storage Facility. The Company purchased approximately
1,900,000 bushels of corn at an approximate market value of
$6,000,000.
26
Under the
Ethanol Agreement, we sell Bunge all of the ethanol produced at the Facility,
and Bunge purchases the same, up to the Facility’s nameplate capacity of
110,000,000 gallons a year. We pay Bunge a per-gallon fee for ethanol
sold by Bunge, subject to a minimum annual fee of $750,000 and adjusted
according to specified indexes after three years. The initial term of
the agreement which commenced August 20, 2009, is three years and it will
automatically renew for successive three-year terms unless one party provides
the other with notice of their election to terminate 180 days prior to the end
of the term. We have incurred expenses of $63,186 during Fiscal
2009.
Under a
Risk Management Services Agreement effective January 1, 2009, Bunge agreed to
provide us with assistance in managing our commodity price risks for a quarterly
fee of $75,000. The agreement has an initial term of three years and
will automatically renew for successive three year terms, unless one party
provides the other notice of their election to terminate 180 days prior to the
end of the term. Expenses for Fiscal 2009 were
$225,000. There were no expenses incurred for the year ended
September 30, 2008.
In June,
2007, we entered into an operating lease agreement with Bunge for the lease of
320 ethanol tank cars and 300 distillers grain
cars. The lease began in January 2009,
continues for a term of ten years, and terminates upon the
termination of the final car lease. On June 26, 2009, we
executed an Amended and Restated Railcar Lease Agreement (“Amended Railcar
Agreement”) with Bunge for the lease of 325 ethanol cars and 300 hopper
cars. Under the Amended Railcar Agreement, we lease railcars for
terms lasting 120 months and continuing on a month to month basis thereafter.
The Amended Railcar Agreement will terminate upon the expiration of all railcar
leases. The Amended Railcar Agreement reflects changes as a result of
Bunge’s purchase and sale/leaseback of railcars from a new railcar equipment
lessor other than contemplated in the 2007 Railcar Sublease Agreement (the
“Railcar Sublease
Agreement”) between the us and Bunge. The Amended Railcar
Agreement provides that we are a lessee rather than a sublessee as under the
Railcar Sublease Agreement and that Bunge is the lessor rather than the lessee
as under the Railcar Sublease Agreement. Expenses for Fiscal 2009
were $3,655,498. There were no expenses incurred for the year ended
September 30, 2009.
In March,
2009, we entered into an agreement with Bunge to provide an interim President /
CEO. The agreement provided for reimbursement in the annual amount of
$150,000 plus monthly expenses. Expenses for Fiscal 2009 were
$85,139, and $29,039 is included in accrued expenses. There were no
expenses incurred for the year ended September 30, 2009. We hired a
new General Manager effective September 8, 2009 thus terminating this agreement
with Bunge effective September 8, 2009.
In
connection with obtaining the Bridge Loan, we entered into the Series C Unit
Amendment as described above.
Holdings
has agreed to extend the Term Note to us, due in five years, repayment of which
is subordinated to the Credit Agreement, as described above.
In
addition, we entered into the Revolving Note with Holdings, providing for the
extension of a maximum of $10,000,000 in revolving credit, as described
above.
We do not
presently have any policies finalized and adopted by the Board governing the
review or approval of related party transactions.
Item
7A. Quantitative
and Qualitative Disclosures About Market Risk
Not
applicable.
27
Item
8. Financial
Statements and Supplementary Data.
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors
Southwest
Iowa Renewable Energy, LLC
We have
audited the accompanying balance sheets of Southwest Iowa Renewable Energy, LLC
as of September 30, 2009 and 2008, and the related statements of operations,
members’ equity, and cash flows for the years then ended. 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 Southwest Iowa Renewable Energy,
LLC as of September 30, 2009 and 2008, and the results of its operations and its
cash flows for years then ended, in conformity with U.S. generally accepted
accounting principles.
We were
not engaged to examine management’s assessment of the effectiveness of Southwest
Iowa Renewable Energy, LLC’s internal control over financial reporting as of
September 30, 2009, included in the accompanying controls and procedures in the
Form 10-K and accordingly, we do not express an opinion thereon.
/s/
McGladrey & Pullen, LLP
Des
Moines, Iowa
December
23, 2009
28
Southwest
Iowa Renewable Energy, LLC
Balance
Sheets
September
30, 2009 and 2008
|
|||||
2009
|
2008
|
||||
ASSETS
|
|||||
CURRENT
ASSETS
Cash and cash
equivalents
|
$
|
7,455,084
|
$
|
6,557,394
|
|
Restricted cash
|
-
|
3,289,949
|
|||
Accounts
receivable
|
1,831,722
|
-
|
|||
Accounts
receivable, related party
|
12,396,172
|
-
|
|||
Due
from broker
|
2,108,267
|
-
|
|||
Inventory
|
4,913,675
|
-
|
|||
Derivative
financial instruments
|
263,688
|
-
|
|||
Prepaid
expenses and other
|
439,431
|
43,261
|
|||
Total current
assets
|
29,408,039
|
9,890,604
|
|||
PROPERTY
AND EQUIPMENT
|
|||||
Land
|
2,064,090
|
2,064,090
|
|||
Construction in progress
|
-
|
172,745,278
|
|||
Plant, building,
and equipment
|
197,435,327
|
-
|
|||
Office and other
equipment
|
680,145
|
389,823
|
|||
200,179,562
|
175,199,191
|
||||
Accumulated
depreciation
|
(9,600,217)
|
(37,249)
|
|||
190,579,345
|
175,161,942
|
||||
OTHER
ASSETS
|
|||||
Financing
costs, net of amortization of $1,467,677
and
$497,672, respectively
|
2,382,317
|
3,088,821
|
|||
TOTAL
ASSETS
|
222,369,701
|
$
|
188,141,367
|
||
LIABILITIES
AND MEMBERS’ EQUITY
|
|||||
CURRENT LIABILITIES | |||||
Accounts payable | $ | 1,351,156 |
$
|
6,260,253 | |
Accounts payable, related parties | 4,297,990 | - | |||
Retainage payable, related party |
697,770
|
7,158,896
|
|||
Accrued expenses
|
5,727,245
|
1,672,950
|
|||
Current maturities
of notes payable
|
18,215,803
|
35,198,440
|
|||
Total current
liabilities
|
30,289,964
|
50,290,539
|
|||
NOTES
PAYABLE, less current maturities
|
130,897,350
|
63,893,467
|
|||
Other
|
800,002
|
900,000
|
|||
131,697,352
|
64,793,467
|
||||
COMMITMENTS
|
|||||
MEMBERS’
EQUITY
|
|||||
Members’ capital, 13,139 units
issued and outstanding
|
76,474,111
|
76,474,111
|
|||
Earnings
(deficit)
|
(16,091,726)
|
(3,416,750)
|
|||
60,382,385
|
73,057,361
|
||||
$
|
222,369,701
|
$
|
188,141,367
|
See Notes
to Financial Statements.
29
Southwest
Iowa Renewable Energy, LLC
Statements
of Operations
Year
Ended September 30, 2009
|
Year
Ended September 30, 2008
|
|||||||
Revenues
|
$ | 99,986,005 | $ | - | ||||
Cost
of Goods Sold
|
102,171,339 | - | ||||||
Gross
Margin
|
(2,185,334 | ) | - | |||||
General
and adminsistrative expenses
|
5,505,160 | 4,008,188 | ||||||
Operating (Loss)
|
(7,690,494 | ) | (4,008,188 | ) | ||||
Other
income and (expense):
|
||||||||
Realized
and unrealized losses on
derivative
instruments
|
(656,973 | ) | - | |||||
Grant
|
49,252 | 136,513 | ||||||
Interest income
|
107,553 | 136,850 | ||||||
Other income
|
633,560 | 17,225 | ||||||
Interest
expense
|
(5,117,874 | ) | - | |||||
(4,984,482 | ) | 290,588 | ||||||
Net (loss)
|
$ | (12,674,976 | ) | $ | (3,717,600 | ) | ||
Weighted
average units outstanding
|
13,139 | 13,139 | ||||||
Net
(loss) per unit – basic and diluted
|
$ | (964.68 | ) | $ | (282.94 | ) |
See Notes
to Financial Statements.
30
Southwest
Iowa Renewable Energy, LLC
Statements
of Members’ Equity
|
Members’
Capital
|
Earnings
(Deficit)
Accumulated
|
Total
|
||||||||||
Balance,
September 30, 2007
|
76,474,111 | 300,850 | 76,774,961 | |||||||||
Net
(loss)
|
--- | (3,717,600 | ) | (3,717,600 | ) | |||||||
Balance,
September 30, 2008
|
76,474,111 | (3,416,750 | ) | 73,057,361 | ||||||||
Net
(loss)
|
--- | (12,674,976 | ) | (12,674,976 | ) | |||||||
Balance,
September 30, 2009
|
$ | 76,474,111 | $ | (16,091,726 | ) | $ | 60,382,385 |
See Notes
to Financial Statements.
31
Southwest
Iowa Renewable Energy, LLC
Statements
of Cash Flows
Year
Ended September 30, 2009
|
Year
Ended September 30, 2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net (loss)
|
$ | (12,674,976 | ) | $ | (3,717,600 | ) | ||
Adjustments
to reconcile net (loss) to net cash (used in) operating
activities:
|
||||||||
Depreciation
|
9,562,968 | 30,016 | ||||||
Amortization
|
493,320 | --- | ||||||
(Increase)
decrease in current assets:
|
||||||||
Accounts
receivables
|
(14,227,894 | ) | --- | |||||
Inventories
|
(4,913,675 | ) | --- | |||||
Prepaid
expenses and other
|
(396,170 | ) | 81,691 | |||||
Derivative
financial instruments
|
(263,688 | ) | --- | |||||
Due
from broker
|
(2,108,267 | ) | --- | |||||
Increase
(decrease) in other non-current liabilities
|
(99,998 | ) | 900,000 | |||||
Increase
(decrease) in current liabilities:
|
||||||||
Accounts
and retainage payable
|
4,295,247 | 105,515 | ||||||
Accrued
expenses
|
3,402,943 | 164,260 | ||||||
Net
cash (used in) operating activities
|
(16,930,190 | ) | (2,436,118 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchase of property and
equipment
|
(34,298,208 | ) | (101,270,842 | ) | ||||
Decrease in cash-held for plant construction
|
--- | 15,638,542 | ||||||
Increase in restricted cash
|
3,289,949 | (3,289,949 | ) | |||||
Net cash (used in) investing
activities
|
(31,008,259 | ) | (88,922,249 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Payments for financing
costs
|
(263,501 | ) | (785,647 | ) | ||||
Proceeds from notes payable, net
of refinance
|
49,119,640 | 64,161,718 | ||||||
Proceeds
from bridge loan
|
--- | 34,100,000 | ||||||
Payments on notes
payable
|
(20,000 | ) | (1,303,250 | ) | ||||
Net cash provided by financing
activities
|
48,836,139 | 96,172,821 | ||||||
Net
increase in cash and cash equivalents
|
897,690 | 4,814,454 | ||||||
CASH
AND CASH EQUIVALENTS
|
||||||||
Beginning
|
6,557,394 | 1,742,940 | ||||||
Ending
|
$ | 7,455,084 | $ | 6,557,394 | ||||
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
|
||||||||
Construction in progress included
in accounts
Payable
|
$ | 1,889,581 | $ | 13,257,061 | ||||
Interest
capitalized and included in notes payable
and
accruals
|
2,049,643 | 2,624,488 | ||||||
Cash
paid for interest, net of amounts capitalized
|
3,315,018 | --- | ||||||
Payment
on Bridge Loan in exchange for Holdings
Note
Payable
|
27,106,079 | --- |
See Notes
to Financial Statements.
32
Southwest
Iowa Renewable Energy, LLC
Notes
to Audited Financial Statements
SOUTHWEST
IOWA RENEWABLE ENERGY, LLC
Notes
to Financial Statements
|
Note
1: Nature of Business
Southwest
Iowa Renewable Energy, LLC (the “Company”), located in
Council Bluffs, Iowa, was formed in March, 2005 to construct and operate a 110
million gallon capacity ethanol plant. The Company began producing
ethanol commencing in February 2009. Since the Company commenced
operations in Fiscal 2009, the Company produced ethanol at an average of 84% of
capacity. The Company sells its ethanol, modified wet distillers
grains with solubles, and corn syrup in the continental United
States. The Company sells its dried distillers grains with solubles
in the continental United States, Mexico, and the Pacific Rim.
Note
2: Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
Cash
& Cash Equivalents
The
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less when purchased to be cash equivalents.
Restricted
Cash
Restricted
cash includes minimum balances required under the AgStar Financial Services, PCA
credit agreement contingent project cost reserve through March,
2009.
Financing
Costs
Financing
costs associated with the construction and revolving loans are recorded at cost
and include expenditures directly related to securing debt
financing. The Company began amortizing these costs using the
effective interest method over the terms of the agreements in March,
2008. The interest expense amortization was capitalized during the
development stage as construction in progress.
Concentration
of Credit Risk
The
Company’s cash balances are maintained in bank deposit accounts which at times
may exceed federally-insured limits. The Company has not experienced
any losses in such accounts.
Revenue
Recognition
The
Company sells ethanol and related products pursuant to marketing
agreements. Revenues are recognized when the marketing company (the
“customer”) has taken title to the product, prices are fixed or determinable and
collectability is reasonably assured. The Company’s products
are generally shipped FOB loading point. Until August 18, 2009,
ethanol sales were handled through a marketing agreement with Lansing (“Lansing”); with the
conclusion of the Lansing agreement, ethanol sales are handled through an
ethanol agreement (the “Ethanol Agreement”)
with Bunge North America, Inc. (“Bunge”). Syrup,
distillers grains and solubles, and modified wet distillers grains with solubles
are sold through a distillers grains agreement (the “DG Agreement”) with
Bunge, which sets the price based on the market price to third
parties. Marketing fees and commissions due to the marketers are paid
separately from the settlement for the sale of the ethanol products and
co-products and are included as a component of cost of goods
sold. Shipping and handling costs incurred by the Company for the
sale of ethanol and co-products are included in cost of goods sold.
33
Southwest
Iowa Southwest Iowa Renewable Energy, LLC
Notes
to Audited Financial Statements
Note
2: Summary of Significant Accounting Policies (Continued)
Accounts
Receivable
Trade
accounts receivable are recorded at original invoice amounts less an estimate
made for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Management determines the allowance for doubtful
accounts by regularly evaluating individual customer receivables and considering
customers’ financial condition, credit history and current economic
conditions. As of September 30, 2009, management has determined no
allowance is necessary. Receivables are written off when deemed
uncollectible. Recoveries of receivables written off are recorded
when received.
Investment
in Commodities Contracts, Derivative Instruments and Hedging
Activities
The
Company adopted new disclosure requirements, which require entities to provide
greater transparency in interim and annual financial statements about how and
why the entity uses derivative instruments, how the instruments and related
hedged items are accounted for, and how the instruments and related hedged items
affect the financial position, results of operations, and cash flows of the
entity.
The
Company is exposed to certain risks related to ongoing business
operations. The primary risks that the Company manages by using
forward or derivative instruments are price risk on anticipated purchases of
corn and sales of ethanol.
The
Company is subject to market risk with respect to the price and availability of
corn, the principal raw material used to produce ethanol and ethanol
by-products. In general, rising corn prices result in lower profit
margins and, therefore, represent unfavorable market conditions. This
is especially true when market conditions do not allow the Company to pass along
increased corn costs to customers. The availability and price of corn
is subject to wide fluctuations due to unpredictable factors such as weather
conditions, farmer planting decisions, governmental policies with respect to
agriculture and international trade and global demand and supply.
Certain
contracts that literally meet the definition of a derivative may be exempted
from derivative accounting as normal purchases or normal
sales. Normal purchases and normal sales are contracts that provide
for the purchase or sale of something other than a financial instrument or
derivative instrument that will be delivered in quantities expected to be used
or sold over a reasonable period in the normal course of
business. Contracts that meet the requirements of normal purchases or
sales are documented as normal and exempted from the accounting and reporting
requirements of derivative accounting.
The
Company enters into short-term cash, options and futures contracts as a means of
securing corn for the ethanol plant and managing exposure to changes in
commodity prices. In addition, the Company enters into derivative
contracts to hedge the exposure to price risk as it relates to ethanol
sales. The Company maintains a risk management strategy that uses
derivative instruments to minimize significant, unanticipated earnings
fluctuations caused by market fluctuations. The Company’s specific
goal is to protect the Company from large moves in commodity
costs. All derivatives will be designated as non-hedge derivatives
and the contracts will be accounted for as market to market. Although
the contracts will be effective economic hedges of specified risks, they are not
designated as and accounted for as hedging instruments.
As part
of its trading activity, the Company uses futures and option contracts offered
through regulated commodity exchanges to reduce risk and is exposed to risk of
loss in the market value of inventories. To reduce that risk, the
Company generally takes positions using cash and futures contracts and
options. Accordingly, any realized or unrealized gain or loss related
to these derivative instruments was recorded in the statement of operations as a
component of non-operating income (expense) until the plant was
operational. The gains or losses are included in revenue if the
contracts relate to ethanol and cost of goods sold if the contracts relate to
corn. During the twelve months ended September 30, 2009, the Company recorded a
combined realized and unrealized gain of $4,966,567 as a component of cost of
goods sold and a ($160,677) loss as a component of revenue. In
addition, the Company recorded a combined realized and unrealized loss of
($656,973) for the twelve months ended September 30, 2009 as a component of
non-operating income. There were no realized or unrealized gains or
losses during the
34
Southwest
Iowa Southwest Iowa Renewable Energy, LLC
Notes
to Audited Financial Statements
Note
2: Summary of Significant Accounting Policies (Continued)
year
ended September 30, 2008. The derivative financial instruments asset
of $263,688 consists of 1,525,000 bushels of corn at September 30,
2009.
Inventory
Inventory
is stated at the lower of cost or market value using the first-in, first-out
method. Market value is based on current replacement values, except
that it does not exceed net realizable values
and it is not less than the net realizable values reduced by an allowance for
normal profit margin.
Property
and Equipment
Property
and equipment are stated at cost. Construction in progress is comprised of costs
related to constructing the plant and is depreciated upon completion of the
plant. Depreciation is computed using the straight-line method over
the following estimated useful lives:
Buildings 40
Years
Process
Equipment 10
Years
Office
Equipment 3-7
Years
Maintenance
and repairs are charged to expense as incurred; major improvements and
betterments are capitalized.
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be
recoverable. An impairment loss would be recognized when
estimated undiscounted future cash flows from operations are less than the
carrying value of the asset group. An impairment loss would be
measured by the amount by which the carrying value of the asset exceeds the fair
value of the asset. In accordance with Company policies, management
has evaluated the plant for possible impairment based on projected future cash
flows from operations. Management has determined that its projected
future cash flows from operations exceed the carrying value of the plant and
that no impairment existed at September 30, 2009.
Interest
capitalized while the Facility was in the developmental stage and included in
property and equipment is approximately $7,744,000 and $4,279,000 as of
September 30, 2009 and 2008, respectively.
Income
Taxes
The
Company has elected to be treated as a partnership for federal and state income
tax purposes and generally does not incur income taxes. Instead, the
Company’s earnings and losses are included in the income tax returns of the
members. Therefore, no provision or liability for federal or state
income taxes has been included in these financial statements.
Net
(loss) per unit
(Loss)
per unit has been computed on the basis of the weighted average number of units
outstanding during each period presented.
Fair
value of financial instruments
The
carrying amounts of cash and cash equivalents, derivative financial instruments,
accounts receivable, accounts payable and accrued expenses approximate fair
value. The carrying amount of long-term debt approximates fair value
because the interest rates fluctuate with market rates and other rates currently
available to the Company for similar issues of debt, taking into account the
current credit risk of the Company.
35
Southwest
Iowa Southwest Iowa Renewable Energy, LLC
Notes
to Audited Financial Statements
Note
3: Inventory
Inventory
is comprised of the following at:
September 30, 2009 | September 30, 2008 | ||||||
$ | 1,401,680 | $ | - | ||||
Raw materials - corn | |||||||
Supplies and chemicals | 1,335,874 | - | |||||
Work in process | 1,033,185 | - | |||||
Finished goods | 1,142,936 | - | |||||
Total | $ | 4,913,675 | $ | - |
Note
4: Members’
Equity
The
Company was formed on March 28, 2005 to have a perpetual life with no limit on
the number of authorized units. The Company was initially capitalized
by an aggregate of $570,000 in exchange for 285 Series A membership
units. In December 2005, the Company issued an additional 360 Series
A membership units in exchange for $1,080,000. In March 2006, the
Company completed a private placement offering with one membership unit at
$6,000 being at risk and the remaining investment held in escrow until closing
of the offering. The Company approved and issued 687 Series A and one
Series B at risk membership units at $6,000 per unit for total proceeds of
$4,128,000. The offering was closed in November 2006 with the
issuance of 7,313 Series A membership units, 3,333 Series B membership units and
1,000 Series C membership units for total proceeds of $69,876,000.
In May
2007, 25 Series A membership units were issued to a development group for its
efforts to develop the project. In addition, in May 2007, 135 Series
A membership units were issued to a related party for its organizational
services.
At
September 30, 2009 and September 30, 2008 outstanding member units
were:
A
Units
|
8,805
|
B
Units
|
3,334
|
C
Units
|
1,000
|
The
Series A, B and C unit holders all vote on certain matters with equal
rights. The Series C unit holders as a group have the right to elect
one Board member. The Series B unit holders as a group have the right
to elect that number of Board members which bears the same proportion to the
total number of Directors in relation to Series B outstanding units to total
outstanding units. Series A unit holders as a group have the right to
elect the remaining number of Directors not elected by the Series C and B unit
holders.
On March
7, 2008, the Company obtained a bridge loan in the maximum principal amount of
$36,000,000 (the “Bridge
Loan”). The Company entered into a Series C Unit Issuance
Agreement (the “Series
C Agreement”) with ICM, Inc. (“ICM”) in connection
with ICM’s provision of a letter of credit (“LC”) to secure the
Company’s repayment of the Bridge Loan. Under the Series C Agreement,
the Company agreed to pay ICM a fee for its issuance of the LC equal to 6% per
annum of the undrawn face amount of the LC. In the event that the LC
or ICM makes any payment to Commerce Bank, N.A. (the “Bridge Lender”) that
reduces amounts owed by the Company under the Bridge Loan (each, a “Bridge Loan
Payment”), the Series C Agreement provides that the Company will
immediately reimburse ICM for the amount of such Bridge Loan Payment by issuing
Units to ICM. Under the Series C Amendment entered into in August
2009, if ICM makes a Bridge Loan Payment, the Company will immediately issue
Series C Units to
ICM based on a Unit price that is equal to the lesser of $3,000 or one half
(1/2) of the lowest purchase price paid by any party for a Unit who acquired (or
who has entered into any agreement, instrument or document to acquire)
such Unit as part of any private placement after the date of the Series C
Amendment but prior to the date of any Bridge Loan Payment made by
ICM.
36
Southwest
Iowa Southwest Iowa Renewable Energy, LLC
Notes
to Audited Financial Statements
Note
4: Members’ Equity (continued)
The
Series C Amendment further provides that ICM will have the right to purchase its
pro-rata share of any Units issued by the Company at any time after the date of
the Series C Amendment and convert any outstanding debt to Series C Units at a
price of $3,000 per Unit.
Bunge
N.A. Holdings Inc. (“Holdings”) extended
to the Company a Subordinated Term Note (the “Term Note”) in favor
of Holdings effective August 26, 2009 in the amount of approximately $27,107,000
and a Subordinated Revolving Credit Note (the “Revolving Note”) in
the amount of $2,000,000. The Term Note was used to reduce the Bridge
Loan in a corresponding amount.
Holdings,
at its option, may convert the Term Note to Series U Units of the Company at a
per unit price of $3,000 in satisfaction of any outstanding principal balance
due to Holdings by the Company pursuant to the Term Note. As a result
of issuance of the Term Note and Revolving Note, a prior agreement with Bunge
whereby Bunge would receive Series E Units in connection with any payments made
to reduce the Bridge Loan on behalf of the Company was terminated.
Note
5: Construction,
Revolving Loan/Credit Agreements
AgStar
The
Company is party to a Credit Agreement (the “Credit Agreement”)
with AgStar Financial Services, PCA (“AgStar”) for
$126,000,000 senior secured debt, consisting of a $111,000,000 construction loan
and a $15,000,000 revolving line of credit. Borrowings under the
construction loan include a variable interest rate based on LIBOR plus 3.65% for
each advance under the Credit Agreement. On August 1, 2009 the
construction loan was segmented into two credit facilities, an amortizing term
facility of $101,000,000 and a revolving term facility of
$15,000,000. The Company has elected to convert 50% of the term note
into fixed rate loans at the lender’s bonds rate plus 3.25%, with a 5% floor,
which is effective on September 1, 2009. The portion of the term loan
not fixed and the term revolving line of credit will accrue interest equal to
LIBOR plus 3.45%, with a 5% floor. The Credit Agreement requires the
maintenance of certain financial and nonfinancial
covenants. Borrowings under the Credit Agreement are collateralized
by substantially all of the Company’s assets. The
construction/revolving term credit facility requires monthly principal payments
starting March 1, 2010. The loan will be amortized over 114 months
and will mature five years after the conversion date, August 1,
2014. The initial term of the revolving line of credit agreement
matures December 18, 2009, which was extended to March 31, 2010 after September
30, 2009. Borrowings are subject to borrowing base restrictions, and
the Credit Agreement includes certain prepayment penalties.
Under the
terms of the Credit Agreement, the Company may draw the lesser of $15,000,000 or
75 percent of eligible accounts receivable and eligible inventory, the borrowing
base. As part of the revolving line of credit, the Company may
request letters of credit to be issued up to a maximum of $5,000,000 in the
aggregate. One letter of credit is outstanding under this provision,
in favor of MidAm, in the amount of $3,300,000.
As of
September 30, 2009 and 2008, the outstanding balance under the Credit Agreement
was approximately $111,223,247 and $64,161,717 respectively. In
addition to all other payments due under the Credit Agreement, the Company also
agreed to pay, beginning at the end of the June 30, 2010 quarter, an amount
equal to 65% of the Company’s Excess Cash Flow (as defined in the Credit
Agreement), up to a total of $4,000,000 per year, and $16,000,000 over the term
of the Credit Agreement.
Effective
August 1, 2009, in addition to compliance with the borrowing base, the Company
is subject to working capital, tangible net worth covenants and other future
financial covenants. As of September 30, 2009, the Company is in
compliance with these covenants.
Bridge
Loan
On March
7, 2008, the Company obtained the Bridge Loan, and on March 1, 2009, the Company
extended the terms of the Bridge Loan through June 2010 and the maximum
principal amount was increased to $36,600,000. The Bridge Loan debt
is secured by the Collateral, described below.
37
Southwest
Iowa Southwest Iowa Renewable Energy, LLC
Notes
to Audited Financial Statements
Note
5: Construction, Revolving Loan/Credit Agreements (continued)
Holdings
pledged a money market account in the amount equal to 76% of the maximum
principal amount of the Bridge Loan in favor of the Bridge Lender (the “Collateral”), through
August 2009 when Bunge's portion of the Bridge Loan was replaced by the Term
Note. ICM caused its lender to issue the LC in the amount equal to 24% of
the maximum principal amount of the Bridge Loan in favor of the Bridge Lender as
well. The ICM LC expires on September 17, 2010, and the Bridge Lender
will only draw against the LC to the extent that the Company defaults under
the Bridge Loan or if the Company has not repaid the Bridge Loan in full by
September 1, 2010. As the Company repays the principal of the Bridge
Loan, the LC will automatically be reduced in the same proportion. As
of September 30, 2009, and 2008, there was an outstanding principal and interest
balance of approximately $8,585,496 and $34,761,857 respectively under the
Bridge Loan.
38
Southwest
Iowa Southwest Iowa Renewable Energy, LLC
Notes
to Audited Financial Statements
|
Note
6: Notes
Payable
Notes
payable consists of the following as of September 30, 2009 and September 30,
2008:
September
30,
2009
|
September
30,
2008
|
||||
$200,000
Note payable to Iowa Department Economic Development (“IDED”) a non-interest bearing obligation
with monthly payments of $1,667 due through the maturity date of March
2012 on the non-forgivable portion. (A)
|
$
|
148,333
|
$
|
168,333
|
|
Bridge
Loan bearing interest at LIBOR plus 1.50% with a floor of 3.00% (3.00% at
September 30, 2009) through maturity on June 1, 2010 secured by a letter
of credit and previously a money market account through August
2009 as described in Note 5.
|
8,585,496
|
34,761,857
|
|||
Note
payable to affiliate, Holdings, bearing interest at LIBOR plus 7.50-10.5%
with a floor of 3.00% (8.41% at September 30, 2009); maturity on August
31, 2014.
|
27,106,079
|
-
|
|||
Term
and Construction loan payable to AgStar bearing interest at LIBOR plus
3.65% and 3.25% (5.00% at September 30, 2009) See maturity
discussed in Note 5 for term loan portion of $101,000,000.
|
108,273,245
|
64,161,717
|
|||
Revolving
line of credit payable to AgStar bearing interest at LIBOR plus 3.45%
(5.00% at September 30, 2009), maturing March 31, 2010.
|
3,000,000
|
-
|
|||
Revolving
line of credit payable to affiliate Holdings, bearing interest at LIBOR
plus 7.5% -10.5% (7.81% at September 30, 2009) maturity on December 24,
2009.
|
2,000,000
|
-
|
|||
149,113,153 | 99,091,907 | ||||
Less
current maturities
|
(18,215,803)
|
(35,198,440)
|
|||
$
|
130,897,350
|
$
|
63,893,467
|
(A) The IDED debt is comprised
of two components under the Master Contract (the “Master Contract”)
between the Company and the IDED. A $100,000 loan is non
interest-bearing and due in monthly payments of $1,667 beginning April 2007,
with a final payment of $1,667 due March 2012; and a $100,000 forgivable
loan. Both notes under the Master Contract are collateralized by
substantially all of the Company’s assets and subordinate to the Credit
Agreement. The $100,000 forgivable loan may be forgiven upon IDED’s
confirmation of the creation and retention of qualifying jobs under the Master
Contract. If the Company does not meet the requirements of the Master
Contract, the note is due on an agreed upon payment schedule.
The Term
Note due to Holdings is subordinated to the Credit
Agreement. Principal and interest may be paid only after payment in
full of all amounts due under the Credit Agreement. Extension of the
Term Note, in the approximate principal amount of $27,100,000, resulted in
reduction of the Bridge Loan principal in a corresponding amount.
In
addition, the Company entered into the Revolving Note with Holdings, providing
for the extension of a maximum of $10,000,000 in revolving
credit. Holdings has a commitment, subject to certain conditions, to
advance up to $3,750,000 at the Company's request under the Holdings Revolving
Note; amounts in excess of $3,750,000 may be advanced by Holdings at its
discretion. The Revolving Note agreement has a two year term, however
individual
39
Southwest
Iowa Southwest Iowa Renewable Energy, LLC
Notes
to Audited Financial Statements
|
Note
6: Notes
Payable (continued)
notes
have short-term maturities. The Company is required to draw the
maximum amount available under the AgStar Credit Agreement to pay any
outstanding advances under the Holdings Revolving Note.
While
repayment of the Revolving Note is subordinated to the Credit Agreement, the
Company may make payments on the Revolving Note so long as the Company is in
compliance with its borrowing base covenant and there is not a payment default
under the AgStar Credit Agreement.
Note
7: Fair Value Measurement
Effective
October 1, 2008, the Company adopted the fair value measurements and disclosures
standard, which provides a framework for measuring fair value under GAAP and is
applicable to all financial instruments that are being measured and reported on
a fair value basis.
Fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. The fair value hierarchy ranks the quality and
reliability of the information used to determine fair
values. Financial assets and liabilities carried at fair value will
be classified and disclosed in one of the following three
categories:
Level
1 - Valuations for assets and liabilities
traded in active markets from readily available pricing sources for
market
transactions involving identical assets or liabilities.
Level
2 - Valuations for assets and liabilities
traded in less active dealer or broker markets. Valuations
are
obtained
from third-party pricing services for identical or similar assets or
liabilities.
Level
3- Valuations incorporate certain
assumptions and projections in determining the fair value assigned
to
such
assets or liabilities.
A
description of the valuation methodologies used for instruments measured at fair
value, including the general classifications of such instruments pursuant to the
valuation hierarchy, is set below. These valuation methodologies were
applied to all of the Company’s financial assets and financial liabilities
carried at fair value.
Derivative financial
statements. Commodity futures and exchange traded options are
reported at fair value utilizing Level 1 inputs. For these contracts, the
Company obtains fair value measurements from an independent pricing
service. The fair value measurements consider observable data that
may include dealer quotes and live trading levels from the CME
market. Ethanol contracts are reported at fair value utilizing Level
2 inputs from third-party pricing services.
The
following table summarizes financial liabilities measured at fair value on a
recurring basis as of September 30, 2009, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair
value:
Total
|
Level
1
|
Level
2
|
Level
3
|
|||||||||
Derivative
financial instruments:
|
||||||||||||
Corn
|
$
|
263,688
|
$
|
263,688
|
$
|
---
|
$
|
---
|
||||
$
|
263,688
|
$
|
263,688
|
$
|
---
|
$
|
---
|
40
Southwest
Iowa Southwest Iowa Renewable Energy, LLC
Notes
to Audited Financial Statements
|
Note
8: Related
Party Transactions
In
September, 2006, the Company entered into a design-build agreement with ICM, a
related party and a member of the Company, for a lump-sum contract price of
$118,000,000 (the “ICM
Contract”). As of September 30, 2009 and 2008, the Company
incurred approximately $147,608,000 and $134,025,000 of construction in
progress, respectively, under the ICM Contract. A total of
approximately $700,000 is included in retainage payable as of September 30,
2009.
The
Company entered into an agreement in October, 2006 with Bunge, a related party
and a member of the Company, to purchase all of the distillers grains with
solubles (“DG”)
produced by the plant (the “DG
Agreement”). Bunge pays a sales price less transportation
costs, rail lease charge and a fixed rate marketing fee for the DG
produced. The DG Agreement continues until February 1, 2019, when it
will automatically renew for successive three-year terms unless a 180-day
written notice is given of either party’s election not to renew before the
expiration of the initial term or the then-current renewal term. The
Company is required to pay a minimum annual marketing fee of
$150,000. Beginning on February 1, 2012, the annual minimum amount
and the purchase price may be adjusted. Either party may terminate
the agreement as provided in the DG Agreement. The Company has
incurred $467,092 of marketing expenses during the year ended September 30,
2009, and there were no expenses incurred for the year ended September 30,
2008.
In
October, 2006, the Company entered into an agreement with a company in which
Bunge holds a membership interest, AGRI-Bunge, LLC (“AB”), to procure all
grain required for the Company’s ethanol plant. The Company pays an
agency fee mutually agreed to by both parties for corn delivered by truck or
rail, with a minimum annual fee paid each calendar year. On December 15, 2008,
this agreement was suspended and replaced with a grain supply agreement between
the parties. The new agreement has a term of ten years and
automatically renews for successive three-year terms unless a 180-day written
notice is given by either party. The Company pays an annual calendar
year minimum fee of $675,000 each calendar year under the new
agreement. Expenses for the year ended September 30, 2009 were
$607,565; $92,714 of this amount is included in accrued expenses at September
30, 2009. There were no fees incurred for the year ended September 30,
2008.
On
January 30, 2008, the Company and Bunge entered into a Support Services
Agreement (the “Support Services
Agreement”), under which Bunge agreed to provide engineering support to
the project, provide reports to AgStar and assist the Company with requests by
the lender’s agent. The Company paid, in addition to Bunge’s out of
pocket expenses, an hourly fee of $95 for such services. The terms of
the Support Services Agreement expired on December 31, 2008; but is being
continued on a month to month basis. Expenses for the years ended
September 30, 2009 and 2008 were $38,924 and $101,000,
respectively.
In
December, 2008, the Company and Bunge entered into other various agreements.
Under a Lease Agreement (the “Lease Agreement”),
the Company leased from Bunge a grain elevator located in Council Bluffs, Iowa,
for approximately $67,000 per month. Expenses for the year ended
September 30, 2009 were $603,474. There were no expenses incurred for
the year ended September 30, 2008. In connection with the Lease Agreement, the
Company entered into a grain purchase agreement, under which the Company agreed
to purchase the grain inventory at the grain elevator and the grain inventory
located in the Company’s on-site storage Facility. The Company
purchased approximately 1,900,000 bushels of corn at an approximate market value
of $6,000,000.
Under an
Ethanol Purchase Agreement (the “Ethanol Purchase
Agreement”), the Company sells Bunge all of the ethanol produced at the
ethanol plant, and Bunge purchases the same, up to the ethanol plant’s nameplate
capacity of 110,000,000 gallons a year. The Company pays Bunge a
per-gallon fee for ethanol sold by Bunge, subject to a minimum annual fee of
$750,000 and adjusted according to specified indexes after three
years. The initial term of the agreement commenced August 20, 2009,
is three years and it will automatically renew for successive three-year terms
unless one party provides the other with notice of their election to terminate
180 days prior to the end of the term. The Company has incurred
expenses of $63,186 during the year ended September 30, 2009.
41
Southwest
Iowa Southwest Iowa Renewable Energy, LLC
Notes
to Audited Financial Statements
|
Note
8: Related
Party Transactions (continued)
Under a
Risk Management Services Agreement effective January 1, 2009, Bunge agreed to
provide the Company with assistance in managing its commodity price risks for a
quarterly fee of $75,000. The agreement has an initial term of three
years and will automatically renew for successive three year terms, unless one
party provides the other notice of their election to terminate 180 days prior to
the end of the term. Expenses for year ended September 30, 2009 were
$225,000. There were no expenses incurred for the year ended
September 30, 2008.
In June,
2007, the Company entered into an operating lease agreement with Bunge for the
lease of 320 ethanol tank cars and 300 distillers grain
cars. The lease began in January 2009,
continues for a term of ten years, and terminates upon the
termination of the final car lease. On June 26, 2009, the
Company executed an Amended and Restated Railcar Lease Agreement (“Railcar Agreement”)
with Bunge for the lease of 325 ethanol cars and 300 hopper cars which will be
used for the delivery and marketing of the Company’s ethanol and distillers
grains. Under the Railcar Agreement, the Company will lease railcars
for terms lasting 120 months and continuing on a month to month basis
thereafter. The Railcar Agreement will terminate upon the expiration of all
railcar leases. The Railcar Agreement reflects changes as a result of
Bunge’s purchase and sale/leaseback of railcars from a new railcar equipment
lessor other than contemplated in the 2007 Railcar Sublease Agreement (the
“Railcar Sublease
Agreement”) between the Company and Bunge. The Railcar
Agreement provides that the Company is a lessee rather than a sublessee as under
the Railcar Sublease Agreement and that Bunge is the lessor rather than the
lessee as under the Railcar Sublease Agreement. Expenses for the year
ended September 30, 2009 were $3,655,498. There were no expenses
incurred for the year ended September 30, 2008.
In March,
2009, the Company entered into an agreement with Bunge to provide an interim
President / CEO. The agreement provided for reimbursement in the
annual amount of $150,000 plus monthly expenses. Expenses for the
year ended September 30, 2009 were $85,139; and $29,039 is included in accrued
expenses. There were no expenses incurred for the year ended
September 30, 2008. The Company hired a new General Manager effective
September 8, 2009 thus terminating this agreement with Bunge effective September
8, 2009.
In
connection with obtaining the Bridge Loan, the Company entered into the Series C
Unit Agreement and Series C Unit Amendment, as described above in Note
4. In connection with the Series C Unit Agreement and the previous
Series E Unit Agreement with Bunge, the Company pays 6% interest on the undrawn
LCs. For the year ended September 30, 2009, the Company recorded
$1,960,888 of interest costs related to the Series C and E Unit
Agreements. For the year ended September 30, 2008, the Company
capitalized $1,248,000 of interest costs. No payments have been made
under these agreements as of September 30, 2009.
Holdings
has agreed to extend the Term Note to the Company, due in five years, repayment
of which is subordinated to the Credit Agreement, as described in
Note 6.
In
addition, the Company entered into the Revolving Note with Holdings, providing
for the extension of a maximum of $10,000,000 in revolving credit, as described
in Note 6.
Note
9:
Commitments
The
Company has entered into a steam contract with an unrelated party under which
the vendor agreed to provide the steam required by the Company, up to 475,000
pounds per hour. The Company agreed to pay a net energy rate for all steam
provided under the contract and a monthly demand charge. The net energy rate is
set for the first three years then adjusted each year beginning on the third
anniversary date. The steam contract will remain in effect until
January 1, 2019. Expenses for the year ended September 30, 2009 were
$3,102,363, respectively. There were no expenses incurred for the
year ended September 30, 2008.
In April,
2008 the Company entered into a Firm Throughput Service Agreement with a natural
gas supplier, an unrelated party, under which the vendor agreed to provide the
gas required by the Company, up to 900 Dth per day. The Company agreed to pay
the maximum reservation and commodity rates as provided under the vendor’s FERC
Gas Tariff as revised from time to time, as well as other additional
charges.
42
Southwest
Iowa Southwest Iowa Renewable Energy, LLC
Notes
to Audited Financial Statements
|
Note
9: Commitments
(continued)
The
agreement specifies an in-service date of October 1, 2008, and the term of the
agreement is seven years. Expenses for the year ended September 30,
2009 were $60,176. There were no expenses incurred for the year
ended September 30, 2008.
The
Company has purchased 71,419 Kilowatts of electricity through
September 30, 2009 from MidAmerica Energy Company (“MidAm”) under an
Electric Service Contract (“Electric Contract”)
dated December 15, 2006. In the Electric Contract, the Company agreed
to own and operate a 13 kV switchgear with metering bay, all distribution
transformers, and all 13 kV and low voltage cable on our side of the
switchgear. The Company agreed to pay (i) a per meter service charge,
(ii) a demand charge which has a rate for the Summer and a different rate for
the Winter (iii) a reactive demand charge at a per kVAR rate of reactive demand
in excess of 50% of billing demand, (iv) an energy charge ranging from $0.03647
to $0.01837 per kilowatt hour, depending on the amount of usage and season, (v)
tax adjustments, (vi) AEP and energy efficiency cost recovery adjustments, and
(vii) a CNS capital additions tracker. These rates only apply to the
primary voltage electric service provided under the Electric
Contract. The electric service will continue at these prices for up
to 60 months, but in any event will terminate on June 30, 2012. The
pricing under the Electric Contract is based on the assumptions that the Company
will have an average billing demand of 7,300 kilowatts per month and that the
Company will average an 85% load factor over a 12 month period. If
these assumptions are not met, the Company will pay the most applicable tariff
rate. Additionally, at any time, the Company may elect to be charged
under one of MidAm’s electric tariffs.
In
January, 2007, the Company entered into an agreement with Iowa Interstate
Railroad, LTD to provide the transportation of the Company’s commodities from
Council Bluffs, Iowa to an agreed upon customer location. The
agreement commenced on December 1, 2007 and continues for five years and will
automatically renew for additional one year periods unless cancelled by either
party. The Company agreed to a schedule of varying rates per car
and varying numbers of cars as necessary for operations. Expenses for
the year ended September 30, 2009 were approximately $855,737, of which
approximately $73,956 is included in accounts payable. There were no
expenses for the year ended September 30, 2008.
In
August, 2008, the Company entered into an agreement with an unrelated party
which establishes terms governing the Company’s purchase of natural
gas. The agreement commenced in August, 2008 and has a term of two
years. The Company has incurred expenses of $4,318,072, for the year
ended September 30, 2009. There were no expenses for the year ended
September 30, 2008.
The
Company leases certain equipment, vehicles, and operating facilities under
non-cancellable operating leases that expire on various dates through
2017. The future minimum lease payments required under these leases
are approximately $5,800,000 in fiscal 2010, $5,800,000 in fiscal 2011,
$5,600,000 in fiscal 2012, $5,600,000 in fiscal 2013, $5,500,000 in fiscal 2014
and $23,200,000 thereafter. Rent expense related to operating leases
for the year ended September 30, 2009 was $4,700,000. Rent expense
related to operating leases for the year ended September 30, 2008 was
approximately $20,000.
Note
10: Major
Customers and Commitments
The
Company had an agreement with an unrelated entity and major customer for
marketing, selling, and distributing all of the ethanol produced by the
Company. This agreement was terminated effective August 19,
2009. The Company has expensed $108,181 in marketing fees for the
year ended September 30, 2009 related to this agreement. Revenues
with this customer were $65,877,348 for the year ended September 30,
2009. There were no trade accounts receivable due from this customer
at September 30, 2009.
The
Company has an agreement with a related entity and significant equity owner for
marketing, selling, and distributing all of the ethanol produced by the Company,
effective August 20, 2009. The Company pays Bunge a per-gallon
fee for ethanol sold by Bunge, subject to a minimum annual fee of $750,000 and
adjustments according to specified indexes after three years. The
initial term of the Ethanol Agreement commenced on February 1, 2009, is three
years, and it will automatically renew for successive three-year terms unless
one party provides the other notice of their election to terminate 180 days
prior to the end of the term.. In
addition, the Company has an agreement with the same related entity for
marketing, selling, and distributing all of the distiller’s grains with solubles
produced by the Company, effective when production commenced in
43
Southwest
Iowa Southwest Iowa Renewable Energy, LLC
Notes
to Audited Financial Statements
|
Note
10: Major
Customers and Commitments (continued)
February,
2009. The Company expensed $543,503 in marketing fees for the year
ended September 30, 2009 related to the ethanol and distiller’s grains with
solubles agreements. Revenues with this customer were $34,269,334 for
the year ended September 30, 2009. Trade accounts receivable due from
this customer were $12,396,172 at September 30, 2009.
Note
11: Subsequent
Events
Subsequent
events have been evaluated through December 23, 2009, the date of this filing
and include the extension of the maturity date of the of the Revolving LOC
with AgStar to March 2010, effective December 18, 2009.
Item
9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure.
|
There are
no items to report.
Item
9A(T).
|
Controls
and Procedures.
|
Our
management, including our President and Chief Executive Officer (our principal
executive officer), Brian Cahill, along with our Controller (our principal
financial officer), Karen L. Kroymann, have reviewed and evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15 under the Securities Exchange Act of 1934, as amended, the “Exchange
Act”), as of September 30, 2009. Based upon this review and evaluation, these
officers believe that our disclosure controls and procedures are presently
effective in ensuring that material information related to us is recorded,
processed, summarized and reported within the time periods required by the forms
and rules of the Securities and Exchange Commission (the “SEC”).
In
accordance with Item 308T of Regulation S-K promulgated under the 1933 Act, the
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company's internal
control system is a process designed to provide reasonable assurance to the
Company's management and board of directors regarding the preparation and fair
presentation of published financial statements.
The
Company's internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispositions of assets;
provide reasonable assurances that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles and that receipts and expenditures are being made
only in accordance with authorizations of management and the directors of the
Company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on our financial
statements.
Management
assessed the effectiveness of the Company's internal control over financial
reporting as of September 30, 2009 and, as indicated by Exhibit 31.1 and 31.2,
management believes the Company's internal control over financial reporting is
effective based on those criteria. However, this annual report does not include
an attestation report of the Company's registered public accounting firm
regarding internal control over financial reporting pursuant to temporary rules
of the SEC that permit us to provide only management’s report in this annual
report on Form 10-K.
There were no changes in our internal control over financial
reporting during the fourth quarter of our 2009 fiscal year, which were
identified in connection with management's evaluation required by paragraph (d)
of rules 13a-15 and 15d-15 under the Exchange Act, that have materially
affected, or reasonably likely to materially affect, our internal control over
financial reporting.
Item
9B.
|
Other
Information.
|
None.
44
|
PART
III
|
Item
10.
|
Directors,
Executive Officers and Corporate
Governance.
|
The
Directors and/or officers listed below under “Independent Directors &
Officers” meet the “independent director” standards applicable to companies
listed on the Nasdaq Capital Market (though the Company’s Units are not listed
on any exchange or quotation system). Those Directors listed below
under “Interested Directors” do not meet the “independent director” standards
applicable to companies listed on the Nasdaq Capital Market. With the
exception of former director Mr. Scharf, who serves on the Board of Directors of
Patriot Coal Corporation, none of the Directors listed below have served on the
board of directors of any other company having a class of securities registered
under Section 12 of the Exchange Act or subject to the requirements of Section
15(d) of the Exchange Act, nor have any of our Directors served as directors of
an investment company registered under the Investment Company Act of
1940. Under the Company’s Operating Agreement, the independent
Directors’ terms are staggered such that one Director will be up for election
every year.
Independent
Directors & Officers
Name
and
Age
|
Position(s)
Held with the Company
|
Term
of Office and Length of Time Served
|
Principal
Occupation(s)
During
Past 5 Years
|
|||
Karol
D. King, 62
|
Series
A Director and Chairman
|
Term
expires 2013, Director since November, 2006
|
Corn,
popcorn and soybean farmer near Mondamin, Iowa, since 1967; President,
King Agri Sales, Inc. (marketer of chemicals, fertilizer and equipment)
since 1995; President, Kelly Lane Trucking, LLC, since
2007. Mr. King attended Iowa State University and has served on
the Harrison County Farm Bureau Board, the Iowa Corn Growers Board, the
Iowa Corn Promotion Board, the US Feed Grains Council Board, the National
Gasohol Commission, and the National Corn Growers Association
Board.
|
|||
Ted
Bauer, 57
|
Series
A Director, President, Secretary and Treasurer
|
Term
expires 2012, Director since March 2005; Officer since November
2006
|
Director,
President (since 2006), Secretary and Treasurer (since 2005) of the
Company from March 2005; Owner and operator of a farming operation and
hunting preserve near Audubon, Iowa, since 1977; Co-Founder, and from 2005
to 2007, Director, Templeton Rye Spirits LLC; Director, Iowa Quality
Producers Alliance, since 2003; Vice President, West Central Iowa Rural
Water, from 2002 to 2007. Mr. Bauer has an Ag Business degree
from Iowa State University and is a graduate of the Texas A&M TEPAP
program.
|
|||
Hubert
M. Houser,
67
|
Series
A Director
|
Term
expires 2010, Director since 2005
|
Lifetime
owner of farm and cow-calf operation located near Carson,
Iowa. Mr. Houser has served in the Iowa Legislature since 1993,
first in the House of Representatives and currently in the
Senate. Mr. Houser also served on the Pottawattamie County
Board of Supervisors from 1979 to 1992, director of the Riverbend
Industrial Park, and was a founder of the Iowa Western Development
Association and Golden Hills RC&D.
|
|||
Michael
K. Guttau,
63
|
Series
A Director
|
Term
expires 2011, Director since 2007
|
Chairman,
Council of Federal Home Loan Banks, Washington, D.C.; Chairman
(2008-present), Vice Chairman (2004-2007) and Chairman of Audit Committee
(2004-2006) and Chairman of Risk Management Committee (2007), Federal Home
Loan Bank of Des Monies; since 1972, various positions with Treynor State
Bank, currently CEO and Chairman of the Board; Superintendent of Banking,
Iowa Division of Banking, 1995-1999; Director, Iowa Bankers Association,
Iowa Bankers Mortgage Corporation, Iowa Student Loan Liquidity Corp., Iowa
Business Development Finance Corp. and Iowa See Capital Liquidation Corp.;
President, Southwest Iowa Bank Administration Institute. Mr.
Guttau received his B.S., Farm Operation, from Iowa State University in
1969 and completed numerous U.S. Army education programs from 1969 to
1978.
|
45
Interested
Directors
Name
and
Age
|
Position(s)
Held with the Company
|
Term
of Office† and Length of Time Served
|
Principal
Occupation(s)
During
Past 5 Years
|
|||
Bailey
Ragan,
53†‡
|
Series
B
Director
and Vice Chairman
|
November
1, 2006 – July 17, 2009
|
Various
positions with Bunge North America, Inc. for more than 25 years, currently
Vice President and General Manager, Bunge Grain.
|
|||
Michael
Scharf,
62†‡
|
Series
B Director
|
November
1, 2006- July 17, 2009
|
Senior
Vice President and CFO, Bunge North America, Inc., since
1989.
|
|||
Tom
J. Schmitt,
59†‡
|
Series
B Director and Vice Chairman
|
Since
July 17, 2009
|
Manager,
Western Region, Bunge North America Oilseed Processing. Mr.
Schmitt has worked with Bunge over thirty-two years. Mr.
Schmitt received a Bachelor’s degree in business administration from St.
Ambrose University.
|
|||
Eric
L. Hakmiller, 47†‡
|
Series
B Director
|
Since
July 17, 2009
|
Vice-President
and General Manager, Bunge Biofuels, Bunge North America. Mr.
Hakmiller received a Bachelor’s degree in economics from the University of
Maine and a graduate degree from Loyola Marymount University.
|
|||
Greg
Krissek,
47†‡
|
Series
C Director
|
Since
November 1, 2006
|
Director
of Government Affairs, ICM, Inc., since 2006; Director of Marketing and
Governmental Affairs, United Bio Energy, from 2003 to 2006; Chairman,
National Ethanol Vehicle Coalition, 2007; Secretary-Treasurer of the
Board, Ethanol Promotion and Information Council since 2004, President
since June 2008; director, Kansas Association of Ethanol Processors since
2004; Kansas Energy Council, since 2004 prior Director of Operations,
Kansas Corn Commission; Assistant Secretary, Kansas Department of
Agriculture, 1997 to 2000.
|
† The
Interested Directors’ terms do not have a specified number of years, as these
Directors are nominated by the Series B Member and the Series C Member, as
discussed further below under Items 11 and 13.
‡ The
information provided below under Item 13, “Certain Relationships and Related
Transactions, and Director Independence,” respecting the election of Messrs.
Ragan, Scharf and Krissek, Schmitt, and Hakmiller as Directors, is
incorporated into this Item 10 by reference.
Executive
Officers
Name
and
Age
|
Position(s)
Held with the Company
|
Length
of Time Served
|
Principal
Occupation(s)
During
Past 5 Years
|
Brian
T. Cahill,
56
|
President
and Chief Operating Officer
|
Since
September,
2009
|
Executive
Vice President, Distillery Innovations Segment, MGP Ingredients, Inc.
(“MGP”) (a public company, which
provides services in the development, production and marketing of
naturally-derived specialty ingredients and alcohol products) from 2007 to
2008; CFO/Vice President of Finance and Administration, MGP, from 2002 to
2007; General Manager, MGP, from 1992 to 2002. Mr Cahill
received a Bachelor of Science in Accounting from Bradley University and
is a Certified Public Accountant.
|
46
Mark
Drake, 50
|
President
and Chief Executive Officer
|
January,
2007-March, 2009
|
Global
Sales and Marketing Manager – Ethanol, Phibro Animal Health Corporation
(global manufacturer of antimicrobials) from 2004 – 2006; Corporate
Account Manager, Novozymes North America (global biotech manufacturer of
food and industrial enzymes) from 2002 -2004; Marketing Manager, Chief
Ethanol Fuels, Inc. (fuel grade ethanol manufacturer) from 2001 –
2002.
|
|||
James
M. Lay, 55
|
President
and Chief Executive Officer
|
March,
2009 - September, 2009
|
Senior
Project Manager / Operations Support Manager for Bio-Fuels, Fertilizer,
Grain and Milling Divisions of Bunge North America from 2006 to present;
Industrial Director, Bunge Europe and Bunge Global Markets from 2004 to
2006; Vice President and Site Manager of Bunge Milling from 2001 to 2004;
Technical Support, Environmental Compliance and Quality Control Manager
for Bunge North America from 1993 to 2000.
|
|||
Karen
L. Kroymann,
48
|
Controller
|
Since
June, 2009
|
Controller,
Transgenomic, Inc., (a public company which provides services for DNA lab
testing and manufacture-analysis equipment) from 2007 to
2008; Controller, TTI Technologies (a synthetic coal manufacturer)
from 2006 to 2007; Asst. Controller, Future Foam (a manufacturer and
fabricator of polyurethane foam) from 1999-2006). Ms. Kroymann
received a Bachelor’s of Arts degree from Mt. St. Clare College, an M.B.A.
from the University of Nebraska and is a Certified Public
Accountant.
|
|||
Cindy
Patterson, 49
|
Chief
Financial Officer
|
August,
2007- June, 2009
|
Controller,
Golden Triangle Energy, L.L.C. (ethanol producer) from 2000 – 2007;
auditor, Profit Management Consultants, 1995 – 1999; staff accountant,
Mitchell Williams, 1994 – 1995. Ms. Patterson received her BBA
degree from the University of Georgia, a Post Baccalaureate in Accounting
from Southern Indiana University and an MBA in Management from Golden Gate
University.
|
The
Company has not adopted a code of ethics that applies to its executive
officers.
Audit
Committee
The Board
has a standing Audit Committee which makes recommendations to the Board
regarding the engagement of the independent registered public accounting firm
for audit and non-audit services; evaluates the independence of the auditors and
reviews with the independent auditors the fee, scope and timing of audit and
non-audit services. The Audit Committee presently consists of Michael
Guttau (Chair), Karol D. King and Ted Bauer. Each member of the Audit
Committee is considered “independent” under standards applicable to companies
listed on the Nasdaq Capital Market (though the Company’s Units are not listed
on any exchange or quotation system). The Audit Committee held
four meetings in Fiscal Year 2009.
Item
11.
|
Executive
Compensation.
|
Governance
/ Compensation Committee
The
Governance / Compensation Committee (the “Governance
Committee”) operates under a written charter, which the Governance
Committee approved on February 15, 2007, and which was adopted by the Board
of
47
Directors
on February 16, 2007 (the “Governance
Charter”). The Governance Charter is not available on the
Company’s website. The Governance Charter provides that the
Governance Committee will annually review and approve the Company’s compensation
program for its Directors, officers and managers. The Governance
Charter does not exclude from the Governance Committee’s membership Directors
who also serve as officers of the Board or Interested
Directors. Presently, the Governance Committee’s membership consists
of Messrs. Schmitt (Chair), Bauer, and King. Accordingly, Messrs.
Bauer and King did participate in recommending to the Board the Compensation
Policy. The Governance Charter does provide that the Governance
Committee may form and delegate its responsibilities to subcommittees, and the
Governance Charter does not contemplate (nor does it prohibit) the use of
compensation consultants to assist the Governance Committee in its determination
of Director, officer and managers’ compensation.
Compensation
of Executive Officers
The
Company does not currently provide any Unit options, Unit appreciation rights,
non-equity incentive plans, non-qualified deferred compensation or pension
benefits to its executive officers. The Governance Committee is
responsible for designing, reviewing and overseeing the administration of the
Company’s executive compensation program. Pursuant to the Governance
Charter, the Governance Committee approved the compensation terms for Mr. Drake
and Ms. Patterson when they were hired in 2007. Pursuant to the
Governance Charter, the Governance Committee approved the compensation terms for
Mr. Cahill and Ms. Kroymann when they were hired in 2009.
Summary
Compensation Table
The
following table provides all compensation paid to our executive officers in
fiscal years 2009, 2008 and 2007. None of our officers received any
bonus, stock or option awards, non-equity incentive plan compensation, or
nonqualified deferred compensation in fiscal years 2007 and 2008.
Name
and Principal Position
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards ($)
|
Option
Awards ($)
|
Non-Equity
Incentive Plan Compensation ($)
|
Nonqualified
Deferred Compensation Earnings ($)
|
All
Other Compensation ($)
|
Total
($)
|
Brian
Cahill, President and CEO
|
2009
|
$6,428(4)
|
$15,000(3)
|
$21,428
|
|||||
Mark
Drake, President and CEO
|
2009
|
$150,0000
|
$0
|
$0
|
$0
|
$0
|
$0
|
$2,905(1)
|
$152,905
|
2008
|
$150,000
|
$0
|
$0
|
$0
|
$0
|
$0
|
$19,905(1)
|
$169,905
|
|
2007
|
$150,000
|
$0
|
$0
|
$0
|
$0
|
$0
|
$37,080(2)
|
$187,080
|
|
James
M. Lay, President and CEO
|
2009
|
$70,100
|
$15,039(6)
|
$0
|
$0
|
$0
|
$0
|
$0
|
$85,139
|
Karen
L. Kroymann, Controller
|
2009
|
$21,538(5)
|
$21,538
|
||||||
Cindy
Patterson, CFO
|
2009
|
$100,000
|
$10,000
|
$0
|
$0
|
$0
|
$0
|
$0
|
$110,000
|
2008
|
$100,000
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
$100,000
|
|
2007
|
$90,000
|
$0
|
$0
|
$0
|
$0
|
$0
|
$25,000(3)
|
$115,000
|
|
(1) This
amount reflects the Company’s cost to provide a vehicle for Mr. Drake’s
use.
(2) This
amount constitutes reimbursements for the officer’s relocation expenses in the
amount of $30,000 and
the cost
of providing the officer with a vehicle in the approximate amount of $7,080 for
fiscal year.
(3) This
amount is a signing bonus for the officer.
(4) Mr.
Cahill’s annual base salary is $180,000.
(5) Ms.
Kroyman’s annual base salary is $80,000.
48
(6) Mr.
Lay received a $15,039 bonus from Bunge as a result of his performance as
President and CEO of the Company. This bonus was paid by Bunge,
but as a result of fees paid to Bunge by the Company.
Compensation
of Directors
The
Company does not provide its Directors with any equity or equity option awards,
nor any non-equity incentive payments or deferred compensation. The
Company has agreed to issue one membership unit to each of its two current
executive officers and intends to include an equity feature in its CEO
compensation arrangements. It is anticipated that an equity incentive
compensation plan incorporating these items will be adopted in
2010. Similarly, the Company does not provide its Directors with any
other perquisites, “gross-ups,” defined contribution plans, consulting fees,
life insurance premium payments or otherwise. Following recommendation by the
Company’s Corporate Governance / Compensation Committee and subsequent approval
by the Board on March 16, 2007, the Company pays its Directors the following
amounts (collectively, the “Compensation
Policy”): (i) each Director receives an annual retainer of $12,000, (ii)
each Director receives $1,000 per Board meeting attended (whether in person or
telephonic), and (iii) once our plant is operational, each Director will receive
$3,000 per Board meeting attended (whether in person or telephonic), provided that the foregoing
amounts in (i) – (iii) shall not exceed $24,000 per Director in any calendar
year. Additionally, the following amounts are paid to Directors for
specified services: (i) the Chairman of the Board is paid $7,500 per year, (ii)
the Chairman of the Audit Committee and Audit Committee Financial Expert is paid
$5,000 per year, (iii) the Chairmen of all other Committees are paid $2,500 per
year, and (iv) the Secretary of the Board is paid $2,500 per year.
Independent
Directors
The
following table lists the compensation the Company paid in Fiscal Year 2009 to
its Directors who are considered “independent” under standards applicable to
companies listed on the Nasdaq Capital Market (though the Company’s Units are
not listed on any exchange or quotation system) (the “Independent
Directors”).
Name
|
Fees
Earned or Paid in Cash
|
All
Other Compensation
|
Equity
or Non-Equity incentives
|
Total
|
Ted
Bauer
|
$26,500
|
$0
|
$0
|
$26,500
|
Hubert
M. Houser
|
$26,500
|
$0
|
$0
|
$26,500
|
Karol
D. King
|
$31,500
|
$0
|
$0
|
$31,500
|
Michael
K. Guttau
|
$29,000
|
$0
|
$0
|
$29,000
|
Interested
Directors
The
following table lists the compensation the Company paid in Fiscal Year 2009 to
its Directors who are not considered “independent” under standards applicable to
companies listed on the Nasdaq Capital Market (though the Company’s Units are
not listed on any exchange or quotation system) (the “Interested
Directors”).
Name
|
Fees
Earned or Paid in Cash
|
All
Other Compensation
|
Equity
or Non-Equity incentives
|
Total
|
Bailey
Ragan†
|
$21,875
|
$0
|
$0
|
$21,875
|
Eric
L. Hakmiller†
|
$4,625
|
$0
|
$0
|
$4,625
|
Tom
J. Scmitt†
|
$4,625
|
$0
|
$0
|
$4,625
|
Michael
M. Scharf†
|
21,875
|
$0
|
$0
|
$21,875
|
Greg
Krissek
|
$24,000
|
$0
|
$0
|
$23,000
|
† The
Directors fees payable to the Interested Directors are paid directly to their
corporate employers at such Directors’ request, and the Interested Directors do
not receive any compensation from the Company for their service as
Directors.
Selection
of the Company’s directors is governed by the Nominating Committee Charter,
which was adopted by the Board of Directors on February 16,
2007. These governing procedures have not been modified or
amended. The Company also has an audit committee, which consists of
Mick Guttau (Chairman), Ted Bauer and Karol D. King.
49
Mr.
Guttau is the financial expert who is required to serve on the audit committee
under SEC rules and is considered an “independent” financial expert under
standards applicable to companies listed on the Nasdaq Capital Market (though
the Company’s Units are not listed on any exchange or quotation
system).
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related Member
Matters.
|
As of
September 30, 2009, there were 8,805 Series A Units, 3,334 Series B Units, and
1,000 Series C Units issued and outstanding. The following table sets
forth certain information as of September 30, 2009, with respect to the Unit
ownership of: (i) those persons or groups (as that term is used in Section
13(d)(3) of the Exchange Act) who beneficially own more than 5% of any Series of
Units, (ii) each Director of the Company, and (iii) all Officers and Directors
of the Company, nine in number, as a group. The address of those in
the following table is 10868 189th
Street, Council Bluffs, Iowa 51503. Messrs. King, Cahill, Bauer and
Ms. Kroymann serve in the capacity of executive officers. Except as
noted below, the persons listed below possess sole voting and investment power
over their respective Units. The following does not reflect any Units
which may be issued to Bunge and ICM, respectively, under the terms of the unit
issuance agreements.
Title
of Class
|
Name
of Beneficial Owner
|
Amount
and Nature of Beneficial Ownership
|
Percent
of Class
|
Series
A
|
Ted
Bauer
|
36
Units1
|
0.41%
|
Series
A
|
Hubert
M. Houser
|
39
Units2
|
0.44%
|
Series
A
|
Karol
D. King
|
29
Units3
|
0.33%
|
Series
A
|
Michael
K. Guttau
|
12
Units4
|
0.14%
|
--
|
Brian
Cahill
|
-0-
|
--
|
--
|
Karen
L. Kroymann
|
-0-
|
--
|
--
|
Eric
L. Hakmiller
|
-0-
|
--
|
--
|
Tom
J. Schmitt
|
-0-
|
--
|
--
|
Greg
Krissek
|
-0-
|
--
|
Series
B
|
Bunge
North America, Inc.
|
3334
Units
|
100%
|
Series
C
|
ICM,
Inc.
|
1000
Units
|
100%
|
Series
A
|
All
Officers and Directors as a Group
|
116
Units
|
1.92%
|
____________________________________
1 These
Series A Units are owned jointly by Mr. Bauer and his wife, Donna
Bauer.
2 These
Series A Units are owned jointly by Mr. Houser and his wife, Paula
Houser.
3 These
Series A Units are owned jointly by Mr. King and his wife, Rozanne
King.
4 These
Series A Units are owned jointly by Mr. Guttau and his wife, Judith
Guttau.
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
Relationships and Related
Party Transactions
On
November 1, 2006, in consideration of its agreement to invest $20,004,000 in the
Company, Bunge purchased the only Series B Units under an arrangement whereby we
would (i) enter into various agreements with Bunge or its affiliates discussed
below for management, marketing and other services to the Company, and (ii) have
the right to elect a number of Series B Directors which are proportionate to the
number of Series B Units owned by Bunge, as compared to all
Units. Under the Operating Agreement, we may not, without Bunge’s
approval (i) issue additional Series B Units, (ii) create any additional Series
of Units with rights which are superior to the Series B Units, (iii) modify the
Operating Agreement to adversely impact the rights of Series B Unit holders,
(iv) change the our status from one which is managed by managers, or change back
to manager management in the event the status is changed to member management,
(v) repurchase or redeem any Series B Units, (vi) cause the Company to take any
action which would cause a bankruptcy, or (vii) approve a transfer of Units
allowing the transferee to hold more than 17% of the Company’s Units or to a
transferee which is a direct competitor of Bunge.
50
Under the
Series E Agreement, if Bunge made a Bridge Loan Payment, the Company was
required to immediately issue Series E Units to Bunge based on a Unit price that
is equal to the lesser of $3,000 or one half (1/2) of the lowest purchase price
paid by any party for a Unit who acquired (or who has entered into any
agreement, instrument or document to acquire) such Unit as part of any offering
of Units after the date of the Series E Agreement but prior to the date of any
Bridge Loan Payment made by Bunge. The Series E Agreement was
terminated effective July 17, 2009.
Holdings
agreed to extend the Term Note to the Company, due in five years, repayment of
which is subordinated to the Credit Agreement. Extension of the Term
Note, in the approximate principal amount of $27,100,000, will result in
reduction of the Bridge Loan in a corresponding amount. The Bunge
Term Loan is convertible into Series U Units, at the option of Holdings, at the
price of $3,000 per Unit. Interest will accrue at the rate of 7.5 to
10.5 percent over six-month LIBOR. Principal and interest may be paid
only after payment in full under the Credit Agreement.
In
addition, we entered into the Revolving Note with Holdings, providing for the
extension of a maximum of $10,000,000 in revolving credit. Holdings
has a commitment subject to certain conditions, to advance up to $3,750,000 at
our request under the Revolving Note; amounts in excess of $3,750,000 may be
advanced by Holdings in its discretion. As of September 30, 2009, we
have a balance of $2.0 million on this line of credit. We are required to draw
the maximum amount available under the Agstar Credit Agreement to pay any
outstanding advances under the Revolving Note. Interest will accrue
at the rate of 7.5 to 10.5 percent over six-month LIBOR. While
repayment of the Revolving Note is subordinated to the Credit Agreement, the
Company may make payments on the Revolving Note so long as we are in compliance
with its borrowing base covenant and there is not a payment default under the
Credit Agreement.
We
entered into the DG Agreement with Bunge on October 13, 2006. The DG
Agreement provides that Bunge will purchase all of the distillers grains
produced by us over a term of 10 years, beginning February 1, 2009, with
automatic renewals for three-year terms unless a party provides six months’
notice. Bunge pays us for the distillers grains, but retains amounts
for transportation costs, rail lease charges and marketing fees. We
pay a minimum annual marketing fee to Bunge in the amount of
$150,000. After the third year of the DG Agreement, the parties may
make adjustments to the prices.
We
entered into the Elevator Agreement with Bunge on October 13, 2006 respecting
the use of Bunge’s grain elevator in Council Bluffs, Iowa. The
Elevator Agreement does not require the payment by the Company of any moneys and
otherwise did not involve the payment of any consideration by either party;
rather, it imposes restrictions on the use and possible disposition by Bunge of
its grain elevator located in Council Bluffs, Iowa, including a right of first
refusal in favor of the Company. The parties entered into the
Elevator Agreement as part of their overall arrangement under which Bunge
initially agreed to invest in the Company.
On
December 15, 2008, we entered into the Lease with Bunge respecting Bunge's grain
elevator in Council Bluffs. Under the Lease, we leased from Bunge the
grain elevator, for approximately $800,000 per year. The Lease
provides customary terms and has an initial one-year term, which will be renewed
for successive one-year terms upon the parties’ agreement to so extend the
term.
We
entered into the Agency Agreement with AB on October 13, 2006, as amended
December 15, 2008. Under the Agency Agreement, we pay an agency fee
to AB for corn delivered, subject to an annual minimum fee of $225,000, for AB’s
service of procuring all grain requirements for our plant. The Agency
Agreement commenced in February 2009.
We
entered into the Supply Agreement with AB on December 15, 2008. Under
the Supply Agreement, AB provides us with all of the corn we need to operate our
ethanol plant, and we agreed to only purchase corn from AB. AB
provides grain originators who will work at the Facility for purposes of
fulfilling its obligations under the Supply Agreement. We pay AB a
per-bushel fee for corn procured by AB, subject to a minimum annual fee of
$675,000 and adjustments according to specified indexes after three
years. The term of the Supply Agreement is ten years, subject to
earlier termination upon specified events. The Supply Agreement
suspended the operation of the Agency Agreement. In the event we
obtain a grain dealer’s license, subject to certain procedures specified in the
Supply Agreement, then the operation of the Supply Agreement will terminate and
the Agency Agreement will be reinstated.
51
On June
25, 2007, we entered into the Railcar Sublease Agreement with Bunge for the
sub-lease of 320 ethanol cars and 300 DDGS cars which will be used in the
delivery and marketing of ethanol and DDGS. We subleased 100 grain
hoppers back to Bunge beginning August 1, 2009 for an initial three year
term. On June 26, 2009, we executed an Amended and Restated Railcar
Lease Agreement (“Amended Railcar
Agreement”) with Bunge for the lease of 325 ethanol cars and 300 hopper
cars. We are responsible for all maintenance and mileage charges as
well as the monthly lease expense and certain railcar modification
expenses. Under the Amended Railcar Agreement, we lease railcars for
terms lasting 120 months and continuing on a month to month basis thereafter.
The Amended Railcar Agreement will terminate upon the expiration of all railcar
leases. The Amended Railcar Agreement reflects changes as a result of
Bunge’s purchase and sale/leaseback of railcars from a new railcar equipment
lessor other than contemplated in the Railcar Sublease Agreement between the
Company and Bunge. The Amended Railcar Agreement provides that we are
a lessee rather than a sublessee as under the Railcar Sublease Agreement and
that Bunge is the lessor rather than the lessee as under the Railcar Sublease
Agreement.
On
December 15, 2008, we entered into the Ethanol Agreement with Bunge, under which
we sell Bunge all of the ethanol produced at the Facility, and Bunge purchases
the same, up to our nameplate capacity of 110,000,000 gallons a
year.
On
December 15, 2008, we entered into a Risk Management Services Agreement with
Bunge (“Risk
Management Agreement”). Under the Risk Management Agreement,
Bunge provides us with assistance in managing our commodity price risks for a
quarterly fee of $75,000. The Risk Management Agreement has an
initial term of three years and will automatically renew for successive three
year terms, unless one party provides the other notice of their election to
terminate 180 days prior to the end of the term.
On
November 1, 2006, in consideration of its agreement to invest $6,000,000 in the
Company, ICM became the sole Series C Member of the Company. As part
of ICM’s agreement to invest in the Company’s Series C Units, the Operating
Agreement provides that we will not, without ICM’s approval (i) issue additional
Series C Units, (ii) create any additional Series of Units with rights senior to
the Series C Units, (iii) modify the Operating Agreement to adversely impact the
rights of Series C Unit holders, or (iv) repurchase or redeem any Series C
Units. Additionally, ICM, as the sole Series C Unit owner, is
afforded the right to elect one Series C Director to the Board so long as ICM
remains a Series C Member. Greg Krissek is the current Series C
Director elected by ICM. We agreed to modify the Series C Unit
Issuance Agreement under the Amended Series C Agreement to provide ICM the
option to convert any amount due under the Bridge Loan which ICM is required to
pay into subordinated debt, on the same terms and conditions as the Term
Note.
In March,
2009, we entered into an agreement with Bunge to provide an interim President /
CEO. The agreement provides for reimbursement in the annual amount of
$150,000 plus monthly expenses. Expenses for the twelve months
ended September 30, 2009 were $85,139, respectively, and $29,039 is included in
accrued expenses. We hired a new General Manager effective September
8, 2009 thus terminating this agreement with Bunge effective September 8,
2009.There were no expenses incurred for the twelve months ended September 30,
2009.
We do not
presently have any policies finalized and adopted by the Board governing the
review or approval of related party transactions.
Director
Independence
We
classify our directors as “independent” according to the standards applicable to
companies listed on the Nasdaq Capital Market (though our Units are not listed
on any exchange or quotation system). Under the Operating Agreement,
the independent directors’ terms are staggered such that one director will be up
for election every year. Our independent directors are Karol D. King,
Ted Bauer, Herbert M. Houser, and Michael K. Guttau. The Audit
Committee currently consists of Michael K. Guttau (Chair), Ted Bauer and Karol
D. King. All of the members of the Audit Committee meet the
“independent director” standards applicable to companies listed on the Nasdaq
Capital Market (though the Company’s Units are not listed on any exchange or
quotation system). Presently, the Nominating Committee’s membership
consists of Ted Bauer, Hubert M. Houser (Chair) and Karol D. King, all of whom
meet the “independent director” standards applicable to companies listed on the
Nasdaq Capital Market (though the Company’s Units are not listed on any exchange
or quotation system). The Corporate
52
Governance/Compensation
Committee Charter does not exclude from its membership directors who also serve
as officers or Interested Directors. Presently, the Governance
Committee’s membership consists of Messrs. Bauer, King, and Schmitt
(Chair). As discussed above, Mr. Hakmiller is considered an
Interested Director.
Item
14.
|
Principal
Accountant Fees and Services.
|
Independent Public
Accountant Fees and Services
The
following table presents fees paid for professional services rendered by the
Company’s independent public accountants for the Company’s Fiscal 2009 and year
ended September 30, 2008 (“Fiscal
2008”):
Fee
Category
|
Fiscal
2009 Fees
|
Fiscal
2008 Fees
|
Audit
Fees
|
$140,300
|
$115,000
|
Audit-Related
Fees
|
$0
|
$0
|
Tax
Fees
|
$83,991
|
$60,125
|
All
Other Fees
|
$0
|
--
|
Total
Fees
|
$224,291
|
$175,125
|
Audit Fees are for
professional services rendered by McGladrey & Pullen, LLP (“McGladrey”) for the
audit of the Company’s annual financial statements and review of the interim
financial statements included in quarterly reports and services that are
normally provided by McGladrey in connection with statutory and regulatory
filings or engagements.
Audit-Related Fees are for
assurance and related services that are reasonably related to the performance of
the audit or review of the Company’s financial statements and are not reported
under “Audit Fees.” These services include accounting consultations in
connection with acquisitions, consultations concerning financial accounting and
reporting standards. The Company did not pay any fees for such
services in Fiscal 2009 or 2008.
Tax Fees are for professional
services rendered by RSM McGladrey, Inc., an affiliate of McGladrey, for tax
compliance, tax advice and tax planning and include preparation of federal and
state income tax returns, and other tax research, consultation, correspondence
and advice.
All Other Fees are for
services other than the services reported above. The Company did not
pay any fees for such other services in Fiscal 2009 or 2008.
The Audit
Committee has concluded the provision of the non-audit services listed above is
compatible with maintaining the independence of McGladrey.
Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors
The Audit
Committee pre-approves all audit and permissible non-audit services provided by
the Company’s independent auditors. These services may include audit
services, audit-related services, tax services and other
services. Pre-approval is generally provided for up to one year and
any pre-approval is detailed as to the particular service or category of
services and is generally subject to a specific budget. The independent auditors
and management are required to periodically report to the Audit Committee
regarding the extent of services provided by the independent auditors in
accordance with this pre-approval, and the fees for the services performed to
date. The Audit Committee may also pre-approve particular services on
a case-by-case basis.
53
|
PART
IV
|
Item
15.
|
Exhibits
and Financial Statement Schedules.
|
(a)
|
Documents
filed as part of this Report:
|
(1) | Balance Sheets at September 30, 2009 and September 30, 2008 | |
Statements
of Operations for the years ended September 30, 2009 and September 30,
2008
Statements
of Members' Equity for the years ended September 30, 2009 and
2008
Statement
of Cash Flows for the years ended September 30, 2009 and September 30,
2008
Notes
to Financial Statements
|
||
(b) See
(a)(1) above
(c)
|
The
following exhibits are filed herewith or incorporated by reference as set
forth below:
|
Exhibit
numbers 10.36 and 10.37 are management contracts.
2
|
Omitted
– Inapplicable.
|
3(i)
|
Articles
of Organization, as filed with the Iowa Secretary of State on March 28,
2005 (incorporated by reference to Exhibit 3(i) of Registration Statement
on Form 10 filed by the Company on January 28,
2008).
|
4(i)
|
Second
Amended and Restated Operating Agreement dated March 7, 2008 (incorporated
by reference to Exhibit 4(i) of Amendment No. 1 to Registration Statement
on Form 10 filed by the Company on March 21,
2008).
|
4(ii)
|
Third
Amended and Restated Operating Agreement dated July 17, 2009 (incorporated
by reference to Exhibit 3.1 of Form 8-K filed by the Company on August 21,
2009).
|
9
|
Omitted
– Inapplicable.
|
10.1
|
Agreement
dated October 13, 2006 with Bunge North America, Inc. (incorporated by
reference to Exhibit 10.1 of Registration Statement on Form 10/A filed by
the Company on October 23, 2008). Portions of the Agreement have been
omitted pursuant to a request for confidential
treatment.
|
10.2
|
Ethanol
Merchandising Agreement dated November 1, 2006 with Lansing Ethanol
Services, LLC (incorporated by reference to Exhibit 10.2 of Registration
Statement on Form 10 filed by the Company on October 23,
2008). Portions of the Agreement have been omitted pursuant to
a request for confidential
treatment.
|
10.3
|
Assignment
of Ethanol Merchandising Agreement dated May 2, 2007 between AgStar
Financial Services, PCA and Southwest Iowa Renewable Energy, LLC
(incorporated by reference to Exhibit 10.3 of Registration Statement on
Form 10 filed by the Company on January 28,
2008).
|
10.4
|
Executed
Steam Service Contract dated January 22, 2007 with MidAmerican Energy
Company (incorporated by reference to Exhibit 10.4 of Registration
Statement on Form 10/A filed by the Company on October 23,
2008). Portions of the Contract have been omitted
pursuant to a request for confidential
treatment.
|
10.5
|
Assignment
of Steam Service Contract dated May 2, 2007 in favor of AgStar Financial
Services, PCA (incorporated by reference to Exhibit 10.5 of Registration
Statement on Form 10 filed by the Company on January 28,
2008).
|
10.6
|
Electric
Service Contract dated December 15, 2006 with MidAmerican Energy Company
(incorporated by reference to Exhibit 10.6 of Registration Statement on
Form 10 filed by the Company on January 28,
2008).
|
10.7
|
Assignment
of Electric Service Contract dated May 2, 2007 in favor of AgStar
Financial Services, PCA (incorporated by reference to Exhibit 10.7 of
Registration Statement on Form 10 filed by the Company on January 28,
2008).
|
10.8
|
Distillers
Grain Purchase Agreement dated October 13, 2006 with Bunge North America,
Inc. (incorporated by reference to Exhibit 10.8 of Registration Statement
on Form 10 filed by the Company on January 28, 2008). Portions
of the Agreement have been omitted pursuant to a request for confidential
treatment.
|
10.9
|
Assignment
of Distillers Grain Purchase Agreement dated May 2, 2007 in favor of
AgStar Financial Services, PCA (incorporated by reference to Exhibit 10.9
of Registration Statement on Form 10 filed by the Company on January 28,
2008).
|
54
10.10
|
Grain
Feedstock Agency Agreement dated October 13, 2006 with AGRI-Bunge, LLC
(incorporated by reference to Exhibit 10.10 of Registration Statement on
Form 10 filed by the Company on October 23, 2008). Portions of
the Agreement have been omitted pursuant to a request for confidential
treatment.
|
10.11
|
Assignment
of Grain Feedstock Agency Agreement dated May 2, 2007 with AgStar
Financial Services, PCA (incorporated by reference to Exhibit 10.11 of
Registration Statement on Form 10 filed by the Company on January 28,
2008).
|
10.12
|
Agreement
between Owner and Design/Builder Based on The Basis of a Stipulated Price
dated September 25, 2006 with ICM, Inc. (incorporated by reference to
Exhibit 10.12 of Registration Statement on Form 10/A filed by the Company
on October 23, 2008). Portions of the Agreement have been
omitted pursuant to a request for confidential
treatment.
|
10.13
|
Railcar
Sublease Agreement dated June 25, 2007 with Bunge North America, Inc.
(incorporated by reference to Exhibit 10.13 of Registration Statement on
Form 10 filed by the Company on January 28, 2008). Portions of
the Agreement have been omitted pursuant to a request for confidential
treatment.
|
10.14
|
Credit
Agreement dated May 2, 2007 with AgStar Financial Services, PCA
(incorporated by reference to Exhibit 10.14 of Registration Statement on
Form 10 filed by the Company on January 28,
2008).
|
10.15
|
Security
Agreement dated May 2, 2007 with AgStar Financial Services, PCA
(incorporated by reference to Exhibit 10.15 of Registration Statement on
Form 10 filed by the Company on January 28,
2008).
|
10.16
|
Mortgage,
Security Agreement Assignment of Rents and Leases and Fixture Filing dated
May 2, 2007 in favor of AgStar Financial Services, PCA (incorporated by
reference to Exhibit 10.16 of Registration Statement on Form 10 filed by
the Company on January 28, 2008).
|
10.17
|
Environmental
Indemnity Agreement dated May 2, 2007 with AgStar Financial Services, PCA
(incorporated by reference to Exhibit 10.17 of Registration Statement on
Form 10 filed by the Company on January 28,
2008).
|
10.18
|
Convertible
Note dated May 2, 2007 in favor of Monumental Life Insurance Company
(incorporated by reference to Exhibit 10.18 of Registration Statement on
Form 10 filed by the Company on January 28,
2008).
|
10.19
|
Convertible
Note dated May 2, 2007 in favor of Metlife Bank, N.A. (incorporated by
reference to Exhibit 10.19 of Registration Statement on Form 10 filed by
the Company on January 28, 2008).
|
10.20
|
Convertible
Note dated May 2, 2007 in favor of Cooperative Centrale
Raiffeisen-Boerenleenbank, B.A. (incorporated by reference to Exhibit
10.20 of Registration Statement on Form 10 filed by the Company on January
28, 2008).
|
10.21
|
Convertible
Note dated May 2, 2007 in favor of Metropolitan Life Insurance Company
(incorporated by reference to Exhibit 10.21 of Registration Statement on
Form 10 filed by the Company on January 28,
2008).
|
10.22
|
Convertible
Note dated May 2, 2007 in favor of First National Bank of Omaha
(incorporated by reference to Exhibit 10.22 of Registration Statement on
Form 10 filed by the Company on January 28,
2008).
|
10.23
|
Revolving
Line of Credit Note in favor of Cooperative Centrale
Raiffeisen-Boerenleenbank, B.A. (incorporated by reference to Exhibit
10.23 of Registration Statement on Form 10 filed by the Company on January
28, 2008).
|
10.24
|
Revolving
Line of Credit Note in favor of Metropolitan Life Insurance Company
(incorporated by reference to Exhibit 10.24 of Registration Statement on
Form 10 filed by the Company on January 28,
2008).
|
10.25
|
Revolving
Line of Credit Note in favor of First National Bank of Omaha (incorporated
by reference to Exhibit 10.25 of Registration Statement on Form 10 filed
by the Company on January 28,
2008).
|
10.26
|
Term
Revolving Note in favor of Metlife Bank, N.A. (incorporated by reference
to Exhibit 10.26 of Registration Statement on Form 10 filed by the Company
on January 28, 2008).
|
10.27
|
Term
Revolving Note in favor of Cooperative Centrale Raiffeisen-Boerenleenbank,
B.A. (incorporated by reference to Exhibit 10.27 of Registration Statement
on Form 10 filed by the Company on January 28,
2008).
|
10.28
|
Term
Revolving Note in favor of Metropolitan Life Insurance Company
(incorporated by reference to Exhibit 10.28 of Registration Statement on
Form 10 filed by the Company on January 28,
2008).
|
10.29
|
Term
Revolving Note in favor of First National Bank of Omaha (incorporated by
reference to Exhibit 10.29 of Registration Statement on Form 10 filed by
the Company on January 28, 2008).
|
10.30
|
Lien
Subordination Agreement dated May 2, 2007 among Southwest Iowa Renewable
Energy, LLC, AgStar Financial Services, PCA and Iowa Department of
Economic Development (incorporated by reference to Exhibit 10.30 of
Registration Statement on Form 10 filed by the Company on January 28,
2008).
|
55
10.31
|
Value
Added Agricultural Product Marketing Development Grant Agreement dated
November 3, 2006 with the United States of America (incorporated by
reference to Exhibit 10.31 of Registration Statement on Form 10 filed by
the Company on January 28, 2008).
|
10.32
|
Engineering
Services Agreement dated November 27, 2006 with HGM Associates, Inc.
(incorporated by reference to Exhibit 10.32 of Registration Statement on
Form 10 filed by the Company on January 28, 2008). Portions of
the Contract have been omitted pursuant to a request for confidential
treatment.
|
10.33
|
Fee
Letter dated May 2, 2007 with AgStar Financial Services, PCA (incorporated
by reference to Exhibit 10.33 of Registration Statement on Form 10 filed
by the Company on January 28,
2008).
|
10.34
|
Design-Build
Agreement dated December 18, 2006 with Todd & Sargent, Inc.
(incorporated by reference to Exhibit 10.34 of Registration Statement on
Form 10 filed by the Company on January 28,
2008).
|
10.35
|
Master
Contract dated November 21, 2006 with Iowa Department of Economic
Development (incorporated by reference to Exhibit 10.35 of Registration
Statement on Form 10 filed by the Company on January 28,
2008).
|
10.36
|
Employment
Agreement dated January 31, 2007 with Mark Drake (incorporated by
reference to Exhibit 10.36 of Registration Statement on Form 10 filed by
the Company on January 28, 2008).
|
10.37
|
Letter
Agreement dated July 23, 2007 with Cindy Patterson (incorporated by
reference to Exhibit 10.37 of Registration Statement on Form 10 filed by
the Company on January 28, 2008).
|
10.38
|
First
Amendment to Credit Agreement dated March 7, 2008 with AgStar Financial
Services, PCA (incorporated by reference to Exhibit 10.38 of Amendment No.
1 to Registration Statement on Form 10 filed by the Company on
March 21, 2008) .
|
10.39
|
Amended
and Restated Disbursing Agreement dated March 7, 2008 with AgStar
Financial Services, PCA (incorporated by reference to Exhibit 10.39 of
Amendment No. 1 to Registration Statement on Form 10 filed by the Company
on March 21, 2008).
|
10.40
|
Promissory
Note dated March 7, 2008 in favor of Commerce Bank, N.A (incorporated by
reference to Exhibit 10.40 of Amendment No. 1 to Registration Statement on
Form 10 filed by the Company on March 21,
2008).
|
10.41
|
Irrevocable
Standby Letter of Credit No. S500381 made by UMB Bank, N.A., for the
account of Bunge North America, Inc. in favor of Commerce Bank, N.A. dated
March 10, 2008 (incorporated by reference to Exhibit 10.41 of Amendment
No. 1 to Registration Statement on Form 10 filed by the Company on March
21, 2008).
|
10.42
|
Irrevocable
Standby Letter of Credit No. 08SBLC0345 made by INTRUST Bank, N.A. for the
account of ICM Inc. in favor of Commerce Bank, N.A. dated March 7, 2008
(incorporated by reference to Exhibit 10.42 of Amendment No. 1 to
Registration Statement on Form 10 filed by the Company on March 21,
2008).
|
10.43
|
Allonge
to Revolving Line of Credit Note in favor of First National Bank of Omaha
dated March 7, 2008 (incorporated by reference to Exhibit 10.43 of
Amendment No. 1 to Registration Statement on Form 10 filed by the Company
on March 21, 2008).
|
10.44
|
Allonge
to Revolving Line of Credit Note in favor of Cooperative Centrale
Raiffeisen-Boerenleenbank, B.A., dated March 7, 2008 (incorporated by
reference to Exhibit 10.44 of Amendment No. 1 to Registration Statement on
Form 10 filed by the Company on March 21,
2008).
|
10.45
|
Allonge
to Revolving Line of Credit Note in favor of Metropolitan Life Insurance
Company, dated March 7, 2008 (incorporated by reference to Exhibit 10.45
of Amendment No. 1 to Registration Statement on Form 10 filed by the
Company on March 21, 2008).
|
10.46
|
Allonge
to Convertible Note in favor of First National Bank of Omaha, dated March
7, 2008 (incorporated by reference to Exhibit 10.46 of Amendment No. 1 to
Registration Statement on Form 10 filed by the Company on March 21,
2008).
|
10.47
|
Allonge
to Convertible Note in favor of Metlife Bank, N.A., dated March 7, 2008
(incorporated by reference to Exhibit 10.47 of Amendment No. 1 to
Registration Statement on Form 10 filed by the Company on March 21,
2008).
|
10.48
|
Allonge
to Convertible Note in favor of Metropolitan Life Insurance Company, dated
March 7, 2008 (incorporated by reference to Exhibit 10.48 of Amendment No.
1 to Registration Statement on Form 10 filed by the Company on March 21,
2008).
|
10.49
|
Allonge
to Convertible Note in favor of Cooperative Centrale
Raiffeisen-Boerenleenbank, B.A., dated March 7, 2008 (incorporated by
reference to Exhibit 10.49 of Amendment No. 1 to Registration Statement on
Form 10 filed by the Company on March 21,
2008).
|
56
10.50
|
Allonge
to Term Revolving Note in favor of First National Bank of Omaha, dated
March 7, 2008 (incorporated by reference to Exhibit 10.50 of Amendment No.
1 to Registration Statement on Form 10 filed by the Company on
March 21, 2008).
|
10.51
|
Allonge
to Term Revolving Note in favor of Cooperative Centrale
Raiffeisen-Boerenleenbank, B.A., dated March 7, 2008 (incorporated by
reference to Exhibit 10.51 of Amendment No. 1 to Registration Statement on
Form 10 filed by the Company on March 21,
2008).
|
10.52
|
Allonge
to Term Revolving Note in favor of Metlife Bank, N.A., dated March 7, 2008
(incorporated by reference to Exhibit 10.52 of Amendment No. 1 to
Registration Statement on Form 10 filed by the Company on March
21, 2008).
|
10.53
|
Allonge
to Term Revolving Note in favor of Metropolitan Life Insurance Company,
dated March 7, 2008 (incorporated by reference to Exhibit 10.53 of
Amendment No. 1 to Registration Statement on Form 10 filed by the Company
on March 21, 2008).
|
10.54
|
Allonge
to Convertible Note in favor of Monumental Life Insurance Company, dated
March 7, 2008 (incorporated by reference to Exhibit 10.54 of Amendment No.
1 to Registration Statement on Form 10 filed by the Company on March 21,
2008).
|
10.55
|
Term
Revolving Note in favor of Amarillo National Bank (incorporated by
reference to Exhibit 10.55 of Amendment No. 1 to Registration Statement on
Form 10 filed by the Company on March 21,
2008).
|
10.56
|
Allonge
to Term Revolving Note in favor of Amarillo National Bank, dated March 7,
2008 (incorporated by reference to Exhibit 10.56 of Amendment No. 1 to
Registration Statement on Form 10 filed by the Company on March 21,
2008).
|
10.57
|
Convertible
Note dated May 2, 2007, in favor of Amarillo National Bank (incorporated
by reference to Exhibit 10.57 of Amendment No. 1 to Registration Statement
on Form 10 filed by the Company on March 21,
2008).
|
10.58
|
Allonge
to Convertible Note in favor of Amarillo National Bank, dated March 7,
2008 (incorporated by reference to Exhibit 10.58 of Amendment No. 1 to
Registration Statement on Form 10 filed by the Company on March 21,
2008).
|
10.59
|
Revolving
Line of Credit Note in favor of Amarillo National Bank (incorporated by
reference to Exhibit 10.59 of Amendment No. 1 to Registration Statement on
Form 10 filed by the Company on March 21,
2008).
|
10.60
|
Allonge
to Revolving Line of Credit Note in favor of Amarillo National Bank, dated
March 7, 2008 (incorporated by reference to Exhibit 10.60 of Amendment No.
1 to Registration Statement on Form 10 filed by the Company on March 21,
2008).
|
10.61
|
Series
C Unit Issuance Agreement dated March 7, 2008 with ICM, Inc. (incorporated
by reference to Exhibit 10.61 of Amendment No. 1 to Registration Statement
on Form 10 filed by the Company on March 21,
2008).
|
10.62
|
Series
E Unit Issuance Agreement dated March 7, 2008 with Bunge North America,
Inc. (incorporated by reference to Exhibit 10.62 of Amendment No. 1 to
Registration Statement on Form 10 filed by the Company on March 21,
2008).
|
10.63
|
Support
Services Agreement dated January 30, 2008 with Bunge North America, Inc.
(incorporated by reference to Exhibit 10.63 of Amendment No. 1 to
Registration Statement on Form 10 filed by the Company on March 21,
2008).
|
10.64
|
Amendment
No. 01 dated March 9, 2007 with Iowa Department of Economic Development
(incorporated by reference to Exhibit 10.2 of Form 8-K filed by the
Company on June 10, 2006).
|
10.65
|
Amendment
No. 02 dated May 30, 2008 with Iowa Department of Economic Development
(incorporated by reference to Exhibit 10.1 of Form 8-K filed by the
Company on June 10, 2006).
|
10.66
|
Industrial
Track Agreement dated as of June 18, 2008 with CBEC Railway, Inc.
(incorporated by reference to Exhibit 10.1 of Form 8-K filed by the
Company on June 25, 2006).
|
10.67
|
Base
Agreement dated August 27, 2008 between Southwest Iowa Renewable Energy,
LLC and Cornerstone Energy, LLC (incorporated by reference to Exhibit 10.1
of Form 8-K filed by the Company on September 2,
2008).
|
10.68
|
Lease
Agreement dated December 15, 2008 with Bunge North America, Inc.
(incorporated by reference to Exhibit 10.2 of Form 8-K filed by the
Company on December 22, 2008).
|
10.69
|
Ethanol
Purchase Agreement dated December 15, 2008 with Bunge North America,
Inc. Portions of the Agreement have been omitted pursuant to a
request for confidential treatment (incorporated by reference to Exhibit
10.3 of Form 8-K filed by the Company on December 22,
2008).
|
10.70
|
Risk
Management Services Agreement dated December 15, 2008 with Bunge North
America, Inc. (incorporated by reference to Exhibit 10.4 of Form 8-K filed
by the Company on December 22,
2008).
|
57
10.71
|
Base
Agreement with Cornerstone Energy, LLC d/b/a Constellation Energy dated
August 27, 2008 (incorporated by reference to Exhibit 10.1 of Report on
Form 8-K filed by the Registrant on September 2,
2008).
|
10.72
|
Grain
Feedstock Supply Agreement dated December 15, 2008 with AGRI-Bunge,
LLC. Portions of the Agreement have been omitted pursuant to a
request for confidential treatment (incorporated by reference to Exhibit
10.1 of Form 8-K filed by the Company on December 22,
2008).
|
10.73
|
Fifth
Amendment to Credit Agreement dated August 1, 2009 by and among Southwest
Iowa Renewable Energy, LLC and AgStar Financial Services, PCA;
Metropolitan Life Insurance Company; MetLife Bank, N.A.; Cooperative
Centrale Raiffeisen-Boerenleenbank B.A.; Amarillo National Bank; First
National Bank of Omaha; Bank of the West; Monumental Life Insurance
Company; M&I Marshall & Ilsley Bank (incorporated by reference to
Exhibit 10.1 of Form 8-K filed by the Company on August 20,
2009).
|
10.74
|
Second
Amendment to Series C Unit Issuance Agreement dated August 1, 2009 between
Southwest Iowa Renewable Energy, LLC and ICM, Inc. (incorporated by
reference to Exhibit 10.2 of Form 8-K filed by the Company on August 20,
2009).
|
10.75
|
Subordinated
Term Loan Note made by Southwest Iowa Renewable Energy, LLC in favor of
Bunge N.A. Holdings, Inc. dated effective August 26, 2009 (incorporated by
reference to Exhibit 10.1 of Form 8-K filed by the Company on September 2,
2009).
|
10.76
|
Subordinated
Revolving Credit Note made by Southwest Iowa Renewable Energy, LLC in
favor of Bunge N.A. Holdings, Inc. dated effective August 26, 2009
(incorporated by reference to Exhibit 10.2 of Form 8-K filed by the
Company on September 2, 2009).
|
10.77
|
Employment
Agreement dated August 27, 2009 between Southwest Iowa Renewable Energy,
LLC and Mr. Brian T. Cahill (incorporated by reference to Exhibit 10.3 of
Form 8-K filed by the Company on September 2,
2009).
|
11
|
Omitted
– Inapplicable.
|
12
|
Omitted
– Inapplicable.
|
13
|
Omitted
– Inapplicable.
|
14
|
Omitted
– Inapplicable.
|
16
|
Omitted
– Inapplicable.
|
18
|
Omitted
– Inapplicable.
|
21
|
Omitted
– Inapplicable.
|
22
|
Omitted
– Inapplicable.
|
23
|
Omitted
– Inapplicable.
|
24
|
Omitted
– Inapplicable.
|
31.1
|
Certification
(pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) executed by
Chief Executive Officer.
|
31.2
|
Certification
(pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) executed by
Principal Financial Officer.
|
32.1
|
Certification
(pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) executed by
the Chief Executive Officer.
|
32.2
|
Certification
(pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) executed by
the Principal Financial
Officer.
|
58
SIGNATURES
In accordance with the requirements of
the Exchange Act, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SOUTHWEST
IOWA RENEWABLE ENERGY, LLC
|
|
Date:
December 23, 2009
|
/s/ Brian T. Cahill
|
Brian
T. Cahill, President and Chief Executive Officer
|
|
Date:
December 23, 2009
|
/s/ Karen L. Kroymann
|
Karen
L. Kroymann, Controller and Principal Financial
Officer
|
59
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
Signature
|
Date
|
/s/ Karol D. King
|
December
23, 2009
|
Karol
D. King, Chairman of the Board
|
|
/s/ Ted Bauer
|
December
23, 2009
|
Ted
Bauer, Director
|
|
/s/ Hubert M. Houser
|
December
23, 2009
|
Hubert
M. Houser, Director
|
|
/s/ Michael K. Guttau
|
December
23, 2009
|
Michael
K. Guttau, Director
|
|
/s/ Eric L. Hakmiller
|
December
23, 2009
|
Eric
L. Hakmiller, Director
|
|
/s/ Tom J. Schmitt
|
December
23, 2009
|
Tom
J. Schmitt, Director
|
|
/s/ Greg Krissek
|
December
23, 2009
|
Greg
Krissek, Director
|
60