Attached files
file | filename |
---|---|
EX-31.2 - EXHIBIT 31.2 - Iowa Renewable Energy, LLC | c94155exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - Iowa Renewable Energy, LLC | c94155exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - Iowa Renewable Energy, LLC | c94155exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - Iowa Renewable Energy, LLC | c94155exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the fiscal year ended September 30, 2009
o | Transition report under Section 13 or 15(d) of the Exchange Act. |
For the transition period from to
Commission file number 000-52428
IOWA RENEWABLE ENERGY, LLC
(Name of small business issuer in its charter)
Iowa | 20-3386000 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
1701 East 7th Street, Washington, Iowa | 52353 | |
(Address of principal executive offices) | (Zip Code) |
(319) 653-2890
(Issuers telephone number)
(Issuers telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
26,331
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o Yes þ No
Note Checking the box above will not relieve any registrant required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulations S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). o Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filed, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of December 1, 2009, the aggregate market value of the membership units held by non-affiliates
(computed by reference to the issuers offering price of such membership units in its 2006 state
registered offering, as no current trading market exists for such membership units) was
$23,581,000.
As of December 15, 2009, there were 26,331 membership units outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant has incorporated by reference into Part III of this Annual Report on Form 10-K its
definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days
after the close of the fiscal year covered by this Annual Report.
Table of Contents
3 | ||||||||
3 | ||||||||
26 | ||||||||
37 | ||||||||
37 | ||||||||
38 | ||||||||
38 | ||||||||
38 | ||||||||
39 | ||||||||
39 | ||||||||
49 | ||||||||
50 | ||||||||
63 | ||||||||
63 | ||||||||
64 | ||||||||
64 | ||||||||
64 | ||||||||
64 | ||||||||
64 | ||||||||
64 | ||||||||
64 | ||||||||
64 | ||||||||
65 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
AVAILABLE INFORMATION
Our website address is http://www.iowarenewableenergy.com. Our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the
Exchange Act), are available, free of charge, on our website under the link SEC Filings, as
soon as reasonably practicable after we electronically file such materials with, or furnish such
materials to, the Securities and Exchange Commission. The contents of our website are not
incorporated by reference in this annual report on Form 10-K.
PART I
ITEM 1. BUSINESS.
Business Development
Our plants construction is fully complete. We began producing biodiesel on July 10, 2007. The
plant was operating at full capacity until the end of September 2007; with only minor temporary
shut downs for maintenance and a weather-related power outage. Since the beginning of October 2007,
we have only been operating to produce biodiesel to satisfy existing contracts for the sale of our
biodiesel and have not been producing biodiesel for speculation. This has allowed us to avoid
excess inventory, but also resulted in several plant shutdowns. During the fourth quarter of fiscal
year 2009, we operated our plant at approximately 36% of our plants capacity.
Most of our shutdowns have been due to:
| Lack of biodiesel contracts at profitable margins; |
||
| Our inability to obtain adequate amounts of feedstock in a timely manner; |
||
| Our inability to obtain adequate amounts of feedstock at competitive costs; |
||
| Lack of demand for biodiesel; |
||
| Inadequate funds to obtain feedstock due to having to pay for feedstock
while waiting for payments from our biodiesel sales; and |
||
| Insufficient working capital to operate our business. |
From October 1, 2008 through September 30, 2009 we produced approximately 9,507,597 gallons of
biodiesel, which is only approximately 32% of our plants capacity. We anticipate operating the
plant at similar levels during our fiscal year 2010; however, our ability to operate depends upon
many factors outside of our control, such as demand for biodiesel, price for biodiesel, cost of
feedstock, and possible expiration of the blenders credit. If demand for biodiesel remains at its
current low levels, or drops further during our 2010 fiscal year, we will likely operate our plant
even less during our 2010 fiscal year. We do not anticipate speculatively producing biodiesel in
the next 12 months. Therefore, if demand does not increase such that we can obtain contracts for
at least the same number of gallons as produced during fiscal year 2009, then we may operate at a
lower production rate than during fiscal year 2009. In addition, we have been experiencing
liquidity difficulties since beginning operations and if these conditions do not improve, or get
worse, during our 2010 fiscal year, then we will likely be unable to purchase sufficient feedstock
to operate our plant at the levels we operated during fiscal year 2009.
Since our start-up of operations we have been dealing with short term liquidity issues. We
currently only have contracts to sell approximately 75,000 gallons of biodiesel after December 31,
2009. In addition, if the blenders tax credit is not extended, our
marketer does not anticipate it will have any contracts for us in
January or February. On February 1, 2008, our $34,715,000 loan with Marshall Bankfirst Group (Bankfirst)
converted from a construction loan to a term loan, which requires monthly principal and interest
payments. As of the date of this report, we have timely paid all of our monthly payments under the
loan, however, for the September and October payments, we made draws from our debt service reserve
for the principal portion of the payments. We began to replenish the draw on our debt service
reserve in December 2009 and plan to fully replenish the debt service draw
3
Table of Contents
by the middle of January
2010. The loan agreements and related documents, including the mortgage, security agreement, and promissory
notes (collectively, the Loan Agreement) contain covenants that require a minimum ratio for
current assets to current liabilities (working capital ratio) and a minimum debt coverage and fixed
charge coverage ratios. On April 2, 2009, we received a written notice of default from Bankfirst
(the Notice). The Notice constituted a notice of default under Section 6.01(b) of the Loan
Agreement, which provides the Company has 30 days to cure the covenant defaults or it will be
considered an event of default. The Notice advises, and the Loan Agreement provides, that upon the
occurrence of an event of default, Bankfirst may exercise a variety of remedies afforded to them
under the Loan Agreement, by applicable law or equity, including without limitation, acceleration
of the due date of the unpaid principal balance of the Loan Agreement and all accrued but unpaid
interest thereon. Further, according to the mortgage and security agreement, Bankfirst may, during
an event of default and in accordance with applicable law, foreclose its mortgage on our real
estate and its security interest in our personal property and exercise any other remedies provided
therein. We have not been able to cure the defaults. Thirty days have passed since we received the
Notice and Bankfirst has not communicated with us in writing further on the matter. In July 2009,
however, Bankfirst was shut down by state regulators and the FDIC was named its receiver. We are
currently working with OSM, a bank out of Minneapolis, Minnesota, as an interim administrative bank
to make payments under our Loan Agreement, until permanent assignment of our Loan Agreement is
made. We anticipate that early in the calendar year 2010 Met Life will assume lead bank status
under our Loan Agreement and we will begin making payments to Bankers Trust as the permanent
administrative bank under our Loan Agreement. However, as of the date of this report, we have
received no written notification as to Bankfirsts successor. We have been in discussions with the
group of bank participants in our Loan Agreement regarding our liquidity issues and have received a
written offer sheet from Washington State Bank and Federation Bank,
both participant banks in our Loan Agreement, for a line of credit of up to
$1.5 million. If we close on a new line of credit, we anticipate this would improve our liquidity.
While BankFirst did not elect to exercise its remedies under the Loan Agreement, there is no
assurance that the receiver or new lead lender will not accelerate our existing obligations which could greatly affect
our ability to continue as a going concern. In addition, the blenders credit is set to expire on
December 31, 2009 and if it is not extended, we would likely be unable to produce and sell
biodiesel profitably, which would likely result in significant plant shut downs either on a
temporary or permanent basis. These liquidity issues raise doubt about whether we will continue as
a going concern. If our financial condition does not improve substantially, which may not occur due
to our historical performance and the anticipated seasonal decrease in demand for biodiesel, we
will continue to be in violation of these covenants. In addition, our loan contains an event of
default for any material adverse change in our financial condition, and the term material adverse
change is defined in such a way that leaves this determination to the subjective opinion of our
lender.
As discussed in the accompanying financial statements, we have generated accumulated losses of
$10,884,041 since inception and undertaken significant borrowings to finance the construction of our biodiesel
plant. These liquidity issues raise doubts about our ability to continue as a going concern (See
Note 6 to the financial statements). In the event our lender declares a default under the Loan
Agreement and elects to accelerate our payments under the Loan
Agreement or take possession of our
assets securing the Loan
Agreement, we may be forced to shutdown the plant and our members could lose some
or all of their investment. In addition, the blenders credit is set to expire on December 31, 2009
and if it is not extended, we would likely be unable to produce and sell biodiesel profitably,
which would likely result in significant plant shut downs either on a temporary or permanent basis.
These losses and risk of default have raised doubts as to our ability to continue as a going
concern.
General Demand
The biodiesel industry is still relatively new and unknown especially when compared to the
ethanol industry. In 2008, the Renewable Fuels Association reported that a record 9.0 billion
gallons of ethanol were produced in the United States. However, the biodiesel industry produced
only approximately 700 million gallons of biodiesel in 2008, constituting only a small part of the
U.S. diesel fuel market and a fraction of the amount of 2008 ethanol production. Total 2008
biodiesel production is also significantly less than current national biodiesel production
capacity. The National Biodiesel Board estimates that as of June 22, 2009 (the latest date for
which information is available), national biodiesel production capacity totaled approximately 2.69
billion gallons per year. Some plants are currently closed and some do not currently operate at
full capacity due to this excess production capacity and other economic factors. The National
Biodiesel Board estimates that production capacity could increase by another 427.8 million gallons
if the plants currently under construction or engaged in expansion begin production.
4
Table of Contents
While there have been some uncertain or negative public opinion regarding biodiesel, in July
2009 there was a change to the ASTM standards which allows up to 5% biodiesel to be blended in with
petroleum diesel and the product to still be labeled as petroleum diesel. This may increase demand
for biodiesel and offset some of the negative public opinions the biodiesel industry has faced.
Principal Products and Markets
The principal products produced at our plant are biodiesel and crude glycerin. Iowa Renewable
Energys biodiesel facility is able to pretreat crude vegetable oils and animal fats. Our plant,
however, does not have a soybean crushing facility and we are not capable of producing
pharmaceutical grade glycerin. The plant is capable of having an annual capacity to process
approximately 160,000,000 pounds of soybean oil and 70,000,000 pounds of animal fats and grease
into approximately 30 million gallons of biodiesel and 3 million gallons of crude glycerin per
year. Our equipment does, however, allow a variance from this ratio to compensate for changes in
feedstock cost and availability. During the fiscal year ended September 30, 2009 we processed
approximately 13,488,750 pounds of soybean oil and 60,800,171 pounds of animal fats and grease into
9,507,597 gallons of biodiesel and 7,797,330 pounds of crude glycerin.
We anticipate that we will continue to operate the plant at a similar ratio in the upcoming
fiscal year, so long as feedstock costs remain at similar levels. If feedstock costs fluctuate, we
will adjust what feedstocks we use accordingly so as to produce our biodiesel in the most
cost-effective manner.
Primary Product-Biodiesel
Biodiesel is a clean-burning alternative fuel produced from domestic, renewable resources.
Biodiesel primarily used in compression ignition (diesel) engines and biodiesel can also be used as
home heating oil. Biodiesel is comprised of mono-alkyl esters of long chain fatty acids derived
from vegetable oils or animal fats, that can be used as feedstock for our facility. A chemical
process called transesterification removes the free fatty acids from the base oil and creates the
desired esters. Transesterification is the reaction of vegetable oil or animal fat with an alcohol,
such as methanol or ethanol, in the presence of a catalyst. The process yields four products:
mono-alkyl ester (biodiesel), glycerin, feed quality fat, and methanol. The methanol can be used
again in the process. Biodiesel can then be used in neat (pure) form, or blended with petroleum
diesel.
Biodiesel that is in neat (pure) form is typically designated in the marketplace as B100. The
100 indicates that the fuel is 100% biodiesel. Biodiesel is frequently blended with petroleum based
diesel. When biodiesel is blended, it is typically identified in the marketplace according to the
percentage of biodiesel in the blend. For instance, B20 indicates that 20% of the fuel is biodiesel
and 80% is petroleum-based diesel.
Biodiesels physical and chemical properties, as they relate to operations of diesel engines,
are similar to petroleum-based diesel fuel. As a result, biodiesel, in its pure form or blended
with petroleum diesel, may be used in most standard diesel engines without making any engine
modifications. Biodiesel demonstrates greater lubricating properties, referred to as lubricity,
than petroleum-based diesel. This could lead to less engine wear in the long-run as biodiesel
creates less friction in engine components than petroleum-based diesel. Biodiesel also demonstrates
greater solvent properties. With higher percentage blends of biodiesel, this could lead to break
downs in certain rubber engine components such as seals. The solvent properties of biodiesel also
can cause accumulated deposits from petroleum-based diesel in fuel systems to break down. This
could lead to clogged fuel filters in the short-term. Fuel filters should initially be checked more
frequently when using biodiesel blends. These problems are less prevalent in blends that utilize
lower concentrations of biodiesel compared to petroleum-based diesel.
Glycerin
Glycerin is the primary co-product of biodiesel production. Glycerin is produced at a rate of
approximately 10% of the quantity of biodiesel produced. Glycerin possesses a unique combination of
physical and chemical properties that make it suitable for use in a wide variety of products. It is
highly stable under typical storage conditions, compatible with a wide variety of other chemicals
and comparatively non-toxic. Glycerin has many applications, including as an ingredient or
processing aid in cosmetics, toiletries, personal care, drugs, and food
products. Our glycerin, however, cannot be used in pharmaceutical products without further
processing, and we do not have the capabilities to refine our glycerin into pharmaceutical quality.
5
Table of Contents
Biodiesel Markets
Biodiesel is primarily used as fuel for compression ignition (diesel) engines. It is produced
using renewable resources and provides environmental advantages over petroleum-based diesel fuel,
such as reduced vehicle emissions. Our ability to market our biodiesel is heavily dependent upon
the price of petroleum-based diesel fuel as compared to the price of biodiesel, in addition to the
availability of economic incentives to produce and use biodiesel.
Biodiesel is frequently used as fuel in transport trucks, ships, trains, in farming activities
and in many government vehicles. Government legislation that seeks to encourage the use of
renewable fuels could lead to an expansion of the market for biodiesel in the future. Biodiesel
has been identified as a potentially good substitute for diesel fuel in underground mining
operations because it burns cleaner and leads to less air pollution, a feature that is very
important in confined places such as mines. Further, biodiesel may be safer to handle in a mine
setting where fire can be disastrous. Additional markets may become available as a result of
growing environmental concerns by American consumers as well as an increased awareness of energy
security and the United States ability to supply its own fuel needs. However, biodiesel still
only accounts for a very small percentage of the diesel fuel market as a whole. The biodiesel
industry will need to continue to grow demand in order to sustain the price of biodiesel into the
future.
Wholesale Market/Biodiesel Marketers
The wholesale market involves selling biodiesel directly to fuel blenders or through biodiesel
marketers. Fuel blenders purchase neat (B100) biodiesel from biodiesel production plants, mix it
with petroleum diesel fuel according to specifications, and deliver a final product to retailers.
There are few wholesale biodiesel marketers in the United States. Three examples are World Energy
of Chelsea, Massachusetts, Eco-Energy, Inc. of Franklin, Tennessee, and REG, Inc. of Ames, Iowa.
These companies use their existing marketing relationships to market the biodiesel of individual
plants to end users for a fee. We have entered into a Management and Operational Services
Agreement (the MOSA) with REG, Inc. (REG) to market the biodiesel we produce at our facility.
On April 3, 2009, however, we received a written notice of termination of the MOSA from REG. The
notice states that it shall constitute the twelve (12) month advance termination notice required by
Section 6 of the MOSA and that the MOSA will terminate effective as of July 12, 2010. REG provided
the notice of termination due to changes in the biodiesel market since the MOSA was originally
signed. REG has proposed that the parties review and cooperate to negotiate a new contract on terms
mutually beneficial to the Company and REG; however, there is no guarantee that a new contract will
be signed with REG. We are also exploring other options for the marketing of our biodiesel, in the
event a new contract is not signed. We may be unable to find a new company to provide these
management and operational services, or we may not enter into a new agreement on favorable terms.
Any lack of a provider for these services would have a negative impact on our revenues. See
Distribution of Principal Products and Dependence on One or More Major Customers below.
Retail Market
The retail market consists of biodiesel distribution primarily through fueling stations to
transport trucks and jobbers, which are individuals that buy products from manufacturers and sell
them to retailers, for the purpose of supplying farmers, maritime customers and home heating oil
users. Retail level distributors include oil companies, independent station owners, marinas and
railroad operators. The biodiesel retail market is still in its very early stages as compared to
other types of fuel. If demand for biodiesel were to increase, then the present marketing and
transportation network must expand significantly in order for our company to effectively market our
biodiesel to retail users. Areas that would require expansion include, but are not limited to:
| additional storage facilities for biodiesel; |
| expansion in refining and blending facilities to handle biodiesel; and |
| growth in service stations equipped to handle biodiesel fuels. |
6
Table of Contents
With greater consumer awareness of renewable fuels, we anticipate that the availability of
biodiesel may increase in the future. However, substantial investments required for these
infrastructure changes and expansions may not be made or they may not occur on a timely basis. Any
delay or failure in making the changes to or expansion of infrastructure could hurt the demand or
prices for our products, impede our delivery of products, impose additional costs on us or
otherwise have a material adverse effect on our results of operations or financial position. Our
business is dependent on the continuing availability of infrastructure and any infrastructure
disruptions could have a material adverse effect on our business.
International Markets
Through our marketer, REG, we expect that a portion of our biodiesel may be sold abroad to
international markets, particularly Europe. However, we are unable to track precisely where our
biodiesel is delivered or how much of it is exported to Europe or other international markets. In
some instances, we believe that international biodiesel sales may return greater profits than
domestic biodiesel sales. However, demand for international sales have been greatly reduced as a
result of anti-dumping and anti-subsidy tariffs imposed by the European Commission on all biodiesel
produced in the United States. The tariffs went into effect March 13, 2009 and the European
Commission determined in July 2009, that the tariffs would be extended through 2014. According to
the May 2009 issue of the Biodiesel Magazine, the tariffs could result in an additional charge of
$30 to $265 per metric ton of biodiesel.
Government/Public Sector
The government has increased its use of biodiesel since the implementation of the Energy
Policy Act (EPACT) of 1992, amended in 1998, which authorized federal, state and public agencies to
use biodiesel to meet the alternative fuel vehicle requirements of EPACT. Although it is possible
that individual plants could sell directly to various government entities, it is unlikely our plant
could successfully market our biodiesel through such channels. Government entities have very long
sales cycles based on the intricacies of their decision making and budgetary processes.
Glycerin Markets and Demand
In 2006, excess production of glycerin caused the price of crude glycerin to decline
dramatically, to the point that some producers had to pay to dispose of their glycerin. Since then
glycerin prices have been experiencing an increase. As of early December 2009, according to the
Jacobsen Biodiesel Bulletin, average crude glycerin prices were approximately 5 to 6 cents per
pound. REG currently markets the glycerin produced at our plant pursuant to our MOSA. If
oversupply of glycerin and low glycerin prices occur it may limit our ability to generate revenues
through the sale of our primary co-product. This may negatively affect the profitability of our
business.
Relatively higher refined glycerin prices, averaging approximately 32 to 36 cents per pound
according to the Jacobsen Biodiesel Bulletin in December 2009, have prompted some of our
competitors, such as Cargill Inc. (Cargill) and Archer Daniels Midland Co. (ADM) to expand their
glycerin refining capacities. These biodiesel producers may therefore have a competitive advantage
over plants like ours that do not have glycerin refining capabilities.
Additional uses for glycerin are being researched. Research has been underway to develop
technology that converts glycerin, a byproduct of biodiesel production, into ethanol. Ethanol made
from glycerin may be cheaper to produce than ethanol made from corn, as glycerin does not require
the extensive pre-processing steps required for corn. Research has also been underway to develop
methods of converting glycerin into propylene glycol, which is a compound used in a variety of
industrial products, including paints, polyester resins, lubricants, antifreeze and cosmetics.
Accordingly, development of these technologies could increase the demand for glycerin. However,
such technologies are still currently under development and there is no assurance that such
technologies will become readily available or that they would increase demand for glycerin.
Moreover, there is no assurance that our glycerin would work to be processed into ethanol, and
taking advantage of such technology may require additional equipment or equipment modification. If
we did not have the resources to purchase additional equipment or make equipment modifications,
such technology developments could result in our glycerin being at a competitive disadvantage.
7
Table of Contents
Distribution of Principal Products
We entered into the MOSA with REG for the purpose of management and operational services.
These services include REG marketing all of our biodiesel and glycerin. We pay REG a fee of 5.7
cents per gallon of biodiesel produced for all the services under this agreement. REG estimates a
break down of this fee to be two cents (2¢) per gallon for biodiesel marketing services.
Additionally, REG estimates one fifth cent (1/5¢) per gallon of this fee to be for the sales and
marketing of glycerin. The sales and marketing services of REG include certain transportation
services such as: arranging for transportation, logistics, and scheduling of biodiesel shipments;
where advantageous, arranging for leased tankers for rail shipments; analyzing and auditing bulk
transportation providers; overseeing reconciliation of shipments, invoicing and payments on a
weekly basis; and providing invoicing and accounts receivable management for biodiesel shipments.
Under the terms of the agreement, REG takes title to the product when loaded for delivery FOB the
plant.
Our products can be delivered by truck or rail. Our property is located approximately
thirty-five miles from Interstate 80 and thirty miles from the Mississippi River. We have
established rail service directly to the plant so that we are able to ship biodiesel to our
customers by rail. Rail service is provided by the Iowa, Chicago and Eastern Railroad and REG
coordinates all of our transportation services.
On April 3, 2009, however, we received a written notice of termination of the MOSA from REG.
The notice states that it shall constitute the twelve (12) month advance termination notice
required by Section 6 of the MOSA and that the MOSA will terminate as of July 12, 2010. Loss of a
marketing company, if we are unable to negotiate a new agreement with REG or unable to find a new
marketing company, would have a significant negative impact upon our revenues. Pursuant to our
MOSA, for the fiscal year ended September 30, 2009, we recognized an expense of approximately
$541,932 under this agreement.
Sources and Availability of Raw Materials
Feedstock Cost and Supply
The cost of feedstock is the largest single component of the cost of biodiesel production,
accounting for 70% to 90% of the overall cost of producing biodiesel. As a result, increased prices
for feedstock greatly impact the biodiesel industry. Our plant is capable of pretreating crude
vegetable oil, including soybean oil and corn oil, and animal fats and utilizing the same to
produce biodiesel. Animal fat has been less expensive to acquire than soybean oil and,
accordingly, we attempt to use as much animal fat feedstock as possible so long as producing our
biodiesel from animal fat would return greater profit margins. Animal fat biodiesel demand,
however, does typically decline in the colder fall and winter months and, accordingly, our use of
animal fats have been declining during such months. In fiscal year 2009, we also continued to
utilize corn oil as a lower-cost feedstock alternative to soybean oil. We anticipate that we will
continue to use corn oil as a feedstock source for so long as its use returns greater profit
margins as compared to soybean oil. The USDA December 2009 Oil Crops Outlook report provides that
the average November 2009 price for corn oil was 38.12 cents per pound, which was slightly higher
than the November 2009 price for soybean oil of 36.59 cents per pound.
In the event we cannot obtain adequate supplies of feedstock at affordable prices, our ability
to operate profitably may be materially impaired. We may be forced to shut down the plant
temporarily or even permanently. Due to the increased prices for our inputs, decreased demand for
biodiesel and our liquidity issues, we have experienced temporary shutdowns and are currently
operating well below our capacity. For the fourth quarter of the year ended September 30, 2009,
our plant operated at approximately 36% of its capacity, averaging 32% capacity production during
the twelve months ended September 30, 2009. Continued plant shutdowns and increased feedstock costs
may reduce our revenues and the value of your investment.
8
Table of Contents
Soybean Oil
The ten-year average price for soybean oil is approximately 26 cents per pound. However,
soybean oil prices have been extremely volatile, reaching record highs in the summer of 2008 and
sharply declining thereafter. The USDA December 2009 Oil Crops Outlook report provides that the
average November 2009 soybean oil price was approximately 36.59 cents per pound, which is below the
July 2008 peak prices of 62.54. The drop in soybean oil prices was likely caused by the changing
global economic conditions triggered by the recent failure of various
major U.S. financial institutions, the passage of the federal governments $700 billion
bailout plan, the tightening of credit markets and the economic downturn experienced by the U.S.
and other countries. According to the USDAs National Weekly Ag Energy Round-Up report, crude
soybean oil prices in Iowa for the week of December 11, 2009 ranged from 35.59 to 38.15 cents per
pound. The USDA forecasted that these soybean oil prices will remain in this range during the
2009/2010 marketing season, with a predicted price range of 35.5 to 38.5 cents per pound. The
charts below show U.S. soybean oil prices over the past ten years and for each month from the
beginning of the 2008/2009 marketing year to November 2009:
U.S.
Soybean Oil Average Prices for
the Past 10 Years
Marketing Year | Price (cents) | |||
1999/00 |
15.60 | |||
2000/01 |
14.15 | |||
2001/02 |
16.46 | |||
2002/03 |
22.04 | |||
2003/04 |
29.97 | |||
2004/05 |
23.01 | |||
2005/06 |
23.41 | |||
2006/07 |
31.02 | |||
2007/08 |
52.03 | |||
2008/09 |
32.16 | |||
2009/2010 |
35.5-38.5 | (1) | ||
U.S. Soybean Oil Average Prices
for 2008-2009
Marketing Year
Marketing Year
Month | Price (cents) | |||
October 2008 |
35.50 | |||
November 2008 |
31.55 | |||
December 2008 |
29.30 | |||
January 2009 |
32.16 | |||
February 2009 |
28.93 | |||
March 2009 |
28.23 | |||
April 2009 |
32.76 | |||
May 2009 |
36.06 | |||
June 2009 |
35.66 | |||
July 2009 |
31.08 | |||
August 2009 |
33.69 | |||
September 2009 |
30.96 | |||
October 2009 |
33.15 | |||
November 2009(1) |
36.59 |
(1) | Preliminary Price |
Data provided by USDA, Oil Crops Outlook Report, December 11, 2009
Because it takes more than seven pounds of soybean oil to make a gallon of biodiesel,
increases in soybean oil costs significantly reduce the potential profit margin on each gallon of
biodiesel produced from soybean oil and sold. Any increase in the cost of soybean oil will
negatively impact our ability to generate revenues and profits. Conversely, if the soybean oil
price drops, this would have a positive impact on our revenues. Due to high soybean oil costs
throughout most of the 2009 fiscal year, we have been using alternative forms of feedstock as
substitutes for soybean oil to the greatest extent possible. These substitutes include animal fat
and corn oil. However, prices for these alternative feedstocks have tended to increase along with
the cost of soybean oil. Accordingly, we will continue to explore additional low-cost feedstocks
and utilize soybean oil to the extent it remains a profitable and marketable option.
Increased competition with other biodiesel plants for soybean oil may result in prices again
increasing for soybean oil. Accordingly, the number of acres of soybeans planted and harvested can
impact the price of and competition for soybean oil. In its December 2009 Oil Crops Outlook
report, the USDA reported that 74.7 million soybean acres were harvested in the 2008-2009 crop
year. The portion of that used to make biodiesel is not expected to increase significantly due to
the competition from other vegetable oils and animal fats being used as alternative sources of
feedstock.
Animal Fats and Other Alternative Feedstocks
Our plant is also capable of utilizing animal fats to produce biodiesel and, like soybean oil,
animal fat costs have also increased over the past several years. Animal fat costs peaked in the
summer of 2008, and have since fallen as domestic and global economic conditions have worsened.
Although prices for animal fats have declined from their recent peak, animal fat costs are
nonetheless higher than their historical average. The USDA December 2009 Oil Crops Outlook report
provides that the average November 2009 prices for lard and edible tallow were 30.07 and 29.65
cents per pound, respectively. The USDA predicted lard and edible tallow prices could increase
slightly for 2009/2010, ranging from 28.5 to 31.5 cents per pound for lard and 29.5 to 32.5 cents
per pound for edible tallow. If animal fat prices increase such that it is not profitable to use this
feedstock, we may again increase our use of soybean oil.
9
Table of Contents
The charts below show U.S. lard and edible tallow prices over the past ten years and for each
month from the beginning of the 2008/2009 marketing year to November 2009:
Lard & Edible Tallow Average Prices for Past
Ten Years
Edible | ||||||||
Tallow | ||||||||
Marketing Year | Lard (cents) | (cents) | ||||||
1999/00 |
13.64 | 13.21 | ||||||
2000/01 |
14.61 | 13.43 | ||||||
2001/02 |
13.55 | 13.87 | ||||||
2002/03 |
18.13 | 17.80 | ||||||
2003/04 |
26.13 | 22.37 | ||||||
2004/05 |
21.80 | 18.48 | ||||||
2005/06 |
21.74 | 18.16 | ||||||
2006/07 |
28.43 | 27.32 | ||||||
2007/08 |
40.85 | 41.68 | ||||||
2008/09 |
26.72 | 25.47 | ||||||
2009/2010 |
27.5-31.5 | (1) | 29.5-32.5 | (1) |
Lard & Edible Tallow Average Prices for 2008-2009
Marketing Year
Marketing Year
Edible | ||||||||
Tallow | ||||||||
Month | Lard (cents) | (cents) | ||||||
October 2008 |
37.07 | 26.97 | ||||||
November 2008 |
26.40 | 18.13 | ||||||
December 2008 |
20.00 | 17.50 | ||||||
January 2009 |
25.36 | 23.36 | ||||||
February 2009 |
20.31 | 21.40 | ||||||
March 2009 |
19.49 | 19.42 | ||||||
April 2009 |
23.36 | 23.77 | ||||||
May 2009 |
29.00 | 28.92 | ||||||
June 2009 |
30.06 | 30.14 | ||||||
July 2009 |
27.63 | 27.64 | ||||||
August 2009 |
32.20 | 34.14 | ||||||
September 2009 |
29.73 | 34.21 | ||||||
October 2009 |
25.75 | 27.63 | ||||||
November 2009 |
30.07 | (1) | 29.65 | (1) |
(1) | Preliminary Prices |
Data provided by USDA, Oil Crops Outlook Report, December 11, 2009
We have also been using corn oil that we obtain from ethanol plants as an alternative
feedstock from time to time. We expect that, like animal fats, corn oil may be a less costly
feedstock alternative to soybean oil. The National Weekly Ag Energy Round-Up for the week of
December 11, 2009 indicates that crude corn oil costs in the Midwest ranged from 39.5 cents to 40.5
cents per pound. Corn oil-based biodiesel has cold flow properties similar to those of soybean
oil-based biodiesel and accordingly, we may be able to continue to use corn oil as feedstock in the
fall and winter months when demand for animal fat-based biodiesel could decrease. Corn oil,
however, tends to cause a waxy substance to build-up during the production process. Due to this
build-up, we expect that we will not be able to produce any biodiesel blends containing greater
than 5% corn oil. The unique characteristic of corn oil could cause it to be a less desirable
feedstock then other feedstocks. The amount of corn oil that we will be able to acquire will likely
depend upon the rate in which ethanol plants begin installing corn oil extraction equipment at
their plants and the extent to which they market their corn oil.
In the event we cannot obtain adequate supplies of feedstock at affordable costs for sustained
periods of time, then we may be forced to shut down the plant temporarily or permanently. Shut
downs and increased feedstock costs may reduce our revenues from operations which could decrease or
eliminate the value of our units.
10
Table of Contents
Feedstock Cold Flow Properties
Because biodiesel has different cold flow properties depending on the type of feedstock used
in its manufacture, cold flow also becomes a primary factor in determining the type of feedstock to
use. Cold flow refers to a fuels ability to flow easily at colder temperatures and is an
important consideration in producing and blending biodiesel for use in colder climates and in
colder seasons. The pour point for a fuel is the temperature at which the flow of the fuel stops.
Therefore, a lower pour point temperature means the fuel is usable in colder temperatures. The
following table represents the pour points for different types of fuels:
Type of Fuel | Pour Point | |||
Soy-based Biodiesel (B100) |
30ºF | |||
Tallow-based Biodiesel (B100) |
61ºF | |||
No. 2 Petro Diesel (B0) |
-30ºF | |||
B2 Soy Blend with No. 2 Diesel |
-25ºF |
To provide biodiesel with an acceptable pour point in cold weather, we will need to blend our
biodiesel with petroleum-based diesel. Generally, biodiesel that is used in blends of 2% to 20%
will provide an acceptable pour point for the Iowa market. We expect that our marketer will sell
our biodiesel throughout the nation and abroad. Cold flow additives can also be used seasonally to
provide a higher level of cold weather protection, similar to the current practice with
conventional diesel fuel. Demand for our biodiesel may diminish in colder climates and during the
colder months as a result of cold flow concerns. We are currently producing biodiesel from soybean
oil, corn oil, and animal fats. Approximately 80% of our biodiesel production for fiscal year 2009
was animal fat biodiesel blends, which is a significant increase from the 68% in fiscal year 2008,
which means we will likely be more effected by seasonal downtrends and lack of demand for biodiesel
produced from animal fat during the winter months.
Hedging
Due to fluctuations in the price and supply of feedstock, we have utilized forward contracting
and hedging strategies to manage our commodity risk exposure and optimize finished product pricing
and supply, however; as of the date of this report we do not have any forward contracts. Hedging
means protecting the price at which we buy feedstock 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 fluctuations.
The effectiveness of such hedging activities is dependent upon, among other things, the cost of
feedstock and our ability to sell sufficient amounts of biodiesel. Although we attempt to link
hedging activities to sales plans and pricing activities, such hedging activities can themselves
result in costs because price movements in feedstock contracts are highly volatile and are
influenced by many factors that are beyond our control. We may incur such costs and they may be
significant. The market for soybean oil trades 18 months into the future. The animal grease
market has no futures trade. However, there is a quoting system through the USDA that provides for
price discovery for animal grease. There is not enough volume of biodiesel produced to currently
justify a futures market. As such, there is no spot biodiesel price, making current price
discovery limited. See MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS Commodity Price Risk Protection.
Pretreatment Costs
Crude soybean oil and all animal fats need to be pretreated before being processed into
biodiesel. Pretreatment takes crude soybean oil, corn oil and any animal fat or grease, removes the
impurities and prepares the feedstock to go through the biodiesel production process. Some types of
feedstock need more treatment than others. For example, virgin soybean oil can be easier and
cheaper to pretreat than turkey fat, and turkey fat can be easier and cheaper to pretreat than beef
tallow. The cost of the process is driven by the structure of the feedstock and the impurities in
the feedstock.
For soybean oil, the pretreatment process results in refined and bleached (RB) oil. The price
differential between RB oil and crude soy oil is ordinarily 5 cents per pound. Our processing plant
has pretreatment capabilities allowing us to utilize crude vegetable oil and many types of fat or
grease as feedstock in our facility. This added flexibility allows us to choose the feedstock that
will produce biodiesel in the most cost-effective manner possible. Transitioning between
feedstocks or to new feedstocks, however, does require our employees to spend time adjusting our
equipment and determining the specific process to most profitably use a different feedstock takes
time and resources.
11
Table of Contents
Feedstock Procurement
We entered into the MOSA with REG to provide management and marketing services for our
facility. Under the MOSA, REG is responsible for arranging the purchase and procurement of the
feedstock and chemical inputs necessary to produce biodiesel at our plant. Under the MOSA, REG
will:
| Provide analysis and audit of feedstock suppliers; |
| Purchase feedstock at competitive prices meeting specifications and in
quantities adequate to satisfy the production schedule of our plant; |
| Negotiate for discounts on feedstock, where obtainable; |
| Arrange for transportation, logistics, and scheduling of feedstock deliveries; |
| Provide analysis and audit of bulk transportation providers; |
| Perform due diligence requirements for investigation of suppliers of the
chemical inputs; |
| Provide analysis and audit of chemical suppliers and bulk transportation
suppliers; |
| Purchase chemical inputs at competitive prices meeting specifications for use
in our plant; |
| Negotiate for discounts on the purchase of chemical inputs, where obtainable; |
| Procure adequate chemical inputs to meet our production schedules; and |
| Arrange for transportation, logistics, and scheduling services for chemical
input deliveries by suppliers. |
The inability of REG to obtain adequate feedstock for our facility at economical prices, or
at all, could have significant negative impacts on our ability to produce biodiesel and on our
revenues. On April 3, 2009 we received a termination notice of our MOSA from REG. The MOSA is thus
set to expire July 10, 2010. If we cannot negotiate a new agreement with REG, enter into a
marketing agreement with a new company, or successfully market our biodiesel on our own, our
revenues will be negatively impacted.
Utilities
Our biodiesel plant requires a significant and uninterrupted supply of electricity, natural
gas and water to operate. We do not have any long term agreements for our utilities but receive
them on a monthly invoice basis.
Electricity. We require a significant supply of electricity to operate our plant. Alliant
Energy supplies us with our electricity needs, on a monthly basis at variable rates.
Water and Sewer. We require a significant supply of water to operate our plant. The City of
Washington supplies us with water, on a monthly basis at variable rates. We have entered into an
agreement to have our wastewater handled by the Cities of Cedar Rapids, Muscatine and Des Moines
until the City of Washington has the capacity to handle our wastewater.
Natural Gas. We require a significant supply of natural gas. Alliant Energy supplies us with
natural gas on a monthly basis at variable rates.
Rail. Our rail access is complete and we are currently shipping our biodiesel by both rail and
truck. The Iowa, Chicago & Eastern Railroad supplies our plant with rail service and REG makes all
of our transportation arrangements.
New Products and Services
We have not introduced any new products or services during the fiscal year ended September 30,
2009.
Government Regulation and Federal Biodiesel Supports
Federal Biodiesel Supports
We expect demand for biodiesel in the United States to grow due to the demand for cleaner air,
an emphasis on energy security, and the Renewable Fuels Standard and other government support of
renewable fuels. The Energy Policy Act of 2005 and Jobs Bill established the groundwork for
biodiesel market development. The Energy Independence and Security Act of 2007 was designed to
further encourage the production and use of biodiesel in the United States.
12
Table of Contents
Renewable Fuels Standard
The Energy Policy Act of 2005 created the Renewable Fuel Standard (RFS) which required
refiners to use 7.5 billion gallons of renewable fuels by 2012. The Energy Independence and
Security Act of 2007 (EISA) expanded the existing RFS to require the use of 9 billion gallons of
renewable fuel in 2008, increasing to 36 billion gallons of renewable fuel by 2022. The EISA
requires that 600 million gallons of renewable fuel used in 2009 must come from advanced biofuels
other than corn-based ethanol, such as ethanol derived from cellulose, sugar or crop residue and
biomass-based diesel (which includes biodiesel and renewable diesel), increasing to 21 billion
gallons in 2022. The EISA further includes a requirement that 500 million gallons of biodiesel and
biomass-based diesel fuel be blended into the national diesel pool in 2009, gradually increasing to
one billion gallons by 2012. However, in November 2008, the EPA announced that the RFS program in
2009 will continue to be applicable to producers and importers of gasoline only. This means that
the 500 million gallons of biomass-based diesel required by the RFS, as amended by the EISA, does
not have to be blended into U.S. fuel supplies in 2009. This is due to the fact that the
regulatory structure of the original RFS program does not provide a mechanism for implementing the
EISA requirement for the use of 500 million gallons of biomass-based diesel. The EPA intends to
propose options and develop mechanisms for implementing the EISA biomass-diesel requirements. The
RFS was modified in 2007 to require that advanced biofuels reduce life cycle greenhouse gas
emissions by 50% relative to gasoline sold or distributed in transportation. In May 2009, the EPA
proposed rules that took into account indirect land use changes when calculating greenhouse gas
emissions. Based on the EPAs preliminary findings, soy-based biodiesel was found to reduce
greenhouse gas emissions by only 22%, which would disqualify it from counting towards the RFS.
Biodiesel from animal fat was found to reduce greenhouse gas emissions by approximately 80%. The
EPAs draft results did not measure biodiesel produced from corn oil. The EPA has announced that
it intends to publish final rules prior to the end of 2009; however, as of the date of this filing,
such final rules have not been released. The EPA has suggested that the final rules will take into
account estimates for the uncertainty of the inclusion of indirect land use changes in its
calculations of greenhouse gas emissions.
We anticipate that the RFS may increase demand for biodiesel in the long-term, as it sets a
minimum usage requirement for biodiesel and other types of biomass-based diesel. However, there
can be no assurances that demand for biodiesel will be increased by the RFS, and demand for
biodiesel from soybean oil will not be increased if the EPA rules determine soybean oil-based
biodiesel does not qualify for the RFS. As of June 22, 2009, the National Biodiesel Board
estimated that national biodiesel production capacity was approximately 2.69 billion gallons per
year, which already exceeds the 2012 biodiesel and biomass-based diesel use mandate contained in
the EISA. Accordingly, there is no assurance that additional production of biodiesel and
biomass-based diesel will not continually outstrip any additional demand for biodiesel that might
be created by this new law. Furthermore, any additional delays in the EPAs implementation of the
EISA biomass-based diesel requirements could hinder the stimulation of additional biodiesel demand.
If the RFS does not significantly increase demand compared to increases in supply, the RFS will not
likely lead to an increase in biodiesel demand. We also anticipate that the expanded RFS will be
primarily satisfied by ethanol, including both corn-based and other types of ethanol. The amount
of corn-based ethanol that may be used to satisfy the RFS requirements is capped at 15 million
gallons starting in 2015 and, accordingly, other types of ethanol, including cellulose-based
ethanol, will likely be used to satisfy any requirements over and above the 15 million gallon
corn-based ethanol cap.
Biodiesel Tax Credit
The American Jobs Creation Act of 2004 originally created the biodiesel blenders excise tax
credit under the Volumetric Ethanol Excise Tax Credit (VEETC). Known as the blenders credit, it
provides a tax credit of $1.00 per gallon for biodiesel. The blenders credit may be claimed in
both taxable and nontaxable markets, including exempt fleet fuel programs and off-road diesel
markets. The desired effect of the blenders credit is to streamline the use of biodiesel and
encourage petroleum blenders to blend biodiesel as far upstream as possible, which will allow more
biodiesel to be used in the marketplace. The blenders credit also streamlines the tax refund
system for below-the-rack blenders to allow a tax refund of the biodiesel tax credit on each gallon
of biodiesel blended with diesel (dyed or undyed) to be paid within 20 days of blending.
Below-the-rack blenders are those blenders that market fuel that is for ground transportation
engines and is not in the bulk transfer system. The blenders credit was set to expire on December
31, 2008, but was extended until December 31, 2009 as part of the Emergency Economic Stabilization
Act of 2008 (EESA) and as of the date of this report has not been extended further. The
blenders credit, as extended by the EESA, contained a few significant changes. The law closed the
so-called splash and dash loophole, which refers to the instances where biodiesel produced in
foreign countries was transported to the United States, blended with a small percentage of diesel
to claim the tax incentive, and then shipped to a third country for sale and use. Pursuant to
updated blenders credit, biodiesel produced outside the United States no longer qualifies for the
biodiesel tax incentive. The law also reduced the credit for biodiesel co-processed with
petroleum feedstock from $1.00 to 50 cents. A bill known as the Biodiesel Tax Incentive Reform and
Extension Act of 2009 (Senate Bill 1589) has been introduced, however; as of the date this article
went to print, the bill had not moved past the Finance Committee. If the credit is not extended
again, or if the extension includes overly-restrictive limitations, it will have a negative impact
on the biodiesel industrys ability to compete with
petroleum-based diesel. The loss of the biodiesel blenders credit would decrease our revenues and
have an adverse impact on our ability to generate a profit, and therefore could reduce the value of
your units.
13
Table of Contents
Commodity Credit Corporation Bioenergy Program
The Farm, Nutrition and Bioenergy Act of 2008 reauthorized the Commodity Credit Corporation,
or CCC, Bioenergy Program. The program provides $55.0 million in funding in both 2009 and 2010, $85.0
million in funding in 2011 and $105.0 million in funding in 2012 for producers of advanced biofuels
derived from renewable biomass, including biodiesel, other than corn kernel. Biodiesel producers
must apply for this credit and will be paid based on the quantity and duration of advanced biofuels
production and on net nonrenewable energy content of the advanced biofuel. Funding to a single
eligible producer may be limited to ensure equitable distribution of funding. Producers with
production capacity of less than 150 million gallons will be eligible for 95% of the funds provided
under the program. We received approximately $216,000 in funds pursuant to the CCC Bioenergy
Program.
Biofuels Interagency Working Group
The White House has recently announced that it has directed Secretary of Agriculture Tom
Vilsack to spearhead a Biofuels Interagency Working Group, to combine the efforts of the Department
of Agriculture, Department of Energy, and the EPA to increase the nations energy independence,
accelerate the investment in the production of biofuels and increase rural economic development.
Secretary Vilsack was directed to expedite and increase production of and investment in biofuels
development efforts by refinancing existing investments in renewable fuels to preserve jobs in
ethanol and biodiesel plants, electricity generation plants, and other supporting industries; and
making renewable fuels energy financing opportunities from Food, Conservation and Energy Act of
2008 available within 30 days. While the specific details on what the Biofuels Interagency Working
Group will accomplish remain unclear, we anticipate that we will benefit from this taskforces
activities.
State Legislation
Several states, including Iowa, are currently researching and considering legislation to
increase the amount of biodiesel used and produced in their states. Minnesota was the first state
to mandate biodiesel use. The Minnesota legislation, which became effective in September 2005,
required that all diesel fuel sold in the state contain a minimum of 2% biodiesel. In 2008,
Minnesota passed additional legislation to increase biodiesel content of diesel fuel sold in the
state from 2% to 20%, which is the highest in the nation, by 2015. The 2% soy biodiesel blend has
nearly the same cold flow properties as No. 2 petroleum diesel, which allows it to be used in
Minnesotas colder climate much the same as petroleum diesel throughout the year. Similarly, in
July 2008, Massachusetts signed a law that requires all home heating oil and diesel fuel in the
state to consist of 2% biodiesel by 2010 and 5% biodiesel by 2013. However, the Massachusetts
Department of Energy Resources will be entitled to delay those requirements if it determines that
fuels are not available to meet these requirements.
In May 2006, Iowa passed legislation that creates a renewable fuels standard that requires 10%
of the fuel used in Iowa to be from renewable sources by 2009 and increasing the renewable fuel
standard to 25% by 2019. While this does not require biodiesel use, it may significantly increase
renewable fuels use in Iowa, which may include increased biodiesel use in Iowa. The Iowa
legislation includes tax credits to help retailers meet this requirement. The Iowa legislation
also provided for an incentive of three cents per gallon of biodiesel sold for retailers who sell
at least 50% biodiesel blends. This is also expected to increase biodiesel sales and production.
Other states have enacted legislation to encourage (but not require) biodiesel production and
use. Several states provide tax incentives and grants for biodiesel-related studies and biodiesel
production, blending, and use. In addition, several governors have issued executive orders
directing state agencies to use biodiesel blends to fuel their fleets.
14
Table of Contents
Future Legislation
Environmental regulations that may affect our company change frequently. It is possible that
the government could adopt more stringent federal or state environmental rules or regulations,
which could increase our operating costs and expenses. The government could also adopt federal or
state environmental rules or regulations that may have an adverse effect on the use of biodiesel.
Furthermore, the Occupational Safety and Health
Administration (OSHA) governs our plant operations. OSHA regulations may change such that the
costs of the operation of the plant may increase. Any of these regulatory factors may result in
higher costs or other adverse effects on our operations, cash flows and financial performance.
These adverse effects could decrease or eliminate the value of our units.
Competition with Other Biodiesel Producers
We operate in a very competitive environment. Biodiesel is a relatively uniform commodity
where competition in the marketplace is predominantly based on price, consistent fuel quality, and
to a lesser extent delivery service. We compete with large, multi-product companies and other
biodiesel plants with varying capacities. Some of these companies can produce biodiesel in a more
efficient manner than we are able. We face competition for capital, labor, management, feedstock
and other resources. Some of our competitors have greater resources than we currently have or will
have in the future. Some of our competitors have soy-crushing facilities and are therefore not
reliant upon third parties for their soybean oil supply.
In 2008, approximately 700 million gallons of biodiesel were produced in the United States. As
of June 22, 2009 (the latest date for which data is available), the National Biodiesel Board
reported that there were 173 operating biodiesel plants in the United States with a total annual
production capacity of 2.69 billion gallons. One of these plants was undergoing expansion to
increase its annual production capacity. Another 29 plants were reported to be in the planning
stages or under construction as of June 2009. The additional combined capacity of these plants
under construction or expansion is estimated at 427.8 million gallons per year. Accordingly,
biodiesel supply may already far exceed demand for biodiesel. Currently, there are 15 existing
biodiesel plants in Iowa, including our plant; however, several of these plants may not be
operating, may not be operating at full capacity, or may never begin operations. We expect that
additional biodiesel producers may enter the market if the demand for biodiesel increases. As
additional biodiesel plants are constructed and brought on line, we expect the supply of biodiesel
to increase. The absence of increased demand may cause prices for biodiesel to decrease. We may
not be able to compete successfully or such competition may reduce our ability to generate the
profits necessary to operate our plant.
While REG markets our biodiesel to end users both domestically and internationally, biodiesel
plants in Iowa are direct competitors for local end users and resources other than customers. We
compete with the plants in Iowa for capital, labor and management. These resources tend to be
utilized from a local market, and additional strains placed on these resources by increased
competition in Iowa could result in our company being forced to expend additional funds on
recruiting labor and management to relocate from other areas. In addition, while we may receive
feedstock from areas beyond the state of Iowa, the most cost-efficient feedstock will likely come
from local suppliers, as this will reduce transportation costs. We directly compete with Iowa
biodiesel plants for business from a limited number of local feedstock suppliers. Local end users
will also be the most cost-efficient customers for REG, due to reduced transportation expenses.
Therefore, we compete directly with Iowa biodiesel producers, including REG, for these local
customers.
Our MOSA with REG does not prevent REG from providing marketing and sales services for our
competitors. If REG provides marketing and sales services for the biodiesel of our competitors, the
result will be increased competition among those biodiesel producers. Biodiesel producers that work
with REG, including our company, rely on REG to market their biodiesel and if REG cannot market all
of the biodiesel it has committed to sell, then all of the biodiesel producers that work with REG
are at risk that this loss will be allocated to them.
15
Table of Contents
We must compete with other biodiesel producers in the industry not just in the sale of our
biodiesel, but also in the acquisition of soybean oil, animal fats and other feedstocks and raw
materials. A majority of biodiesel plants, including many of the largest biodiesel producers,
utilize soybean oil. This may change over time as high soybean oil prices are encouraging
biodiesel producers to find ways to utilize alternative and less costly types of feedstock.
Furthermore, producers may increasingly design their plants with the capability to use multiple
feedstocks. Nonetheless, we expect that increased biodiesel production will continue to increase
the demand and cost of not only soybean oil, but also animal fats and other inputs. We expect this
will make it more expensive for us to produce our biodiesel and will reduce our profit margins from
biodiesel. This is because there is little or no correlation between the cost of feedstock and the
market price of biodiesel and, therefore, we cannot pass along increased feedstock costs to our
biodiesel customers. In order to stay competitive in the diesel industry, biodiesel must be
competitively priced with petroleum-based diesel. Therefore, biodiesel prices fluctuate more in
relation to petroleum-based diesel market prices than with feedstock market prices. As a result, increased
feedstock costs and reduced biodiesel prices result in decreased profit margins. If we experience
high feedstock costs or reduced biodiesel prices for a sustained period of time, such pricing and
costs may reduce our ability to generate revenues and our profit margins may significantly decrease
or be eliminated.
Many current plants are capable of using only vegetable oil for feedstock. Our plant is able
to use both vegetable oils and animal fats to produce biodiesel, allowing us to use whichever types
of feedstock provides the greatest return at any given time. This is beneficial because the cost of
feedstock is the highest cost associated with biodiesel production. Our ability to utilize animal
fats is also significant because animal fat-based biodiesel has some favorable advantages over
soybean oil-based biodiesel, such as better lubricity and lower nitrogen oxide (NOx) emissions and
qualifying for RFS under the preliminary EPA findings. However, some purchasers of animal fat-based
biodiesel may believe that it is not suitable for use during the winter months in colder climates
due to its tendency to gel at higher temperatures. This could limit our ability to sell animal
fat-based biodiesel during winter months.
We compete with large, multi-product companies and other biodiesel plants with varying
capacities. Some of our competitors have greater resources than we currently have or will have in
the future. Large plants with which we compete include the 85 million gallon per year Archer
Daniels Midland Co (ADM) canola-based plant in Velva, North Dakota; the 90 million gallon per year
Green Earth Fuels multi-feedstock plant in Galena Park, Texas; the 100 million gallon per year
multi-feedstock Imperium Grays Harbor plant in Grays Harbor, Washington; the 100 million gallon per
year multi-feedstock plant in Las Vegas, Nevada; and the 180 million gallon per year
multi-feedstock RBF Port Neches plant in Port Neches, Texas which became operational in the fourth
quarter of 2008.
Although most biodiesel plants are not equipped to process raw materials (such as soybeans)
into feedstock (such as soybean oil), there are several of our competitors that have soy-crushing
facilities and are therefore not reliant upon third parties for their feedstock supply like we are.
As a result, we face a competitive challenge from biodiesel plants owned and operated by the
companies that supply our inputs, such as Cargill, Inc., Ag Processing, Inc. (AGP) and ADM.
Cargill, AGP and ADM have significant crush capabilities throughout North America and are large
suppliers of soybean oil that own and operate their own biodiesel plants in the Midwest. Cargill
owns a 37.5 million gallon plant in Iowa Falls, Iowa and AGP owns a 30 million gallon per year
plant in Sergeant Bluff, Iowa, both of which process soy oil into biodiesel. ADM has constructed
an 85 million gallon plant in Velva, North Dakota which processes canola oil into biodiesel. Also,
increasing feedstock costs have spurred, and will likely continue to spur, additional development
of crush facilities throughout the country. Such vertical integration provides these plants with
greater control over their feedstock supplies, thereby providing them with a competitive advantage
over plants like ours that do not have soy-crushing capabilities, especially as prices and
competition for soybean oil and other feedstocks have increased.
16
Table of Contents
The following map produced by the National Biodiesel Board indicates the locations of current
active plants in the U.S as of December 7, 2009. Active plants are those companies that are
actively producing biodiesel.
Commercial Biodiesel Production Plants (December 7, 2009).
Ann. | ||||||||||||||
Production | Start | |||||||||||||
Company | City | State | Capacity | Feedstock | date | BQ9000 | ||||||||
Allied Renewable Energy, LLC |
Birmingham | AL | 15,000,000 | Soy | May-07 | |||||||||
Eagle Biodiesel, Inc. |
Bridgeport | AL | 30,000,000 | Multi Feedstock | Apr-07 | |||||||||
N.A.B. Energy Group, Inc. |
Florence | AL | ||||||||||||
Delta American Fuel, LLC |
Helena | AR | 40,000,000 | Multi Feedstock | Mar-09 | |||||||||
Amereco Biofuels Corp. |
Arlington | AZ | 15,000,000 | Multi Feedstock | Sep-07 | |||||||||
Environmental Development Group |
Tucson | AZ | 1,500,000 | Recycled Cooking Oil | Aug-09 | |||||||||
Grecycle Arizona, LLC |
Tucson | AZ | 2,500,000 | Yellow Grease | May-09 | |||||||||
Performance Biofuels, LLC |
Chandler | AZ | 1,500,000 | Recycled Cooking Oil | Dec-08 | |||||||||
Baker Commodities |
Los Angeles | CA | 10,000,000 | Multi Feedstock | Dec-10 | |||||||||
Biodiesel Industries of Ventura, LLC
|
Port Hueneme | CA | 3,000,000 | Full Spectrum, including but not limited to yellow grease, jatropha & algae | Aug-09 | |||||||||
Community Fuels |
Stockton | CA | 10,000,000 | Multi Feedstock | Jun-08 | |||||||||
Crimson Renewable Energy, LP |
Bakersfield | CA | 30,000,000 | Multi Feedstock | 3Q 2009 | |||||||||
Eco Energy Biodiesel, Inc. |
Adelanto | CA | 1,000,000 | Multi Feedstock | 3Q 2009 | |||||||||
Enviro Fuels Enterprises, LLC |
Fresno | CA | 3Q 2009 | |||||||||||
GeoGreen Biofuels, LLC |
Vernon | CA | 3,000,000 | Recycled Cooking Oil | Apr-09 | |||||||||
Imperial Western Products |
Coachella | CA | 8,000,000 | Multi Feedstock | Oct-01 | * | ||||||||
Manning Beef, LLC |
Pico Rivera | CA | Tallow | 3Q 2009 | ||||||||||
New Leaf Biofuel, LLC |
San Diego | CA | Dec-08 | |||||||||||
Noil Energy Group |
Commerce | CA | 5,000,000 | Multi Feedstock | 2Q 2009 | |||||||||
Promethean Biofuels Cooperative Corporation |
Temecula | CA | ||||||||||||
Renewable Energy Products, LLC |
Santa Fe Springs | CA | 10,000,000 | Multi Feedstock | Jul-08 | |||||||||
Simple Fuels Biodiesel, Inc. |
Chilcoot | CA | 3Q 2009 | |||||||||||
Whole Energy Fuels |
Pacifica | CA | 3,000,000 | Recycled Cooking Oil | 2Q 2009 | |||||||||
Wright Biofuels, Inc. |
San Jacinto | CA | 5,500,000 | Multi Feedstock | Sep-07 | |||||||||
Yokayo Biofuels, Inc. |
Ukiah | CA | 350,000 | Recycled Cooking Oil | Apr-06 | |||||||||
Hawaiian Islands Bioenergy, Inc. |
Parker | CO | 1,000,000 | Multi Feedstock | May-09 | |||||||||
BioDiesel One Ltd. |
Southington | CT | 4,000,000 | Recycled Cooking Oil | Feb-09 | |||||||||
BioPur Inc. |
Bethlehem | CT | 1,000,000 | Multi Feedstock | Jul-06 | |||||||||
Clayton |
Clayton | DE` | 11,000,000 | Multi-Feedstock | Jan-10 |
17
Table of Contents
Ann. | ||||||||||||||
Production | Start | |||||||||||||
Company | City | State | Capacity | Feedstock | date | BQ9000 | ||||||||
Agri-Source Fuels, Inc. |
Dade City | FL | 10,000,000 | Multi Feedstock | Oct-07 | |||||||||
New Eden Energy, LLC |
St. Cloud | FL | 1,000,000 | Recycled Cooking Oil | Dec-08 | |||||||||
Smart Fuels, LLC |
Fruitland Park | FL | 3Q 2009 | |||||||||||
Southern Biodiesel Corporation |
Miami | FL | 4Q 2009 | |||||||||||
Alterra Bioenergy of Middle Georgia, LLC |
Gordon | GA | 15,000,000 | Multi Feedstock | Aug-07 | |||||||||
Alterra Bioenergy of Plains Georgia, LLC |
Plains | GA | 30,000,000 | Soy | 4Q 2008 | |||||||||
BullDog BioDiesel |
Ellenwood | GA | 18,000,000 | Multi Feedstock | Jan-08 | |||||||||
Down to Earth Energy, Inc. |
Monroe | GA | 2,000,000 | Multi Feedstock | Aug-09 | |||||||||
ECO Solutions, LLC |
Chatsworth | GA | 25,000,000 | Multi Feedstock | Aug-07 | |||||||||
Middle Georgia Biofuels |
East Dublin | GA | 1,500,000 | Poultry Fat, Tallow | Apr-06 | |||||||||
Peach State Labs |
Rome | GA | Soy | Jan-05 | * | |||||||||
Perfect Circle Renewable Energy, LLC |
Atlanta | GA | Recycled Cooking Oil | Jul-09 | ||||||||||
Seminole Biodiesel |
Bainbridge | GA | 10,000,000 | Multi Feedstock | Jan-08 | |||||||||
AGP |
Sergeant Bluff | IA | 30,000,000 | Soy | Aug-96 | * | ||||||||
Cargill |
Iowa Falls | IA | 37,500,000 | Soy | Jun-06 | * | ||||||||
Central Iowa Energy, LLC |
Newton | IA | 30,000,000 | Multi Feedstock | Apr-07 | * | ||||||||
Energy Tec, LLC |
Maquoketa | IA | 37,000 | Sep-08 | ||||||||||
Iowa Renewable Energy, LLC |
Washington | IA | 30,000,000 | Multi Feedstock | Jul-07 | * | ||||||||
Maple River Energy, LLC |
Galva | IA | 5,000,000 | Soy | May-09 | |||||||||
Nova Biosource Clinton County |
Clinton | IA | 10,000,000 | Multi Feedstock | Apr-06 | |||||||||
REG Ralston, LLC |
Ralston | IA | 12,000,000 | Multi Feedstock | 2002 | * | ||||||||
Riksch BioFuels, LLC |
Crawfordsville | IA | 10,000,000 | Multi Feedstock | Dec-06 | |||||||||
Sioux Biochemical, Inc. |
Sioux Center | IA | 2,000,000 | Corn, Soy | Dec-06 | |||||||||
Western Dubuque Biodiesel |
Farley | IA | 30,000,000 | Crude or Refined Vegetable Oils | Aug-07 | * | ||||||||
Western Iowa Energy, LLC |
Wall Lake | IA | 30,000,000 | Multi Feedstock | Jun-06 | * | ||||||||
BiofuelBox Corporation |
American Falls | ID | 1,000,000 | Waste Vegetable Oil, Brown Grease | Feb-09 | |||||||||
Blue Sky Biodiesel, LLC |
New Plymouth | ID | 10,000,000 | Soy | Jul-06 | |||||||||
Pleasant Valley Biofuels, LLC |
American Falls | ID | 1,500,000 | Recycled Cooking Oil, Tallow | Aug-08 | |||||||||
BioVantage Fuels, LLC |
Belvidere | IL | 5,000,000 | Multi Feedstock | 3Q 2009 |
18
Table of Contents
Ann. | ||||||||||||||
Production | Start | |||||||||||||
Company | City | State | Capacity | Feedstock | date | BQ9000 | ||||||||
Blackhawk Biofuels, LLC |
Danville | IL | 45,000,000 | Multi Feedstock | Nov-08 | * | ||||||||
Incobrasa Industries, Ltd. |
Gilman | IL | 31,000,000 | Soy | Jan-07 | |||||||||
Midwest Biodiesel Products, Inc. |
South Roxanna | IL | 30,000,000 | Multi Feedstock | May-07 | |||||||||
Nova Biosource Seneca |
Seneca | IL | 60,000,000 | Multi Feedstock | Apr-08 | * | ||||||||
Stepan Company |
Millsdale | IL | 22,000,000 | Multi Feedstock | Jan-01 | * | ||||||||
Alternative Fuel Solutions, LLC |
Huntington | IN | 3Q 2009 | |||||||||||
e-biofuels, LLC |
Middletown | IN | 15,000,000 | Multi Feedstock | Jun-07 | |||||||||
Integrity Biofuels |
Morristown | IN | 10,000,000 | Soy | Aug-06 | |||||||||
Kingsbury Energy Group, LLC |
La Porte | IN | Soy | Dec-08 | ||||||||||
Louis Dreyfus Agricultural Industries, LLC |
Claypool | IN | 80,000,000 | Soy | Jan-08 | * | ||||||||
Healy Biodiesel, Inc. |
Sedgwick | KS | 1,000,000 | Recycled Cooking Oil | Jun-07 | |||||||||
REG Emporia, LLC |
Emporia | KS | 60,000,000 | Multi Feedstock | 2Q 2010 | |||||||||
Griffin Industries |
Butler | KY | 1,750,000 | Multi Feedstock | Dec-98 | * | ||||||||
Owensboro Grain |
Owensboro | KY | 50,000,000 | Soy | Jan-08 | |||||||||
REG New Orleans, LLC |
New Orleans | LA | 60,000,000 | Multi Feedstock | 2Q 2010 | |||||||||
Baker Commodities |
Billerica | MA | 15,000,000 | Multi Feedstock | Dec-10 | |||||||||
Baystate Biofuels, LLC |
North Andover | MA | 10,000,000 | Multi Feedstock | 3Q 2009 | |||||||||
Biofuels of New England, LLC |
Newburyport | MA | 300,000 | Recycled Cooking Oil | Nov-08 | |||||||||
MBP Bioenergy, LLC |
Attleboro | MA | 500,000 | Recycled Cooking Oil | Nov-06 | |||||||||
Eagle Creek Fuel Services, LLC |
Baltimore | MD | Recycled Cooking Oil, Multi Feedstock | Aug-08 | ||||||||||
Greenlight Biofuels, LLC |
Princess Anne | MD | 4,000,000 | Multi Feedstock | Oct-07 | |||||||||
Michigan Biodiesel, LLC |
Bangor | MI | 10,000,000 | Multi Feedstock | Jan-07 | |||||||||
TPA Inc. |
Warren | MI | 20,000,000 | Multi Feedstock | Jul-08 | |||||||||
Ever Cat Fuels, LLC |
Isanti | MN | 3,000,000 | Multi Feedstock | Aug-09 | |||||||||
FUMPA BioFuels |
Redwood Falls | MN | 3,000,000 | Multi Feedstock | Dec-04 | |||||||||
Minnesota Soybean Processors |
Brewster | MN | 30,000,000 | Soy | Aug-05 | * | ||||||||
AGP |
St. Joseph | MO | 29,900,000 | Soy | Sep-07 | * | ||||||||
American Energy Producers, Inc. |
Carrollton | MO | 50,000,000 | Soy | 4Q 2009 |
19
Table of Contents
Ann. | ||||||||||||||
Production | Start | |||||||||||||
Company | City | State | Capacity | Feedstock | date | BQ9000 | ||||||||
Global Fuels, LLC |
Dexter | MO | 3,000,000 | Multi Feedstock | Apr-07 | |||||||||
Mid America Biofuels, LLC |
Mexico | MO | 30,000,000 | Soy | Dec-06 | * | ||||||||
Paseo Cargill Energy, LLC |
Kansas City | MO | 37,500,000 | Soy, Animal Fats | Apr-08 | * | ||||||||
Prairie Pride |
Deerfield | MO | 30,000,000 | Soy | Dec-07 | * | ||||||||
Producers Choice Soy Energy LLC |
Moberly | MO | 5,000,000 | Soy | Jun-09 | |||||||||
Terra Bioenergy, LLC |
St. Joseph | MO | 30,000,000 | Multi Feedstock | 4Q 2009 | |||||||||
Delta Biofuels, Inc. |
Natchez | MS | 80,000,000 | Multi Feedstock | May-07 | * | ||||||||
GreenLight Biofuels, LLC |
Meridian | MS | Mar-09 | |||||||||||
Scott Petroleum Corporation |
Greenville | MS | 20,000,000 | Multi Feedstock | Oct-07 | * | ||||||||
Earl Fisher Bio Fuels |
Chester | MT | 250,000 | Canola, Camelina, Safflower, Sunflower | Apr-08 | |||||||||
Blue Ridge Biofuels |
Asheville | NC | 1,000,000 | Multi Feedstock | May-06 | |||||||||
Evans Environmental Energies, Inc. |
Wilson | NC | 3,000,000 | May-07 | ||||||||||
Foothills Bio-Energies, LLC |
Lenoir | NC | 5,000,000 | Multi Feedstock | Sep-06 | |||||||||
Leland Organic Corporation |
Leland | NC | 30,000,000 | Multi Feedstock | Sep-08 | |||||||||
Patriot Biodiesel, LLC |
Greensboro | NC | 1,500,000 | Multi Feedstock | Dec-08 | |||||||||
Piedmont Biofuels |
Pittsboro | NC | 4,000,000 | Multi Feedstock | Nov-06 | * | ||||||||
Triangle Biofuels Industries, Inc. |
Wilson | NC | 3,000,000 | Multi Feedstock | Jan-08 | |||||||||
ADM |
Velva | ND | 85,000,000 | Canola | Aug-07 | * | ||||||||
Atlantic Biodiesel |
Salem | NH | 3,000,000 | 3Q 2009 | ||||||||||
White Mountain Biodiesel, LLC |
North Haverhill | NH | 3Q 2009 | |||||||||||
Fuel Bio One, LLC |
Elizabeth | NJ | 50,000,000 | Multi Feedstock | Mar-07 | |||||||||
Innovation Fuels |
Newark | NJ | 40,000,000 | Multi Feedstock | Jul-04 | * | ||||||||
ARFuels, LLC |
Clovis | NM | 30,000,000 | Multi Feedstock | 3Q 2010 | |||||||||
Rio Valley Biofuels, LLC |
Anthony | NM | 750,000 | Multi Feedstock | Jul-06 | |||||||||
Bently Biofuels |
Minden | NV | 1,000,000 | Multi Feedstock | Nov-05 | |||||||||
Biodiesel of Las Vegas |
Las Vegas | NV | 100,000,000 | Multi Feedstock | 4Q 2009 | |||||||||
Metro Fuel Oil Corp. |
Brooklyn | NY | 2009 | |||||||||||
Northern Biodiesel, Inc. |
Ontario | NY | 20,000,000 | Jun-08 |
20
Table of Contents
Ann. | ||||||||||||||
Production | Start | |||||||||||||
Company | City | State | Capacity | Feedstock | date | BQ9000 | ||||||||
TMT Biofuels, LLC |
Port Leyden | NY | 250,000 | Recycled Cooking Oil | Sep-08 | |||||||||
Agrifuels, LLC |
Bremen | OH | 1,000,000 | Multi Feedstock | Mar-07 | |||||||||
Ambiol Flex Fuels, LLC |
East Toledo | OH | 2,000,000 | Soy | Feb-08 | |||||||||
American Ag Fuels, LLC |
Defiance | OH | 7,000,000 | Multi Feedstock | Jul-05 | |||||||||
Arlington Energy, LLC |
Mansfield | OH | 4,000,000 | Multi Feedstock | Jul-08 | |||||||||
Center Alternative Energy Company |
Cleveland | OH | 5,000,000 | Soy, Choice White Grease, yellow grease, tallow | May-07 | |||||||||
Jatrodiesel Inc. |
Miamisburg | OH | 5,000,000 | Multi Feedstock | Jun-07 | |||||||||
Peter Cremer NA |
Cincinnati | OH | 30,000,000 | Soy | Oct-02 | * | ||||||||
PK Biodiesel |
Woodstock | OH | 5,000,000 | Multi Feedstock | Aug-08 | |||||||||
Twin Rivers Technologies Natural Ingredients, LLC |
Cincinnati | OH | 60,000,000 | Multiple Feedstocks | Dec-06 | * | ||||||||
High Plains Bioenergy |
Guymon | OK | 30,000,000 | Multi Feedstock | Mar-08 | * | ||||||||
South East Oklahoma Biodiesel |
Valliant | OK | 5,000,000 | Multi Feedstock | Nov-08 | |||||||||
Tulsa Biofuels, LLC |
Tulsa | OK | Nov-07 | |||||||||||
Beaver Biodiesel, LLC |
Albany | OR | 1,200,000 | Multi Feedstock | Feb-09 | |||||||||
Green Fuels of Oregon, Inc. |
Klamath Falls | OR | 1,000,000 | Canola, Waste Vegetable Oil | Mar-07 | |||||||||
Biodiesel of Pennsylvania, Inc. |
White Deer | PA | 1,500,000 | Multi Feedstock | Mar-07 | |||||||||
Eagle Bio Diesel |
Kane | PA | 2Q 2009 | |||||||||||
Keystone BioFuels, Inc. |
Shiremanstown | PA | Multi Feedstock | Mar-06 | ||||||||||
Lake Erie Biofuels |
Erie | PA | 45,000,000 | Soy | Sep-07 | * | ||||||||
Middletown Biofuels, LLC |
Middletown | PA | 4,000,000 | Soy | Jun-07 | |||||||||
Mother Earth Energy, Inc. |
Chester | PA | 3,500,000 | Recycled Cooking Oil, Vegetable Oils | 3Q 2009 | |||||||||
Pennslyvania Biodiesel, Inc. |
Monaca | PA | 25,000,000 | Multi Feedstocks | Jul-09 | |||||||||
Soy Energy, Inc. |
New Oxford | PA | 1,500,000 | Soy | Feb-07 | |||||||||
United Biofuels, Inc. |
York | PA | 3,000,000 | Multi Feedstock | Apr-06 | |||||||||
United Oil Company |
Pittsburgh | PA | 5,000,000 | Multi Feedstock | Dec-05 | |||||||||
US Alternative Fuels Corp. |
Johnstown | PA | 4Q 2008 | |||||||||||
Lantic Green Energy, LLC |
West Greenwich | RI | 1Q 2009 | |||||||||||
Newport Biodiesel, LLC |
Newport | RI | 500,000 | Recycled Cooking Oil | Jan-08 |
21
Table of Contents
Ann. | ||||||||||||||
Production | Start | |||||||||||||
Company | City | State | Capacity | Feedstock | date | BQ9000 | ||||||||
Cateechee Biofuels, LLC |
Central | SC | 3Q 2009 | |||||||||||
Ecogy Biofuels, LLC |
Estill | SC | 30,000,000 | Soy | Dec-07 | |||||||||
Green Valley Biofuels, LLC |
Warrenville | SC | 10,000,000 | Multi Feedstock | 3Q 2009 | |||||||||
Greenlight Biofuels, LLC |
Laurens | SC | 10,000,000 | Multi Feedstock | 4Q 2008 | |||||||||
Greenpath Biofuels of Myrtle Beach, Inc. |
Conway | SC | Recycled Cooking Oil | 4Q 2009 | ||||||||||
Southeast BioDiesel, LLC |
North Charleston | SC | 8,000,000 | Multi Feedstock | Jan-07 | |||||||||
Midwest BioDiesel Producers, LLC |
Alexandria | SD | 7,000,000 | Multi Feedstock | Mar-06 | |||||||||
Milagro Biofuels of Memphis |
Memphis | TN | 5,000,000 | Multi Feedstock | Oct-06 | |||||||||
Southern Alliance for Clean Energy |
Knoxville | TN | 380,000 | Recycled Cooking Oil | Jul-09 | |||||||||
SunsOil, LLC |
Athens | TN | 1,500,000 | Multi Feedstock | Oct-07 | |||||||||
Agribiofuels, LLC |
Dayton | TX | 12,000,000 | Multi Feedstock | Dec-06 | |||||||||
AgriMax Fuels, LLC |
Channelview | TX | 3,000,000 | Soy | Mar-07 | |||||||||
Beacon Energy |
Cleburne | TX | 12,000,000 | Multi Feedstock | Mar-06 | * | ||||||||
Biodiesel of Texas, Inc. |
Denton | TX | 360,000 | Multi Feedstock | 3Q 2009 | |||||||||
BioSelect Fuels (GBBLP) |
Galveston | TX | 30,000,000 | Multi Feedstock | May-07 | |||||||||
Brownfield Biodiesel, LLC |
Ralls | TX | 2,000,000 | Cottonseed, Soy, Canola | Apr-06 | |||||||||
Direct Fuels |
Euless | TX | 10,000,000 | Multi Feedstock | Feb-08 | * | ||||||||
Global Alternative Fuels, LLC |
El Paso | TX | 5,000,000 | Multi Feedstock | Mar-09 | |||||||||
Green Earth Fuels of Houston, LLC |
Galena Park | TX | 90,000,000 | Multi Feedstock | Jul-07 | |||||||||
Greenlight Biofuels, Ltd. |
Littlefield | TX | 5,000,000 | Multi Feedstock | Aug-07 | |||||||||
Hardin Fuels, Inc. |
Kountze | TX | Mar-08 | |||||||||||
Mississippi Investment Petroleum Co., LLC |
Houston | TX | 5,000,000 | Poultry Fat, Recycled Cooking Oil | 3Q 2009 | |||||||||
New Fuel Company |
Dallas | TX | 250,000 | Multi Feedstock | Apr-06 | |||||||||
Organic Fuels, LLC |
Galena Park | TX | 45,000,000 | Multi Feedstock | Jan-06 | * | ||||||||
RBF Port Neches, LLC |
Port Neches | TX | 180,000,000 | Multi Feedstock | 4Q 2008 | |||||||||
Red River Biodiesel Ltd. |
New Boston | TX | 15,000,000 | Multi Feedstock | May-08 | |||||||||
REG Houston, LLC |
Seabrook | TX | 35,000,000 | Multi Feedstock | Jul-08 | |||||||||
Texas Green Manufacturing, LLC |
Littlefield | TX | 1,250,000 | Tallow | Apr-09 |
22
Table of Contents
Ann. | ||||||||||||||
Production | Start | |||||||||||||
Company | City | State | Capacity | Feedstock | date | BQ9000 | ||||||||
The Sun Products Corp |
Pasadena | TX | 15,000,000 | Palm | Jun-05 | * | ||||||||
TM Chemicals LP |
Deer Park | TX | 7,000,000 | Tallow | Dec-08 | |||||||||
Denali Industries, LLC |
American Fork | UT | 3,800,000 | Multi Feedstock | Jul-07 | |||||||||
Chesapeake Custom Chemical |
Ridgeway | VA | 5,500,000 | Multi Feedstock | Jan-06 | |||||||||
RECO Biodiesel, LLC |
Richmond | VA | 10,000,000 | Multi Feedstock | Dec-06 | |||||||||
Red Birch Energy, Inc. |
Bassett | VA | 2,500,000 | Multi Feedstock | Jun-08 | |||||||||
REVNOVA Biofuels, LLC |
Remington | VA | Oct-08 | |||||||||||
Synergy Biofuels, LLC |
Pennington Gap | VA | 3,000,000 | Multi Feedstock | Dec-08 | |||||||||
Virginia Biodiesel Refinery |
West Point | VA | 7,000,000 | Multi Feedstock | Oct-03 | |||||||||
General Biodiesel Seattle LLC |
Seattle | WA | 5,000,000 | Multi Feedstock | Jun-09 | |||||||||
General Biodiesel Seattle LLC |
Seattle | WA | 5,000,000 | Multi Feedstock | 3Q 2009 | |||||||||
Gen-X Energy Group, Inc. |
Burbank | WA | 15,000,000 | Multi Feedstock | Jun-07 | |||||||||
Imperium Grays Harbor |
Hoquiam | WA | 100,000,000 | Multi Feedstock | Aug-07 | * | ||||||||
Inland Empire Oilseeds, LLC |
Odessa | WA | 8,000,000 | Canola, Soy, Camelina | Nov-08 | |||||||||
Whole Energy Fuels |
Bellingham | WA | Recycled Cooking Oil | 1Q 2009 | ||||||||||
Best Biodiesel, Inc. |
Cashton | WI | 10,000,000 | Multi Feedstocks | Jan-08 | |||||||||
Bio Blend Fuels Inc. |
Manitowoc | WI | 2,600,000 | May-09 | ||||||||||
Sun Power Biodiesel, LLC |
Cumberland | WI | 3,000,000 | sunflower, canola | Dec-09 | |||||||||
Walsh Bio Fuels, LLC |
Mauston | WI | 5,000,000 | Multi Feedstock | May-07 | |||||||||
AC & S, Inc. |
Nitro | WV | 3,000,000 | Soy | Dec-07 |
Source: National Biodiesel Board |
||
* | Denotes BQ-9000 Accredited Producers |
|
(1) | Annual Production Capacity only refers to the reported maximum production capability of the
facility. It does not represent how many gallons of biodiesel were actually produced at each
plant. |
|
(2) | Includes the annual production capacity of plants which chose not to list their production. |
23
Table of Contents
Competition from Other Fuel Sources
The biodiesel industry is in competition with the diesel fuel segment of the petroleum
industry. Historically, biodiesel prices have correlated to the prices of petroleum-based diesel.
Over the past several years, according to the Energy Information Administration, the price of
diesel fuel steadily increased until reaching record high prices in July 2008 of approximately
$4.70 per gallon for No. 2 ultra low sulfur diesel, and thereafter declined sharply to
approximately $2.75 as of December 7, 2009. Although the price of diesel fuel has decreased over
the past several months, diesel fuel prices per gallon remain at levels below or equal to the price
of biodiesel. Following the trend of diesel prices, biodiesel prices steadily increased over the
past year to their peak in the summer of 2008, after which time they decreased. As of December 11,
2009, the National Weekly Ag Energy Roundup reports that B100 biodiesel prices in Iowa ranged from
$3.25 to $3.50 per gallon, which is up from a range of $2.65 to $2.84 approximately one year ago.
If the diesel fuel industry is able to produce petroleum-based diesel fuel with acceptable
environmental characteristics, we may find it difficult to compete with diesel fuel. In addition,
other more cost-efficient domestic alternative fuels may be developed and displace biodiesel as an
environmentally-friendly alternative. If diesel prices do not continue to increase or a new fuel is
developed to compete with biodiesel, it may be difficult to market our biodiesel, which could
result in the loss of some or all of our ability to operate profitably.
One advantage biodiesel has in the petroleum diesel market is the marketability and value of
RINs. The RFS system will be enforced through a system of registration, recordkeeping and
reporting requirements for obligated parties and renewable producers (RIN generators), as well as
any party that procures or trades renewable identification numbers, either as part of their
renewable purchases or separately. Any person who violates any prohibition or requirement of the
RFS program may be subject to civil penalties for each day of each violation. For example, a
failure to acquire sufficient RINs to meet a partys renewable fuels obligation would constitute a
separate day of violation for each day the violation occurred during the annual averaging period. The
enforcement provisions are necessary to ensure the RFS program goals are not compromised by illegal
conduct in the creation and transfer of RINs. The EPA has assigned equivalence values to each
type of renewable energy fuel in order to determine compliance with the RFS. The equivalence
values used ethanol as the base-line measurement (such that one gallon of ethanol is equivalent to
one credit towards RFS compliance) and assigned biodiesel and equivalence value of 1.5, such that
each gallon of biodiesel used by an obligated party will be equal to one and one-half gallons
credit towards its RFS compliance. A market has established in the petroleum diesel industry for
trading these RINs. Thus, the value of the RIN can sometimes offset higher biodiesel pricing,
which can make biodiesel more competitive on the market with petroleum diesel.
At least one large oil company has previously announced its intent to produce renewable
diesel, another form of diesel with which we may be required to compete. Renewable diesel has
characteristics similar to that of petroleum-based diesel fuel and can be co-processed at
traditional petroleum refineries from vegetable oils or animal fats mixed with crude oil through a
thermal de-polymerization process. However, as a result of an Internal Revenue Service
interpretation of the application of certain biodiesel tax credits created under the Energy Policy
Act of 2005, renewable diesel processed in traditional petroleum-refining equipment is currently
eligible for the blenders tax credit, but only at a reduced rate of 50 cents per gallon.
Opponents of the IRS interpretation argue that the blenders tax credit was intended for specific,
limited production technologies, including the methyl ester biodiesel production process, and that
the recent interpretation will allow a large subsidy of conventional petroleum refinery capacity at
the expense of free-standing producers of biodiesel. In 2007, ConocoPhillips announced its plans
to add technology to some of its refineries to produce approximately 175 million gallons of
renewable diesel per year. Because renewable diesel is currently eligible for the blenders tax
credit (although only at a reduced credit of 50 cents compared to the $1.00 credit available for
biodiesel), other large oil companies may also decide to add production capacity for renewable
diesel, if the blenders tax credit is extended past December 31, 2009. These large petroleum
refiners likely have greater financial resources than we do and may be able to devote greater
production capacity to the production of renewable diesel than the typical biodiesel plant, which
on average has an annual production capacity of 30 million gallons. Accordingly, if renewable
diesel proves to be more cost-effective than biodiesel, our revenues and our ability to operate
profitably may be adversely affected.
Glycerin Competition
Excess production of glycerin, a co-product of the biodiesel production process, may cause the
price of glycerin to decline, thereby adversely affecting our source of revenue from glycerin. It
is estimated that every one million gallons of biodiesel produced adds approximately another
100,000 gallons of crude glycerin into the market. Accordingly, as biodiesel production has
increased, the glycerin market has become increasingly saturated. As a result, glycerin prices
dropped dramatically in 2006, with crude glycerin prices hovering around 2 cents per pound or less.
Some plants were forced to give away glycerin, and according to the Jacobsen Publishing Companys
Biodiesel Bulletin, others paid 3 cents to 4 cents per pound to dispose of crude glycerin.
However, as of early December 2009, according to the Jacobsen Biodiesel Bulletin, average crude
glycerin prices increased to approximately 5 to 6 cents per pound. REG markets the glycerin
produced at our plant under our MOSA, however, our MOSA is set to terminate on July 10, 2010.
24
Table of Contents
Excess glycerin production capacity may limit our ability to market our glycerin co-product,
and we may even be forced to pay to dispose of our glycerin if prices decrease as they did in 2006.
Low glycerin prices may also limit our ability to generate revenues through the sale of our
co-product. This may negatively affect the profitability of our business. Additionally, some of
our competitors, such as Cargill and ADM, have expanded their glycerin refining capacities due to
relatively higher prices for refined glycerin when compared to the price of crude glycerin. In
Iowa Falls, Iowa, Cargill has built a 30 million pound per year glycerin refinery near its 37.5
million gallon per year biodiesel production plant. These biodiesel producers may therefore have a
competitive advantage over plants like ours that do not have glycerin refining capabilities.
Research and Development
We do not conduct any research and development activities associated with the development of
new technologies for use in producing biodiesel and glycerin.
Dependence on One of a Few Major Customers
We have entered into a marketing contract with REG in which REG markets all biodiesel and
glycerin produced at our facility. Therefore, we are highly dependent on REG for the successful
remarketing of our products. REG provides market analysis of biodiesel supply and demand; market
access to distribution channels developed by REG; analysis and audit of biodiesel customers,
including creditworthiness; provides marketing specialists and sales representatives to attain and
establish sales opportunities and relationships for the facilitys products; provides
transportation and logistics for biodiesel shipments; and invoicing and accounts receivable
management.
On April 3, 2009, we received a written notice of termination of the MOSA from REG. The notice
states that it shall constitute the twelve (12) month advance termination notice required by
Section 6 of the MOSA and that the MOSA will terminate as of July 12, 2010. REG provided the notice
of termination due to changes in the biodiesel market since the MOSA was originally signed. REG has
proposed that the parties review and cooperate to negotiate a new contract on terms mutually
beneficial to the Company and REG; however, there is no guarantee that a new contract will be
signed. In the event a new contract is not signed, we have begun to search for a new company to
provide these management and operational services. We may not be able to find a marketer, or may
not enter into an agreement on favorable terms. Any lack of a provider for these services would
have a negative impact on our revenues. Any loss of REG as our marketer for our products or any
inability of REG to successfully market our products could have a significant negative impact on
our revenues.
Furthermore, we are in direct competition with REG due to its ownership and management of
other existing biodiesel plants and proposed biodiesel plants, and any failure by REG to comply
with the terms of our MOSA could negatively impact our ability to generate revenues. The MOSA does
not prohibit REG from providing services to our competitors, and its does not provide any
procedures as to how REG will address any conflicts of interest that may arise during REGs service
to our plant and competitor plants. If REG places the interests of other biodiesel plants which it
owns or manages ahead of our interests, our profitability may be negatively impacted.
Costs and Effects of Compliance with Environmental Laws
We are subject to extensive air, water and other environmental regulations and we have been
required to obtain a number of environmental permits to construct and operate the plant. We have
obtained all of the necessary permits to begin plant operations including air emissions permits, a
NPDES Permit, storm water discharge permits, and boiler permits. We have obtained all of the
permits required to construct the plant. The majority of our expenses in complying with
environmental laws, including the cost of obtaining construction and operation permits have been
paid by REG, however; during our 2009 fiscal year we expended approximately $13,000 on
environmental costs that were not paid by REG. In addition, we may have to pay any environmental
compliance and permitting costs that arise after our MOSA terminates. 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.
25
Table of Contents
We are subject to oversight activities by the EPA. We have obtained an identification number
from the EPA for any hazardous waste that may result from our production of biodiesel. There is
always a risk that the EPA may enforce certain rules and regulations differently than Iowas
environmental administrators. Iowa or EPA rules are subject to change, and any such changes could
result in greater regulatory burdens on plant operations. We could also be subject to environmental
or nuisance claims from adjacent property owners or residents in the area arising from possible
foul smells or other air or water discharges from the plant. Such claims could have an adverse
result in court if we are deemed to engage in a nuisance that substantially impairs the fair use
and enjoyment of real estate.
Employees
Currently we have 16 full-time employees to operate our biodiesel facility, which is a
reduction in staff from our 2008 fiscal year. We have been forced to reduce our staff in order to
save costs when the plant is not operating at full capacity. In addition to the employees that are
directly employed by Iowa Renewable Energy, REG has hired a General Manager, Al Yoder, and
Operations Manager, Glen Hansel, who direct the operations of our biodiesel facility. The General
Manager and Operations Manager are employees of REG.
ITEM 1A. RISK FACTORS.
You should carefully read and consider the risks and uncertainties below and the other information
contained in this report. The risks and uncertainties described below are not the only ones we may
face. The following risks, together with additional risks and uncertainties not currently known to
us or that we currently deem immaterial could impair our financial condition and results of
operations.
Risks Related to Our Business
We are experiencing liquidity issues which could require us to cease operations. We are
experiencing liquidity issues associated with the high cost of our raw materials, lack of demand
for our product, and the ordinary delay between when we purchase raw materials and when we receive
payments from REG for our finished products. This has resulted in a situation where we are short
on cash. This has caused us to scale back production at our biodiesel plant, and may require us to
cease operations altogether. These shutdowns could be temporary or permanent depending on the cash
we have available to continue operations. We have already had several temporary shut downs at the
plant and are not operating at full capacity. Should we not be able to continue to secure the cash
we require in order to pay our obligations as they become due, we may have to cease operations,
either on a permanent or temporary basis, which could decrease or eliminate the value of our units.
We
have a history of losses and may not ever operate profitably. For the fiscal year ended
September 30, 2009 we incurred a net loss of $3,320,609. There is no assurance that we will be
successful in our efforts to continue to operate the biodiesel plant. Even if we successfully meet
all of our objectives, there is no assurance that we will be able to operate profitably. We have
experienced very high raw material costs and low biodiesel prices that in some cases have been less
than our production costs. Should our raw material costs increase without an increase in the price
we receive for our biodiesel or glycerin, we may have to scale back or cease operations at the
biodiesel plant, either on a temporary or permanent basis. This may affect our ability to generate
revenues and could decrease or eliminate the value of our units.
We may be required to write down our long-lived assets and these impairment charges would
adversely affect our operating results. We account for the impairment of long-lived assets to be
held and used in accordance with ASC Topic 360. In accordance with ASC Topic 360, an asset (other
than goodwill and indefinite-lived intangible assets) is considered impaired when estimated future
cash flows are less than the carrying amount of the asset. In the event the carrying amount of such
asset is not deemed recoverable, the asset is adjusted to its estimated fair value. Fair value is
generally determined based upon estimated discounted future cash flows. At September 30, 2009 the
carrying amount of our fixed assets is $36 million. In determining if there has been an
impairment, we have projected future cash flows assuming that we are able to obtain sufficient
working capital to operate our plant, our expectations related to the extension of the blenders
credit, and favorable legislation related to the applicability of soybean oil-based biodiesel under
the RFS. If conditions or events change and we have to reconsider our plans, the projected cash
flows could change, requiring the assets to be adjusted to the estimated fair value. As a result,
the amount of any annual or interim impairment could be significant and could have a material
adverse effect on our reported financial results for the period in which the charge is taken.
26
Table of Contents
Our business is not diversified. Our success depends largely upon our ability to profitably
operate our biodiesel plant. We do not have any other lines of business or other sources of revenue
if we are unable to operate our biodiesel plant and manufacture biodiesel and glycerin. We have no
other line of business to fall back on if the biodiesel business declines or if our biodiesel plant
cannot operate at full capacity for any extended period of time. Should we continue to experience
difficulty operating our biodiesel plant, the value of our units may decrease or be eliminated.
We are in competition with REG, our design-builder, manager and marketer, which could place us
at a competitive disadvantage and cause a conflict of interest for REG. We have contracted with
REG for management, feedstock procurement and marketing services for our plant. We are highly
dependent upon REG to procure our inputs and market our products. Further, if our plant does not
operate at the level anticipated by us in our business plan, we will rely on REG to adequately
address such deficiency. REG operates its own biodiesel production facility in Ralston, Iowa, and
acquired a 35 million gallon per year plant in Houston, Texas, which now operates under the name
REG Houston, and anticipates increasing its biodiesel production through wholly-owned and
third-party managed biodiesel plants in the future. Moreover, REG has entered into a merger
agreement with Blackhawk Biodiesel and into asset purchase agreements with Central Iowa Energy and
Western Iowa Energy. This means that REG is in competition with us in many aspects of our business,
including feedstock procurement and biodiesel production and marketing. We also have to compete with REG for employees. Because
REG operates its own biodiesel production facilities and competes with us in many aspects of our
business, REG may have a conflict of interest in managing our plant. Although we have entered into
a MOSA with REG for management and marketing services, there is no assurance that REGs performance
of these services is not compromised by its own biodiesel production operations. We are currently
in arbitration with REG based on our claims of breach of the MOSA by REG, which may further result
in a conflict of interest for REG.
We have limited experience in the biodiesel industry, which increases the risk of our
inability to operate the biodiesel plant. We are presently, and will likely continue to be,
dependent upon our directors to manage our business. Most of our directors are experienced in
business generally but have limited or no prior experience in operating a biodiesel plant or in
governing and operating a public company. Most of our directors have no expertise in the biodiesel
industry. In addition, certain directors on our board of directors are presently engaged in
business and other activities that impose substantial demands on the time and attention of such
directors. REG has hired Al Yoder to be General Manager and Glen Hansel to be Operations Manger of
the plant and they have experience with production facilities. However, REG may not be successful
in retaining such individuals because of the competitive market for such individuals and when the
MOSA expires, and if we do not enter into a new agreement with REG, then we will have to find and
retain our own General Manager and Operations Manager. In addition, we or REG may have difficulty
in attracting other competent personnel to relocate to Iowa in the event that such personnel are
not retained. If we cannot retain skilled management for our plant, our members could lose all or
substantially all of their equity interest.
We engage in hedging transactions which involve risks that can harm our business. We are
exposed to market risk from changes in commodity prices. Exposure to commodity price risk results
from our dependence on soybean oil or other feedstocks for the biodiesel production process. In
addition, we have engaged in hedging transactions for home heating oil, in an attempt to lock in
profit margins on the sale of our biodiesel, because home heating oil has historically tracked with
the price of biodiesel. The effectiveness of our hedging strategies is dependent upon the cost of
soybean oil and home heating and our ability to sell sufficient amounts of our products. There is
no futures market for animal fats. There is no assurance that our hedging activities will
successfully reduce the risk caused by price fluctuation which may leave us vulnerable to volatile
soybean oil and home heating oil prices. Alternatively, we may choose not to engage in hedging
transactions, which is our situation currently. As a result, our results of operations and
financial conditions may also be adversely affected during periods in which soybean oil prices
increase.
Hedging activities themselves can result in increased costs because price movements in soybean
oil contracts and home heating oil contracts are highly volatile and are influenced by many factors
that are beyond our control. There are several variables that could affect the extent to which our
derivative instruments are impacted by price fluctuations in the cost of soybean oil and home
heating oil. However, it is likely that commodity cash prices will have the greatest impact on the
derivative instruments with delivery dates nearest the current cash price. We may incur such costs
and they may be significant. If we realize losses with respect to our derivative instruments, our
net loss could increase.
27
Table of Contents
Risks Related to Operation of the Biodiesel Plant
We depend on key suppliers, whose failure to perform could force us to abandon business,
hinder our ability to operate profitably or decrease the value of our units. We are highly
dependent upon REG or its affiliates for the operations of the plant. Should REG fail to perform in
any manner significant to our operations, our project could fail and our members could lose some or
all of the value of their investment. Further, we are depending on REGs assessment of the cost and
feasibility of operating our plant. If REGs assessment of the cost and feasibility of operating
our plant are incorrect, we may encounter unforeseen costs or difficulties in the operation of our
plant which could affect our profitability or force us to abandon our business.
We are highly dependent upon REG to procure our inputs and market our products. REG has
already had difficulty selling all of our biodiesel. If REG does not perform its obligations
pursuant to our management and operations services agreements we may be unable to specifically
enforce our agreement which could negatively affect the value of our units. Our reliance on REG may
place us at a competitive disadvantage. REG and its affiliates are competitors for many aspects of
our business including: feedstock procurement, biodiesel marketing, as well as management service
providers and employees.
Moreover, on April 3, 2009 we received a notice of termination from REG, meaning that our MOSA
is set to expire on July 10, 2010. If we do not enter into a new agreement with REG, we may be
unable to find a new marketer and manager or may be unable to enter into such an agreement on
favorable terms. We will likely be highly dependent upon any new marketer or manager we may hire
and if they do not adequately perform their duties, or if we cannot find a new marketer or manager,
we will likely experience increased losses and our business may fail.
Changes in production technology could require us to commit resources to updating the
biodiesel plant or could otherwise hinder our ability to compete in the biodiesel industry or to
operate at a profit. We expect advances and changes in the technology of biodiesel production to
occur. Such advances and changes may make our biodiesel production technology less desirable or
obsolete. The plant is a single-purpose facility and likely has no use other than the production of
biodiesel and associated products. Much of the cost of the plant is attributable to the cost of
production technology which may be impractical or impossible to update. The value of our units
could decline if changes in technology cause us to operate the plant at less than full capacity for
an extended period of time or cause us to abandon our business. Further, more efficient
technologies might be developed in the future that we cannot implement that would allow our
competitors to produce biodiesel in a more cost effective manner than us.
Because our natural gas provider will not allow us to enter into forward contracts for our
natural gas, we may pay higher prices for our natural gas than other biodiesel producers, which
puts us at a competitive disadvantage and may increase our losses. Our natural gas provider does
not allow us to enter into forward contracts for our natural gas, and management has determined
that it is not feasible to use a different natural gas provider. Many biodiesel producers can and
do enter into forward contracts for their natural gas, which may allow them to lock in their
natural gas costs at a lower price. Our inability to enter into forward contracts for our natural
gas may put us at a competitive disadvantage which may increase our losses.
Risks Related to Biodiesel Industry
The downturn in the U.S. economy has caused demand for biodiesel to decline, which may
adversely affect our ability to generate revenues. The U.S. stock markets tumbled in the Fall of
2008 upon the collapse of multiple major financial institutions, the federal governments takeover
of two major mortgage companies, Freddie Mac and Fannie Mae, and the Presidents enactment of a
$700 billion bailout plan pursuant to which the federal government will directly invested in
troubled financial institutions. Financial institutions across the country have lost billions of
dollars due to the extension of credit for the purchase and refinance of over-valued real property.
Other large corporate giants, such as the big three auto makers, have also received government
bailout money. These factors have caused significant economic stress and upheaval in the financial
and credit markets in the United States, as well as abroad. Credit markets have tightened and
lending requirements have become more stringent. Oil prices have dropped rapidly as demand for fuel
has decreased. Although demand for biodiesel typically declines in colder winter months due to its
cold flow properties, we believe that these economic factors have contributed to an even greater
decrease in demand for biodiesel, which may persist throughout all or parts of fiscal year 2010.
It is uncertain for how long and to what extent these economic troubles may negatively affect
biodiesel demand in the future. If demand for biodiesel declines, we may be forced to temporarily
or permanently cease operations and you may lose some or all of your investment.
28
Table of Contents
Several
biofuels companies throughout the country have filed for Chapter 11 bankruptcy due to
industry and economic conditions, and we may also be forced to consider filing for bankruptcy
protection in the event that economic conditions and our liquidity problems do not improve. In
November 2008, Freedom Fuels, LLC, a biodiesel plant located near Mason City, Iowa, filed for
Chapter 11 bankruptcy and is proceeding from a Chapter 11 bankruptcy into Chapter 7 bankruptcy.
Beatrice Biodiesel, a biodiesel plant near Beatrice, Nebraska, filed for Chapter 11 bankruptcy, but
has not found a company to purchase and reorganize the company. In December 2009, Hawkeye
Renewables, an ethanol plant filed for Chapter 11 bankruptcy. A Chapter 11 bankruptcy is an option
in which a company attempts to reorganize with the intent that it will continue to operate. A
Chapter 11 bankruptcy differs from a Chapter 7 bankruptcy because under Chapter 7 the assets of a
company are liquidated and it is not anticipated that the business will continue to operate.
Unfavorable worldwide economic conditions, the decreasing availability of credit, and volatile
biofuel prices and input costs have likely contributed to the necessity of these bankruptcy
filings. We are experiencing liquidity problems due to our lack of credit and low cash reserves,
which are resulting primarily from the general decrease in demand for biodiesel that the industry
is currently experiencing,
our lack of biodiesel sale contracts, the unfavorable economic conditions that are currently
prevailing in the U.S. and abroad and the other factors identified in this report. We anticipate
operating at significantly below our nameplate production capacity for the first quarter of 2010
based on our historical performance and lack of seasonal demand. If our current liquidity problems
persist and we are unable to generate sufficient revenues from the sale of our biodiesel, we may
also have to consider bankruptcy as an option to cope with our financial difficulties. This could
reduce or eliminate the value of our members investments in the Company.
The decline in oil and diesel prices may affect our ability to sell biodiesel at profitable
prices. The price for biodiesel is correlated to the price for diesel, as biodiesel is used
primarily as a diesel additive. The price of biodiesel tends to increase as the price of diesel
increases, and the price of biodiesel tends to decrease as the price of diesel decreases. Diesel
prices are typically influenced by oil prices. The recent global economic downturn has resulted in
a rapid decline in oil and diesel prices. In November 2008, oil prices fell to their lowest level
in more than three years, dropping below $50 a barrel, down from approximately $150 a barrel in
July 2008, and the current December 2009 average is up slightly at approximately $75 per barrel.
Additionally, average retail diesel prices declined by approximately 40% from July 2008 to November
2008, and the price of biodiesel went down also. Since then diesel and biodiesel prices have risen
slightly from the November 2008 lows, with diesel fuel at approximately $2.75 per gallon in early
December 2009, according to the Energy Information Administration and biodiesel prices at
approximately $3.25 to $3.50 per gallon in Iowa as of December 11, 2009, according to the National
Weekly Ag Energy Roundup. If oil and diesel prices remain low or decline even further, biodiesel
prices will also likely remain low or decline further. This could make it difficult for us to
produce and sell biodiesel at a profit and you could lose some or all of your investment as a
result.
An investigation by the European Commission into whether the U.S. biodiesel industry has been
engaging in unfair trade practices has led to the imposition of tariffs on biodiesel imported into
Europe, which could result in further losses from our business. The European Commission conducted
antisubsidy and antidumping investigations on U.S. biodiesel imports into Europe. Based on
complaints from the European Biodiesel Board (EBB), the European Commission claims that U.S.
biodiesel producers, after claiming maximum U.S. subsidies for B99 biodiesel, have been dumping
biodiesel in the European market, where it may also be eligible for European subsidies. The
European Commission states that these factors have adversely affected the European biodiesel
industry, causing adverse effects on the prices and market share of European biodiesel producers.
The EBB claims that subsidized B99 exports are a trade practice that breaches World Trade
Organization rules. The tariffs went into effect March 13, 2009 and the European Commission
determined in July 2009 that the tariffs would be extended through 2014. According to the May 2009
issue of the Biodiesel Magazine, the tariffs could result in an additional charge of $30 to $265
per metric ton of biodiesel. These tariffs have virtually eliminated our ability to make
profitable sales in Europe.
29
Table of Contents
If demand for biodiesel fails to grow at the same rate as planned supply, the excess
production capacity will adversely impact our financial condition. In 2008, approximately 700
million gallons of biodiesel were produced in the United States, according to the National
Biodiesel Board. Our biodiesel plant alone could produce almost 4% of the 2008 domestic
production. The National Biodiesel Board estimates the current dedicated U.S. biodiesel
production capacity of existing biodiesel plants as of June 22, 2009 (the latest date for which
information is available) is approximately 2.69 billion gallons per year. Further, plants under
construction and expansion as of June 22, 2009, if completed, are expected to result in another
427.8 million gallons of annual U.S. biodiesel production capacity, for total annual production
capacity of approximately 3.89 billion gallons. Thus, the current annual production capacity of
existing plants far exceeds 2008 annual biodiesel consumption, and will likely far exceed 2009
biodiesel consumption. As production capacity increases, our competition with other biodiesel
producers for the sale of our products increases, especially if there is not a corresponding
increase in demand for biodiesel. Many biodiesel plants do not operate at full capacity due to the
discrepancy between annual domestic biodiesel consumption and annual U.S. biodiesel production
capacity. Several biodiesel plants have even been forced to completely shut down or declare
bankruptcy, which may be due in part to an increase in national excess production capacity without
a corresponding increase in biodiesel demand in combination with the worsening economic conditions.
If biodiesel production capacity continues to expand at its current pace, and demand does not grow
to meet the available supply, we may be forced to suspend production at our plant and the value of
your units could be decreased or eliminated.
Excess capacity in the biodiesel industry may cause increased competition for inputs and
decreased market prices for biodiesel. Biodiesel production at our plant requires significant
amounts of soybean oil, animal fats and other inputs. If overproduction of biodiesel occurs, we
will face increased competition for inputs which means we
may be either unable to acquire the inputs that we need or unable to acquire them at
profitable prices. In addition, if excess capacity occurs, we may also be unable to market our
products at profitable prices. If the demand for biodiesel does not grow at the same pace as
increases in supply, we would expect the price for biodiesel to decline. Any decrease in the price
at which we can sell our biodiesel will negatively impact our future revenues. Increased expenses
and decreased sales prices for biodiesel will result in decreased revenues and increased losses.
Excess production of glycerin, the primary co-product of the biodiesel production process, may
cause the price of glycerin to decline, thereby adversely affecting our ability to generate revenue
from the sale of glycerin. It is estimated that every million gallons of biodiesel produced adds
approximately another one hundred thousand gallons of crude glycerin into the market. As biodiesel
production has increased, the glycerin market has become increasingly saturated, resulting in
significant declines in the price of glycerin. In 2006, glycerin prices dropped dramatically, with
crude glycerin prices hovering around 2 cents per pound or less. According to the September 2006
issue of Biodiesel Magazine, some smaller plants were even forced to essentially give away glycerin
and some even had to pay to dispose of the glycerin. Since then, however, there has recently been a
steady, gradual increase in glycerin prices. The Jacobsen Company reported average glycerin prices
of 5 to 6 cents in December 2009. However, if the price of glycerin declines again, our revenues
will be adversely affected and we could even be forced to pay to dispose of our glycerin as plants
were required to do in the past. Any further excess glycerin production capacity may limit our
ability to market our glycerin co-product and could negatively impact our future revenues.
The biodiesel manufacturing industry is a feedstock limited industry. As more plants are
developed and go into production there may not be an adequate supply of feedstock to supply the
demands of the industry, which could threaten the viability of our plant. The number of biodiesel
manufacturing plants either in production or in the planning or construction phase continues to
increase. As more plants are developed and go into production, and as more existing plants expand
their production capacities, there may not be an adequate supply of feedstock to supply the demand
of the biodiesel industry. Consequently, the cost of feedstock may rise to the point where it
threatens the viability of our plant. This is because there is little or no correlation between the
cost of feedstock and the market price of biodiesel and, therefore, we cannot pass along increased
feedstock costs to our biodiesel customers. We cannot pass along increased feedstock costs to our
biodiesel customers because in order to stay competitive in the diesel industry, biodiesel must be
competitively priced with petroleum-based diesel. Therefore, biodiesel prices fluctuate more in
relation to petroleum-based diesel market prices then with feedstock market prices. As a result,
increased feedstock costs or decreased biodiesel prices may result in decreased revenues. If we
experience a sustained period of high feedstock costs or reduced biodiesel prices, such pricing and
costs may reduce our ability to generate revenues and our profit margins may significantly decrease
or be eliminated. Furthermore, REG currently owns and operates biodiesel plants in Ralston, IA and
Houston, TX and has also entered into a merger agreement with Blackhawk Biodiesel and asset
purchase agreements with Central Iowa Energy and Western Iowa Energy. This means that our plant
manager and product marketer, REG and its affiliates, are competitors for a limited supply of
feedstock.
30
Table of Contents
The biodiesel industry is becoming increasingly competitive and we compete with some larger,
better financed entities which could impact our ability to operate
profitably. We face a
competitive challenge from larger biodiesel plants and from biodiesel plants owned and operated by
the companies that supply our inputs. Cargill, Inc., a large supplier of soybean oil, owns a 37.5
million gallon plant in Iowa Falls, Iowa. Another large corporation and supplier of soybean oil,
Archer Daniels Midland Co., has constructed an 85 million gallon plant in Velva, North Dakota to
process canola oil into biodiesel. Additionally, Biodiesel of Las Vegas is expected to begin
operations of a 100 million gallon per year multi-feedstock plant in the fourth quarter of 2009,
Imperium Renewables operates a 100 million gallon per year biodiesel plant in Grays Harbor,
Washington, and RBF Port Neches operates a 180 million gallon per year multi-feedstock plant in
Port Neches, Texas making these plants some of the largest biodiesel producers in the country.
These plants will be capable of producing significantly greater quantities of biodiesel than the
amount we expect to produce. Moreover, some of these plants may not face the same competition we
do for inputs as the companies that own them are suppliers of the inputs. In light of such
competition, lower prices for biodiesel may result which would adversely affect our ability to
generate profits and adversely affect our financial obligations.
Risks Related to Biodiesel Production
Declines in the demand for and prices of biodiesel and its primary co-product will have a
significant negative impact on our financial performance. Our revenues will be greatly affected by
the price at which we can sell our biodiesel and its primary co-product, glycerin. These prices
can be volatile as a result of a number of factors over which we have no control. These factors
include the overall supply and demand, the price of diesel fuel, level of government support, and
the availability and price of competing products, and domestic and global economic conditions. The
total production capacity of biodiesel continues to expand at this time. Demand may not rise to
meet the increase in supply, and increased production of biodiesel may lead to lower prices. Any
lowering of biodiesel prices may negatively impact our ability to generate profits.
We believe that the recent U.S. recession and global financial market turmoil may also depress
biodiesel demand and prices. Biodiesel prices have significantly declined over recent months. We
expect that we will operate below our nameplate capacity throughout our fiscal year 2010. If we
continue to operate at less than full capacity, this would have a negative impact on our revenues.
In addition, increased biodiesel production has lead to increased supplies of co-products such
as glycerin. While prices have been increasing after a dramatic drop in 2006, prices are still
lower than ten year historical prices. If the price of glycerin declines, our revenue from
glycerin may substantially decrease. Increased expenses and decreased sales prices for our
products will result in decreased revenues.
Because of volatile soybean oil prices, we are attempting to use alternative feedstocks, such
as corn oil, to produce our biodiesel, which may have risks and disadvantages of which we are not
yet fully aware. We are currently producing some of our biodiesel from corn oil that we obtain
from ethanol plants or other sources. Corn oil, however, poses several unique challenges due to
its moisture and solid content, as well as its elevated free-fatty-acid levels. Furthermore,
unlike many other oil sources, corn oil from ethanol plants contains waxy compounds and sterols.
This tends to cause a waxy substance to build-up in the process equipment during the production
process. Unless a process for removing this waxy substance is developed, we expect that we will
not be able to produce any biodiesel blends containing greater than 5% corn oil. The technology
utilized by the ethanol plant which extracts the corn oil may also cause the suitability of the
corn oil for the biodiesel production process to vary. These characteristics of corn oil could
cause corn oil-based biodiesel to be less desirable than other types of biodiesel. Furthermore,
special technologies may be necessary to pretreat corn oil for utilization in the biodiesel
production process. Accordingly, our use of alternative feedstocks, such as corn oil, may require
us to make modifications to our equipment, purchase new equipment or repair equipment that could
unexpectedly be damaged by the use of different feedstocks. There may be disadvantages to the use
of corn oil as a feedstock of which we are not yet aware. If as a result of the unique
characteristics of corn oil, the demand for or price we are able to receive for biodiesel produced
from corn oil is less than what we can receive for biodiesel produced from other types of
feedstock, our revenues could be negatively affected.
31
Table of Contents
The decreasing availability and volatile cost of feedstock may hinder our ability to
profitably produce biodiesel and may result in plant shut downs and decreased revenues. On
December 11, 2009, the USDA reported the November average cost of soybean oil was approximately
36.59 cents per pound, which is below the July 2008 peak prices but higher than a year ago.
Although prices have sharply dropped from the record high prices experienced in the summer of 2008,
the November average is still higher than historical averages. The ten-year average price for
soybean oil is approximately 26 cents per pound. In the USDA December 2009 Oil Crops Outlook
Report, it was forecasted soybean oil prices will likely remain close to current prices during the
2009/2010 marketing season, with a predicted price range of 35.5-38.5 cents per pound. Soybean oil
prices have been extremely volatile over the recent years. The declining global economic
conditions brought on by the collapse of major U.S. financial institutions in the fall of 2008 and
the disruption of the financial and credit markets likely contributed to the sharp drop in prices
from the summer of 2008 through fall of 2008. However, demand, supply, acres planted, weather,
soybean crush rates and many other factors can contribute to price volatility. Prices for animal
fats have also been volatile in recent months, as they tend to correlate to the prices of soybean
oil. In a December 2009 Oil Crops Outlook Report, the USDA provided that the average November 2009
prices for lard and edible tallow were 30.07 cents and 29.65 cents per pound, respectively, which
are down from their peak prices in the summer of 2008. These average prices, however, still exceed
their historical averages. We expect that this volatility in feedstock costs will continue through
the 2010 fiscal year. In the event we cannot obtain adequate supplies of feedstock at affordable
costs for sustained periods of time, then we may be forced to shut down the plant, either
temporarily or permanently. Shut downs or the persistence of recent high feedstock costs, or any
further increase of feedstock costs, may reduce our revenues from operations which could decrease
or eliminate the value of our units.
If we are forced to continue to have to temporarily cease operating our biodiesel plant, we
might not be able to meet our current liabilities and our losses may be increased. If we are forced
to temporarily cease operations at our biodiesel plant, either due to our inability to sell the
biodiesel we are producing, feedstock costs, our lack of working capital and available credit,
defects in our equipment at the plant, violations of environmental law, or any other reason, our
ability to produce revenue would be adversely affected. We do not have any source of revenues other
than production of biodiesel and glycerin at our biodiesel plant. If our plant were to cease
production for any significant period of time, we would not generate any revenue and we might not
be able to pay our debts as they become due, including payments required under our loan agreements
with our lender. If the plant ceases to operate for enough time, we might not be able to re-start
operations at the plant and our members could lose some or all of their investment.
We are at a disadvantage in marketing our glycerin because our plant will not produce
pharmaceutical grade glycerin, thereby decreasing the market for the glycerin we produce. A major
use of glycerin is in the production of drugs. The glycerin our plant produces, however, is not
pharmaceutical grade glycerin. This limits our ability to market the glycerin produced by our
biodiesel plant. The glycerin we produce has to be purified in order for it to be used in
pharmaceutical applications. Since the market in which we can sell our glycerin is limited, we
might not be able to sell all of the glycerin we produce or we may not be able to sell our glycerin
at a favorable price. If we cannot sell all of the glycerin we produce or cannot sell it at a
favorable price, our ability to operate our biodiesel plant profitably might be adversely affected
which could decrease the value of our units.
Competition from other sources of fuel may decrease the demand for our biodiesel. Diesel fuel
prices per gallon remain at levels below or equal to the price of biodiesel making it difficult for
the biodiesel industry to compete with the diesel fuel industry without government support
programs. In addition, other more cost-efficient domestic alternative fuels may be developed and
displace biodiesel as an environmentally-friendly alternative. If diesel prices do not continue to
increase or a new fuel is developed to compete with biodiesel, it may be difficult to market our
biodiesel, which could result in increased losses for our company.
Concerns about fuel quality may impact our ability to successfully market our biodiesel.
Industry standards impose quality specifications for biodiesel fuel. Actual or perceived problems
with quality control in the industry may lead to a lack of consumer confidence in the product and
hinder our ability to successfully market our biodiesel. An inability to successfully market our
biodiesel will lead to decreased revenues and may adversely impact our ability to operate at all.
32
Table of Contents
Cold weather may cause biodiesel to gel, which could have an adverse impact on our ability to
successfully market our biodiesel. The pour point for a fuel is the temperature at which the flow
of the fuel stops. A lower pour point means the fuel is usable in colder weather. The pour point
of 100% soy-based biodiesel is approximately 27ºF to 30ºF. The pour point for 100% tallow-based
biodiesel is approximately 61ºF. The pour point for No. 2 petroleum diesel fuel, the non-biodiesel
fuel currently used in machines, is approximately -30ºF. When diesel is mixed with soy-based
biodiesel to make a 2% biodiesel blend, the pour point is -25ºF. Therefore, we believe we will
need to blend soy-based biodiesel and animal fat-based biodiesel with petroleum diesel in order to
provide a biodiesel product that will have an acceptable pour point in cold weather. Generally,
biodiesel that is used in blends of 2% to 20% is expected to provide an acceptable pour point for
colder markets comparable to the No. 2 petroleum diesel pour point. In colder temperatures, lower
blends are recommended to avoid fuel system plugging. This may cause the demand for our biodiesel
in northern markets to diminish during the colder months.
The tendency of biodiesel to gel in colder weather may also result in long-term storage
problems. At low temperatures, fuel may need to be stored in a heated building or heated storage
tanks. This may result in a decrease in demand for our product in colder climates due to increased
storage costs.
Automobile manufacturers and other industry groups have expressed reservations regarding the
use of biodiesel, which could negatively impact our ability to market our biodiesel. Because it is
still a relatively new product, the research on biodiesel use in automobiles and its effect on the
environment is ongoing. Some industry groups, including the World Wide Fuel Charter, have
recommended that blends of no more than 5% biodiesel be used for automobile fuel due to concerns
about fuel quality, engine performance problems and possible detrimental effects of biodiesel on
rubber components and other parts of the engine. Although some manufacturers have
encouraged use of biodiesel fuel in their vehicles, cautionary pronouncements by others may
impact our ability to market our product.
In addition, studies have shown that nitrogen oxide emissions increase by 10% when pure
biodiesel is used. Nitrogen oxide is the chief contributor to ozone or smog. New engine technology
is available and is being implemented to eliminate this problem. However, these emissions may
decrease the appeal of our product to environmental groups and agencies who have been historic
supporters of the biodiesel industry, which may result in our inability to market our biodiesel.
Moreover, the EPA has made preliminary findings that soybean oil-based biodiesel does not
sufficiently decrease greenhouse gas omissions (when indirect land use changes are taken into
account) in order to qualify for the RFS. If these preliminary findings are reiterated in the
final EPA rules, demand for soybean oil-based biodiesel will likely further decrease.
Competition from other diesel fuel lubricity additives for ultra low sulfur diesel may be a
less expensive alternative to our biodiesel, which would cause us to lose market share and
adversely affect our ability to generate revenues. The Environmental Protection Agency (EPA) has
issued regulations to reduce the amount of sulfur in diesel fuel in order to improve air quality.
These regulations affect all diesel fuel available for retail sale since October 2006. The removal
of sulfur from diesel fuel also reduces its lubricity which must be corrected with fuel additives,
such as biodiesel which has inherent lubricating properties. Our biodiesel plant is expected to
compete with producers of other diesel additives made from other raw materials having similar
lubricity values as biodiesel, such as petroleum-based lubricity additives. Many major oil
companies produce these petroleum-based lubricity additives and strongly favor their use because
they may be used in lower concentrations than biodiesel. In addition, much of the infrastructure
in place is for petroleum-based additives. As a result, petroleum-based additives may be more
cost-effective than biodiesel. Therefore, it may be difficult to market our biodiesel as a
lubricity additive, which could adversely affect our ability to generate revenues.
Our management and operational services agreement with REG does not address feedstock
allocation between REG and its other customers which could lead to insufficient feedstock to
operate our plant and negatively affect our financial condition. We have entered into a MOSA with
REG, whereby REG acquires the feedstock that we require to operate our biodiesel plant. Our
agreement does not address the way in which REG allocates feedstock between us and the other
customers for which REG acquires soybean oil. If a shortage of feedstock was to occur, there is no
provision in the MOSA that requires REG to supply us with the feedstock we require as opposed to
REGs other customers, including REGs own biodiesel facilities. REG has already encountered
difficulties in obtaining enough feedstock for us to operate the plant at full capacity. If a
shortage of feedstock occurs, REG may not supply us with all of the feedstock we require to operate
the plant which could decrease our revenues and could decrease or eliminate the value of our units.
33
Table of Contents
Risks Related to Our Financing Plan
We are experiencing liquidity issues which could require us to cease operations. We are
experiencing liquidity issues associated with the high cost of our raw materials, decreased demand
for biodiesel, and the delay between when we purchase those raw materials and when we receive
payments from REG for sales of our finished products. We have exhausted the funds available under
our debt facilities and do not have further commitments for funds from any lender, other than the
offer sheet we have received from Washington State Bank and Federation Bank, current participants
in our Loan Agreement, for a line of credit of up to $1.5 million. We also do not currently have
significant cash reserves. Accordingly, we are currently lacking sufficient working capital to fund
continual operations at this time and, accordingly, we are only producing biodiesel when an order
for our product has been placed and when we have sufficient cash on hand to acquire the necessary
feedstock. Our lack of funds could cause us to further scale back production at our biodiesel
plant or cease operations altogether. These shutdowns could be temporary or permanent depending on
the cash we have available to continue operations. We are already not operating at full capacity.
Should we not be able to secure the cash we require to operate the plant and pay our obligations as
they become due, we may have to cease operations, either on a permanent or temporary basis, which
could decrease or eliminate the value of our units.
The loan agreement under which we obtained financing for the construction of our biodiesel
plant contains restrictive covenants. We have undertaken significant borrowings to finance the
construction of the biodiesel plant. Our loan agreements with our lender contain restrictive covenants which,
among other things, require us to maintain minimum levels of working capital, as well as debt
coverage and fixed charge coverage financial ratios. These covenants may restrict our ability to
make distributions on the units without the prior consent of our lender. In addition, failure to
comply with these covenants may constitute an event of default under our loan agreements. On
April 2, 2009, we received a written notice of default from Bankfirst (the Notice). The Notice
constituted a notice of default under Section 6.01(b) of the Loan Agreement, which provides the
Company has 30 days to cure the covenant defaults or it will be considered an event of default. The
Notice advises, and the Loan Agreement provides, that upon the occurrence of an event of default,
Bankfirst may exercise a variety of remedies afforded to them under the Loan Agreement, by
applicable law or equity, including without limitation, acceleration of the due date of the unpaid
principal balance of the Loan Agreement and all accrued but unpaid interest thereon. Further,
according to the mortgage and security agreement, Bankfirst may, during an event of default and in
accordance with applicable law, foreclose its mortgage on our real estate and its security interest
in our personal property and exercise any other remedies provided therein. We have not been able to
cure the defaults. Thirty days have passed since we received the Notice and Bankfirst has not
communicated with us in writing further on the matter.
In July 2009, however, Bankfirst was shut down by state regulators and the FDIC was named its
receiver. We are currently working with OSM as an interim administrative bank to make payments
under our Loan Agreement, until permanent assignment of our Loan Agreement is made. We anticipate
that early in the calendar year 2010 that Met Life will assume lead bank status under our Loan
Agreement and we will begin making payments to Bankers Trust as the permanent administrative bank
under our Loan Agreement. However, as of the date of this report, we have received no written
notification as to Bankfirsts successor. While BankFirst did not elect to exercise its remedies
under the Loan Agreement, there is no assurance that the receiver will not accelerate our existing
obligations which could greatly affect our ability to continue as a going concern. These liquidity
issues raise doubt about whether we will continue as a going concern. If our financial condition
does not improve substantially, which may not occur due to our historical performance and the
anticipated seasonal decrease in demand for biodiesel, we will continue to be in violation of these
covenants. In addition, our loan contains an event of default for any material adverse change in
our financial condition, and the term material adverse change is defined in such a way that
leaves this determination to the subjective opinion of our lender.
We may be unable to raise additional capital in the event our funds from operations and our
credit facilities are insufficient to fund our operations for the next twelve months. In the event
that the board of directors deems it necessary to obtain additional capital in order to fund plant
operations or to otherwise comply with the covenants contained in our financing agreements with our
lender during the next 12 months, the board of directors may decide to attempt to issue additional
membership units in our company through one or more private placements. In such event, however,
there is no guarantee that such an offering of our membership units would be successful in raising
the desired capital. Due to current market conditions in the biodiesel industry, such as the
increasing costs of soybean oil, animal fats, and methanol, and lack of demand for our biodiesel,
we may not be able to attract sufficient numbers of investors to provide us with the necessary
amount of additional capital. For the same reasons, we may be unable to obtain additional debt
financing for operations in the event we cannot raise sufficient capital. In such event, we may be
forced to shut down the plant, either temporarily or permanently, or we may continue to be unable
to comply with the loan covenants contained in our Loan Agreement, which entitles our lender to
accelerate payments under our Loan Agreement or foreclose its lien or security interest in the
assets securing the Loan Agreement.
34
Table of Contents
Our auditor has raised doubts about our ability to continue as a going concern and if we are
unable to continue our business, our units may have little or no value. As discussed in the
accompanying financial statements, we have generated accumulated losses of $10,884,041 since our
inception, have experienced significant increases in our input costs and undertaken significant
borrowings to finance the construction of our biodiesel plant. These liquidity issues raise doubts
about our ability to continue as a going concern. See Note 6 to the financial statements.
Moreover, our term loan is listed as a current liability because we have a going concern in the
notes to our financial statements and GAAP requires long term debt to be listed as a current
liability when a company has a going concern disclosure. In the event our lender declared a
default under the Loan Agreement and elected to accelerate our payments or take possession of our
assets securing the loans, we may be forced to shut down the plant and our members could lose some
or all of their investment. These factors have raised doubts as to our ability to continue as a
going concern.
Risks Related to Regulation and Governmental Action
Loss of or ineligibility for favorable tax benefits for biodiesel production could further
hinder our ability to operate at a profit and reduce the value of our units. The biodiesel
industry and our business are assisted by various federal biodiesel incentives. One such incentive
is the biodiesel blenders credit, which provides a tax credit of $1.00 per gallon of biodiesel.
The blenders credit is set to expire on December 31, 2009 and there can be no guarantees that it
will be extended beyond this date. These tax incentives for the biodiesel industry may not
continue, or, if they continue, the incentives may not be at the same level. The elimination or
reduction of tax incentives to the biodiesel industry, including the blenders tax credit, could
significantly reduce the market for biodiesel and could materially impair our ability to profitably
produce and sell biodiesel. The loss or reduction of the blenders tax credit would make it more
costly or difficult to produce and sell biodiesel and we could be forced to take significant cost
savings measures or temporarily or permanently cease production at our plant. If the federal tax
incentives are eliminated or sharply curtailed, we believe that a decreased demand for biodiesel
will result, which could depress biodiesel markets and negatively impact our financial performance.
A change in environmental regulations or violations thereof could result in the devaluation of
our units. We are subject to extensive air, water and other environmental regulations. We have
obtained all of the permits required to construct the plant and have obtained all the permits
currently required to operate the plant. Environmental laws and regulations, both at the federal
and state level, are subject to change and changes can be made retroactively. Consequently, even if
we have the proper permits at the proper time, we may be required to spend considerable resources
to comply with future environmental regulations or new or modified interpretations of those
regulations, which may increase our losses and could reduce or eliminate the value of our units.
The EPAs delay in implementing the RFS requirement that 500 million gallons of biomass-based
diesel be blended into the national diesel pool in 2009 and preliminary findings that soybean
oil-based biodiesel does not meet the RFS standards may hinder stimulation of demand for biodiesel
that may have otherwise been created by the 2007 amendments to the RFS program. The Energy
Independence and Security Act of 2007 (EISA) amended the Renewable Fuel Standard (RFS) program
originally created by the Energy Policy Act of 2005 by increasing the amount of biofuels that are
required to be blended into the national diesel pool annually through 2022. The EISA created a
biodiesel mandate requiring that 500 million gallons of biomass-based diesel fuel be used in
on-road fuel in 2009, increasing to 1 billion gallons in 2022. However, in November 2008, the EPA
announced that the RFS 2009 program will continue to be applicable to producers and importers of
gasoline only. This means that the 500 million gallons of biomass-based diesel required by the EISA
does not have to be blended into U.S. fuel supplies in 2009. The EPA indicated that this is due to
the fact that the regulatory structure of the original RFS program does not provide a mechanism for
implementing the EISA biomass-based diesel mandate. The EPA intends to propose options and develop
mechanisms for implementing the EISA biomass-based diesel requirements. Accordingly, the EPAs
delay in implementing the RFS biomass-based diesel mandate may hinder any growth in biodiesel
demand that may have otherwise been created if the 2009 mandate was implemented as originally
anticipated.
35
Table of Contents
Moreover, the RFS was modified in 2007 to require that advanced biofuels reduce life cycle
greenhouse gas emissions by 50% relative to gasoline sold or distributed in transportation. In May
2009, the EPA proposed rules that took into account indirect land use changes when calculating
greenhouse gas emissions. Based on the EPAs preliminary findings, soy-based biodiesel was found to
reduce greenhouse gas emissions by only 22%, which would disqualify it from counting towards the
RFS. Biodiesel from animal fat was found to reduce greenhouse gas emissions by approximately 80%.
The EPAs draft results did not measure biodiesel produced from corn oil. The EPA has announced
that it intends to publish final rules prior to the end of 2009; however, as of the date of this
report, such final rules have not been released. Any future delays in the implementation of the RFS
biomass-based diesel mandate or implementation of final rules that find soybean oil-based biodiesel
does not count towards the RFS could cause stagnant biodiesel demand, which could adversely affect
our ability to generate profits.
Risks Related to Conflicts of Interest
We may have conflicts of interest with REG, which may cause difficulty in enforcing claims
against REG. Until the MOSA terminates (which is set to occur on July 10, 2010), we anticipate REG
to continue to be involved in substantially all material aspects of our operations. There is no
assurance that our arrangements with REG are as favorable to us as they could have been if obtained
from unrelated third parties. In addition, because of
the extensive roles that REG has in the operation of the plant, it may be difficult or
impossible for us to enforce claims that we may have against REG. We are currently in arbitration
with REG, based on our claims against REG for breach of the MOSA, which may exacerbate REGs
conflict of interest. Such conflicts of interest may increase our losses and reduce the value of
our units and could result in reduced distributions to investors.
REG and its affiliates may also have conflicts of interest because employees or agents of REG
are involved as owners, creditors and in other capacities with other biodiesel plants in the United
States. We cannot require REG to devote its full time or attention to our activities. As a result,
REG may have conflicts of interest in allocating personnel, materials and other resources to our
biodiesel plant.
Our directors may have relationships with individuals, companies or organizations with which
we do business which may result in conflicts of interest. There may be business relationships
between our directors and other individuals, companies or organizations with which we do business
that may pose potential conflicts of interest with us. These relationships may result in conflicts
of interest with respect to transactions between us and the other individuals, companies or
organizations if our directors and officers put their interests in other companies or their own
personal relationships ahead of what is best for our company.
Risks Related to Tax Issues in a Limited Liability Company
We expect to be taxed as a partnership, however, if we are taxed as a corporation we could be
subject to corporate level taxes which could decrease our net income, if any, and decrease the
amount of cash available to distribute to our members. We expect that our company will continue to
be taxed as a partnership. This means that our company does not pay any company level taxes.
Instead, the members are allocated any income or losses generated by our company based on the
members ownership interest, and could pay taxes on the members share of our income, if any. If we
are not taxed as a partnership, our company could be liable for corporate level taxes which would
decrease our net income, if any, which may decrease the cash we have to distribute to our members.
Members may be allocated a share of our taxable income that exceeds any cash distributions
received, therefore members may have to pay this tax liability using their personal funds. We
expect to continue to be taxed as a partnership. This means members are allocated a percentage of
our taxable income or loss based on their ownership interest in our company. Members may have tax
liability based on their allocation of this income, if any. We may make distributions that are less
than the amount of tax members owe based on their allocated percentage of our taxable income, or we
may not make any distributions. If this is the case, members would have to satisfy this tax
liability using their personal funds.
If we are audited by the IRS resulting in adjustments to our tax returns, this could cause the
IRS to audit members tax returns, which could lead to additional tax liability for our members.
The IRS could audit our tax returns and could disagree with tax decisions we have made on our
returns. This could lead to the IRS requiring us to reallocate items of income, gain, losses,
deductions, or credits that could change the amount of our income or losses that were allocated to
members. This could require adjustments to members tax returns and could lead to audits of
members tax returns by the IRS. If adjustments are required to members tax returns, this could
lead to additional tax liabilities for members as well as penalties and interest being charged to
members.
36
Table of Contents
We do not anticipate declaring distributions to members in the foreseeable future. We have
incurred a net loss of $3,320,609 as of our fiscal year ended September 30, 2009. We do not
anticipate that our board of directors will be declaring distributions to members in the
foreseeable future. Accordingly, members will not likely receive distributions on their units and,
in the event that members incur any tax liability as a result of their ownership of units in the
company, members may be required to satisfy such liability with their personal funds.
ITEM 2. PROPERTIES.
Our property consists primarily of the plant and the real estate upon which the plant sits
near Washington, Iowa. The plant is fully operational. The plant is located on an approximately 28
acre site located near Washington, Iowa. The site is approximately thirty-five miles from
Interstate 80 and thirty miles from the Mississippi River. We paid $420,000 for the site. The
plants address is 1701 East 7th Street, Washington, Iowa. The site is adjacent to the main line of
the Iowa Chicago & Eastern Railroad, which serves the plant. The plant consists of the following
buildings:
| Administrative building |
| Processing building |
| Pretreatment building |
| Storage tank farm |
The site also contains improvements such as rail tracks and a rail spur, landscaping, drainage
systems and paved access roads. Construction of the plant was substantially complete in June 2007.
All of our tangible and intangible property, real and personal, serves as the collateral for
the debt financing with Marshall Bankfirst Corporation (Bankfirst). Bankfirst has been seized by
the FDIC. We are currently working with OSM as an interim administrative bank to make payments
under our Loan Agreement, until permanent assignment of our Loan Agreement is made. We anticipate
that early in the calendar year 2010 that Met Life will assume lead bank status under our Loan
Agreement and we will begin making payments to Bankers Trust as the administrative bank under our
Loan Agreement. However, as of the date of this report, we have received no written notification
as to Bankfirsts successor. Regardless of the final receiver of our Loan Agreement, all of our
tangible and intangible property, real and personal, will continue to serve as collateral under our
Loan Agreement. Money borrowed under the Iowa Department of Economic Development loan is also
secured by substantially all of the companys assets, but is subordinate to the agreements with
Bankfirst.
ITEM 3. LEGAL PROCEEDINGS.
In February 2009, we gave notice to REG that it had breached the MOSA in a variety of manners
and requested the annual review of the MOSA, as provided for in the MOSA. After not receiving
requested information and being unable to resolve any disputes, in June 2009, we gave notice to REG
that we intended to proceed with arbitration to resolve disputes arising under the MOSA. On or
about October 30, 2009, we delivered our Statement of Claims to REG and the selected arbitrator
alleging the following: (1) breach of the MOSA for failure to utilize best efforts; (2) breach of
the covenant of good faith and fair dealing; (3) breach of fiduciary duties; (4) fraudulent
non-disclosure; and (5) negligent misrepresentation. On or about December 7, 2009, REG responded to
these claims and also asserted counterclaims for breach of written contract, breach of the covenant
of good faith and fair dealing, breach of oral contract and promissory estoppel, all of which arise
out of one customer issue. On or about December 16, 2009, we responded to the counterclaims. No
date has been set for the arbitration and no discovery has been initiated or completed.
37
Table of Contents
On November 4, 2009, three of our directors, Denny Mauser, William J. Horan and Warren L.
Bush, which are also members of The Biodiesel Group, LLC, (the TBG Directors), filed suit in the
Iowa District Court for Washington County against the remaining directors of our board of
directors: Michael J. Bohannan, Mark A. Cobb, Richard Gallagher, John Heisdorffer, Edwin
Hershberger and J. William Pim (Defendants). The TBG Directors requested temporary and permanent
injunctions against the Defendants, in an effort to reverse certain actions taken by Defendants,
acting as a majority of the board of directors. These actions include the adoption of an Executive
Committee Charter, the appointment of Defendants to the Executive Committee, and adoption of a
Resolution adopting the Amended and Restated Director and Officer Compensation Plan.
The TBG Directors claim that Defendants exceeded their authority, acting as a majority of the
board, in taking these actions. Defendants claim that under our amended and restated operating
agreement, Defendants were permitted and justified in taking such actions, due to recent
revelations regarding certain payments made in 2007 to the TBG Directors by predecessors in
interest to REG, which Defendants claim constitute a conflict of interest and breach of our amended
and restated operating agreement. Defendants filed a motion for summary judgment on November 16,
2009, on which arguments were heard on December 18, 2009, and a decision by the judge regarding
summary judgment is pending.
Iowa Renewable Energy is not a party to this lawsuit. However, under Section 5.20 of our
amended and restated operating agreement, we are required to indemnify and pay all judgments and
claims against each director or officer of ours relating to any liability or damage incurred by
reason of any act performed or omitted to be
performed by such director, or officer, in connection with our business. This indemnification
includes reasonable attorneys fees incurred by such director or officer in connection with the
defense of any action based on any such act or omission. These attorneys fees may be paid as
incurred, including those fees relating to all such liabilities under federal and state securities
laws as permitted by law. As a result, we may be required to indemnify Defendants for costs
incurred in defending this litigation.
At this time we are unable to predict whether such indemnification, if any, could have a
material effect on our financial statements, taken as a whole. We have been notified by our
insurance company that this litigation is not covered by director and officer insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matter to a vote of our unit holders through the solicitation of proxies
or otherwise during the fourth fiscal quarter of our fiscal year ended September 30, 2009.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
Market Information
There is no public trading market for our units. We have created a private qualified online
matching service in order to facilitate trading of our units, however; as of the date of this
report no trades have been completed on our private qualified online matching service. Our online
matching service consists of an electronic bulletin board that provides information to prospective
sellers and buyers of our units. We do not receive any compensation for creating or maintaining
the matching service. We do not become involved in any purchase or sale negotiations arising from
our qualified matching service. In advertising our qualified matching service, we do not
characterize Iowa Renewable Energy as being a broker or dealer in an exchange. We do not give
advice regarding the merits or shortcomings of any particular transaction. We do not receive,
transfer or hold funds or securities as an incident of operating the online matching service. We
do not use the bulletin board to offer to buy or sell securities other than in compliance with the
securities laws, including any applicable registration requirements. We have no role in effecting
the transactions beyond approval, as required under our amended and restated operating agreement,
and the issuance of new certificates. So long as we remain a public reporting company, information
about the Company will be publicly available through the SECs filing system. However, if at any
time we cease to be a public reporting company, we will continue to make information about the
Company publicly available on our website. No sales of our units have been completed under our
qualified online matching service.
38
Table of Contents
Unit Holders
As of September 30, 2009, we had approximately 640 unit holders of record.
Distributions
We have not declared or paid any distributions on our units. Our board of directors has
complete discretion over the timing and amount of distributions to our unit holders. However, our
amended and restated operating agreement requires the board of directors to endeavor to make cash
distributions at such times and in such amounts as will permit our unit holders to satisfy their
income tax liability in a timely fashion.
Equity Compensation Plans
We do not have any equity compensation plans under which equity securities of Iowa Renewable
Energy are authorized for issuance.
Sale of Unregistered Securities
We did not make any sales of equity securities that were unregistered during the fiscal year
ended September 30, 2009.
Repurchases of Equity Securities
Neither we, nor anyone acting on our behalf, has repurchased any of our outstanding units.
ITEM 6. SELECTED FINANCIAL DATA.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of
1934 and are not required to provide information under this item.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Cautionary Statements Regarding Forward Looking Statements
Throughout this report, we make forward-looking statements that involve future events, our
future performance, and our future operations and actions. In some cases, you can identify
forward-looking statements by the use of words such as may, should, plan, future, intend,
could, estimate, predict, hope, potential, continue, believe, expect or
anticipate or the negative of these terms or other similar expressions. These forward-looking
statements are only our predictions and involve numerous assumptions, risks and uncertainties. Our
actual results may differ from these forward-looking statements for many reasons, including the
following factors:
Changes in interest rates or the availability of credit;
Our ability to raise additional equity capital proceeds or obtain additional debt financing;
Overcapacity within the biodiesel industry resulting in increased competition and costs for feedstock and/or
decreased prices for our biodiesel and glycerin;
Decrease in the demand for biodiesel;
Actual biodiesel and glycerin production varying from expectations;
Economic consequences of the domestic and global economic downturn and recent financial crisis;
Availability and cost of products and raw materials, particularly soybean oil, animal fats, natural gas and
methanol;
Our ability to market and our reliance on third parties to market our products;
39
Table of Contents
Changes in or elimination of governmental laws, tariffs, trade or other controls or enforcement practices such as:
| national, state or local energy policy; |
||
| federal and state biodiesel tax incentives; |
||
| legislation establishing a renewable fuel standard or other legislation mandating the use of biodiesel or
other lubricity additives; or |
||
| environmental laws and regulations that apply to our plant operations and their enforcement; |
Total U.S. consumption of diesel fuel;
Fluctuations in petroleum and diesel prices;
Changes in plant production capacity or technical difficulties in operating the plant;
Changes in our business strategy, capital improvements or development plans;
Results of our hedging strategies;
Competition with other manufacturers in the biodiesel industry;
Our ability to generate free cash flow to invest in our business and service our debt;
Our liability resulting from litigation;
Our ability to retain key employees and maintain labor relations;
Changes and advances in biodiesel production technology;
Competition from alternative fuels and alternative fuel additives;
Failure to comply with loan covenants contained in our financing agreements;
Our ability to continue to export our biodiesel;
The imposition of tariffs or other duties on biodiesel imported into Europe;
Our ability to generate profits; and
Other factors described elsewhere in this report.
We are not under any duty to update the forward-looking statements contained in this report.
We cannot guarantee future results, levels of activity, performance or achievements. We caution
you not to put undue reliance on any forward-looking statements, which speak only as of the date of
this report. You should read this report and the documents that we reference in this report and
have filed as exhibits completely and with the understanding that our actual future results may be
materially different from those we currently expect. We qualify all of our forward-looking
statements by these cautionary statements.
Overview
Our plant is currently fully operational. We began producing biodiesel on July 10, 2007.
After obtaining independent testing of our biodiesel to certify that our biodiesel meets the
American Society for Testing and Materials (ASTM) standards, we began shipping our first lot of
7,200 gallons of biodiesel on July 12, 2007. The plant was operating at full capacity until the
end of September 2007, with only minor temporary shut downs for maintenance and a weather-related
power outage. Since the beginning of October 2007, we have only been operating to produce biodiesel
to satisfy existing contracts for the sale of our biodiesel and have not been producing biodiesel
for speculation. This has allowed us to avoid excess inventory, but also, resulted in several
plant shutdowns. During the fourth quarter of fiscal year 2009, we operated our plant at
approximately 36% of our plants capacity.
40
Table of Contents
Most of our shutdowns have been due to:
| Our inability to obtain adequate amounts of feedstock in a timely manner; |
| Our inability to obtain adequate amounts of feedstock at competitive costs; |
| Lack of demand for biodiesel; |
| Lack of biodiesel contracts at profitable margins; and |
| Inadequate funds to obtain feedstock due to having to pay for feedstock while
waiting for payments from our biodiesel sales. |
From October 1, 2008 through September 30, 2009 we produced approximately 9,507,597 gallons
of biodiesel, which is only approximately 32% of our plants capacity. We anticipate operating the
plant at similar levels during our fiscal year 2010; however, our ability to operate depends upon many factors
outside of our control, such as the demand for biodiesel, price for biodiesel and cost of
feedstock. If demand for biodiesel remains at its current low levels, or drops further during our
fiscal year 2010 we will likely operate at even lower levels. We do not however, anticipate
speculatively producing biodiesel in the next 12 months. Therefore, if demand does not increase
such that we can obtain contracts for the same amount of biodiesel that we produced during our
fiscal year 2009, then we may operate at a lower production rate than during our fiscal year 2009.
In addition, we have been experiencing liquidity difficulties since beginning our operations and if
these conditions do not improve, or get worse, during our fiscal year 2010 then we will likely
operate our plant at lower levels than we did during our fiscal year 2009.
On February 1, 2008, our $34,715,000 Loan Agreement with Bankfirst converted from a
construction loan to a term loan, which requires monthly principal and interest payments. As of
the date of this report, we have timely paid all of our monthly payments under the Loan Agreement,
however; we made draws from our debt service reserve for the principal portions of our September
and October 2009 payments. We began to replenish our debt service reserve in December 2009 and
anticipate it will be completely replenished in January 2010. The Loan Agreement with Bankfirst
currently contains covenants that require a minimum ratio for current assets to current liabilities
(working capital ratio) and a minimum debt coverage and fixed charge coverage ratios.
On April 2, 2009, we received a written notice of default from Bankfirst (the Notice). The
Notice constituted a notice of default under Section 6.01(b) of the Loan Agreement, which provides
the Company has 30 days to cure the covenant defaults or it will be considered an event of default.
The Notice advises, and the Loan Agreement provides, that upon the occurrence of an event of
default, Bankfirst may exercise a variety of remedies afforded to them under the Loan Agreement, by
applicable law or equity, including without limitation, acceleration of the due date of the unpaid
principal balance of the Loan Agreement and all accrued but unpaid interest thereon. Further,
according to the mortgage and security agreement, Bankfirst may, during an event of default and in
accordance with applicable law, foreclose its mortgage on our real estate and its security interest
in our personal property and exercise any other remedies provided therein. We have not been able to
cure the defaults. Thirty days have passed since we received the Notice and Bankfirst has not taken
any further action or communicated with us in writing further on the matter. In July 2009, however,
Bankfirst was shut down by state regulators and the FDIC was named its receiver. We are currently
working with OSM as an interim administrative bank to make payments under our Loan Agreement, until
permanent assignment of our Loan Agreement is made. We anticipate that early in the calendar year
2010 that Met Life will assume lead bank status under our Loan Agreement and we will begin making
payments to Bankers Trust as the administrative bank under our Loan Agreement. However, as of the
date of this report, we have received no written notification as to Bankfirsts successor. We have
been in discussions with the group of bank participants in our Loan Agreement regarding our
liquidity issues and have received a written offer sheet from Washington State Bank and Federation
Bank, current participants in our Loan Agreement, for a line of credit of up to $1.5 million. If
we closed on a new line of credit, we anticipate this would improve our liquidity.
While BankFirst did not elect to exercise its remedies under the Loan Agreement, there is no
assurance that the receiver, or our new lead bank, will not accelerate our existing obligations
which could greatly affect our ability to continue as a going concern. These liquidity issues raise
doubt about whether we will continue as a going concern. If our financial condition does not
improve substantially, which may not occur due to our historical performance and the anticipated
seasonal decrease in demand for biodiesel, we will continue to be in violation of these covenants.
In addition, our loan contains an event of default for any material adverse change in our financial
condition, and the term material adverse change is defined in such a way that leaves this
determination to the subjective opinion of our lender.
41
Table of Contents
Plan of Operations for the Next 12 Months
Plant Operations
We expect to spend the next 12 months engaging in the production of biodiesel and glycerin at
our plant. Our plant is fully operational. We are actively producing biodiesel at our plant,
although not at full capacity.
Results of Operations
Comparison of Fiscal Years Ended September 30, 2009 and September 30, 2008
The following table shows the results of our operations and the percentage of revenues, costs
of goods sold, operating expenses and other items to total revenues in our statements of operations
for the fiscal years ended September 30, 2009 and September 30, 2008.
Income Statement | Fiscal Year Ended | Fiscal Year Ended | ||||||||||||||
Data | September 30, 2009 | September 30, 2008 | ||||||||||||||
Revenues |
$ | 29,132,604 | 100.00 | % | $ | 67,135,224 | 100.00 | % | ||||||||
Cost of Goods Sold |
$ | 29,795,410 | 102.28 | % | $ | 67,000,778 | 99.80 | % | ||||||||
Gross Profit (Loss) |
$ | (662,806 | ) | (2.28 | )% | $ | 134,446 | 0.20 | % | |||||||
Operating Expenses |
$ | 1,421,907 | 4.88 | % | $ | 1,729,356 | 2.58 | % | ||||||||
Interest Income |
$ | 36,579 | 0.13 | % | $ | 91,762 | 0.14 | % | ||||||||
Interest (Expense) |
$ | (1,272,475 | ) | (4.37 | )% | $ | (2,281,776 | ) | (3.40 | )% | ||||||
Net (Loss) |
$ | (3,320,609 | ) | (11.40 | )% | $ | (3,784,924 | ) | (5.64 | )% |
Our operating results generally reflect the relationship between the price of biodiesel and
the costs of feedstocks used to produce our biodiesel. Because biodiesel is used as an additive or
alternative to diesel fuel, biodiesel prices are strongly correlated to petroleum-based diesel fuel
prices. Historically, the price of biodiesel has fluctuated with the price of diesel fuel. In
addition, the price of biodiesel is generally influenced by factors such as general economic
conditions, the weather, and government policies and programs. Surplus biodiesel supplies also
tend to put downward price pressure on biodiesel. Additionally, prices for diesel and the costs of
feedstock, including soybean oil or animal fats, have been volatile and such fluctuations in the
cost of feedstock may significantly affect our financial performance. Our results of operations
will benefit when the margin between biodiesel prices and feedstock costs widens and will be harmed
when this margin narrows. The biodiesel industry experienced very high feedstock costs during the
summer of 2008, without corresponding increases in biodiesel prices, thereby causing profit margins
to be small or nonexistent. More recently, the biodiesel industry has been experiencing dropping
feedstock costs; however, biodiesel prices have dropped even more rapidly, resulting in continued
small or nonexistent profit margins. We expect these price relationships to continue for the
foreseeable future. In addition, our revenues are also impacted by such factors as our dependence
on one or a few major customers who market and distribute our products; the intensely competitive
nature of our industry; the extensive environmental laws that regulate our industry; possible
legislation at the federal, state and/or local level; and changes in federal biodiesel tax
incentives.
42
Table of Contents
Revenues
Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||
Revenue Source | Amount | % of Revenues | Amount | % of Revenues | ||||||||||||
Biodiesel Sales |
$ | 24,995,232 | 86 | % | $ | 57,539,313 | 86 | % | ||||||||
Glycerin Sales |
$ | 486,327 | 2 | % | $ | 1,887,636 | 3 | % | ||||||||
Fatty Acids and
Soapstock Sales |
$ | 424,978 | 1 | % | $ | 901,617 | 1 | % | ||||||||
Federal Incentives |
$ | 3,226,067 | 11 | % | 6,806,658 | 10 | % | |||||||||
Total Revenues from Sales |
$ | 29,132,604 | 100 | % | $ | 67,135,224 | 100 | % | ||||||||
Revenues from operations for the fiscal year ended September 30, 2009 totaled $29,132,604
compared with $67,135,224 for the fiscal year ended September 30, 2008. Included within our total
revenues for the fiscal year ended September 30, 2009 and 2008 are approximately $3,226,067 and
$6,806,658 respectively, in incentives we received or which were receivable from certain federal
government programs for the sale of our biodiesel. Revenues in fiscal year 2009 were approximately
half the revenues in fiscal year 2008. The decrease in revenues was due primarily to decreased
production and sales volume of biodiesel, glycerin, fatty acids and soapstock. The decrease in
production volume was due to lack of demand and contracts for our biodiesel.
Lower biodiesel prices in fiscal 2009 compared to fiscal 2008, combined with a decrease in
biodiesel sales volume, contributed to the lower total revenues in fiscal year 2009 as compared
with fiscal year 2008. Average biodiesel sale prices during most of the year ended September 30,
2009 trended downward from the average biodiesel sale prices we experienced in the same period in
2008. The average biodiesel sale price we received for the year ended September 30, 2009 was
approximately 32% lower than our average biodiesel sale price for the comparable period in 2008.
Because biodiesel is primarily used as an additive to petroleum-based diesel, biodiesel prices
have generally correlated to diesel fuel prices. Diesel prices have climbed over the past several
years reaching record highs of over $4.70 per gallon in July 2008, but have since trended downward,
as oil prices have plummeted and the U.S. economic downturn and credit crisis have contributed to a
decrease in demand for fuel in general. According to the Energy Information Administration, average
retail prices for No. 2 Ultra Low Sulfur Diesel peaked at over $4.70 per gallon in July 2008, but
rapidly dropped thereafter to approximately $2.75 per gallon as of early December 2009. Biodiesel
prices have followed a similar trend, peaking in the summer of 2008 and declining thereafter.
Nonetheless, diesel fuel prices per gallon remain at levels below or equal to the price of
biodiesel. For example, the price for B100 biodiesel in Iowa was approximately $3.25 to $3.50 per
gallon for the week of December 11, 2009, according to the USDAs Weekly Ag Energy Round-Up report. However, according
to the Energy Information Administration, Midwestern diesel fuel prices as of the week of December
14, 2009 averaged approximately $2.72 per gallon, which is slightly lower than the price per gallon
for B100 biodiesel after the tax credit. The premium of biodiesel prices over diesel prices could
cause a reduction in the demand for biodiesel. Through most of fiscal year 2008, biodiesel prices
steadily increased and were well above historical highs and, therefore helped, to a certain extent,
to offset high input costs, such as soybean oil. However, we expect that a continued drop in
biodiesel prices without a corresponding decrease in the cost of feedstock and other inputs will
cause the profit margin on each gallon of biodiesel produced to continue to be small to
nonexistent, which could result in significant losses. Due to the volatility of the global
economic conditions and commodities markets, it is uncertain whether biodiesel prices and input
costs will continue to decrease or whether they will rebound to the higher prices experienced in
the summer of 2008.
Based on historical trends, we anticipate that seasonal demand for biodiesel will decrease in
the fall and winter months when blenders have typically decreased their biodiesel blend percentages
due to cold flow concerns. Such decrease in demand could cause downward pressure on biodiesel sale
prices. We anticipate the RFS will increase demand for biodiesel; however, until the EPA final
rules under the RFS are released it is unclear what impact, if any, the RFS will have on biodiesel
demand. Our financial condition may be negatively affected by decreases in the sales price of
biodiesel. This is especially true during periods when feedstock costs for soybean oil and animal
fats are relatively high, causing our profit margins to decrease even further.
43
Table of Contents
We also believe that recent U.S. and global economic downturn and the financial crisis that
led to a collapse of a variety of major U.S. financial institutions and the federal governments
passage of a $700 billion bailout plan may also place downward pressure on the demand for fuel,
including biodiesel. These factors have caused significant upheaval in the financial markets and
economy of the U.S., as well as abroad. Credit markets have tightened and lending requirements
have become more stringent. Commodity markets have tumbled as a result of the recent economic
turmoil, causing oil and other commodity prices to drop significantly. We expect that these
conditions may lead to a decline in biodiesel demand and it is uncertain for how long and to what
extent these financial troubles may negatively affect biodiesel demand in the future.
Excess production capacity in the biodiesel industry could make it difficult for us to market
our products at profitable prices. The National Biodiesel Board estimates that current dedicated
biodiesel production capacity of existing plants as of June 22, 2009 (the most recent date for
which data is available) was about 2.69 billion gallons per year, which is up from approximately
1.92 billion gallons per year as of September 2007. The National Biodiesel Board also estimates
that plants under construction and expansion as of June 22, 2009 could add another 427.8 million
gallons to U.S. biodiesel production capacity, for a total annual production capacity of 3.89
billion gallons. Despite these significant increases in production capacity, the National
Biodiesel Board estimates that only 700 million gallons of biodiesel were produced in 2008. Many
biodiesel plants do not operate at full capacity due in part to the fact that total production
capacity significantly exceeds demand. If the demand for biodiesel does not grow at the same pace
as increases in supply, we expect the price for biodiesel to decline in the long-term.
Higher crude glycerin sales prices in fiscal 2009 compared to fiscal 2008, did not, however;
result in increased revenues. This is because even though demand for glycerin has increased, we
produced less biodiesel in our fiscal year 2009 due to decreased demand for biodiesel, which meant
we had less of our primary by-product, glycerin, to sell. The sales price of glycerin has increased
due to increased demand for crude glycerin, which has trended upwards due to expanding glycerin
refining capacity and increasing uses for glycerin.
We expect our results of operations to benefit from federal and state biodiesel supports and
tax incentives. Biodiesel has generally been more expensive to produce than petroleum-based diesel
and, as a result, the biodiesel industry depends on such incentives to be competitive. Changes to
these supports or incentives could significantly impact demand for biodiesel. The most significant
of these are the biodiesel blenders credit, which is set to expire December 31, 2009, and the RFS.
See BUSINESS Government Regulation and Federal Biodiesel Supports.
We are highly dependent upon REG for the successful marketing of our products. We do not have
our own sales force and we do not have any other agreements or relationships with feedstock
suppliers. If REG breaches the agreement or does not have the ability, for financial or other
reasons, to market all of the biodiesel and glycerin we produce, we will not have any readily
available means to sell our biodiesel. Any loss of our relationship with REG could have a
significant adverse impact on our revenues. Moreover, REG has given us a termination notice under
the MOSA, which is now set to terminate on July 10, 2010. Our inability to retain a new marketer,
or negotiate a new agreement with REG, could have also have a significant adverse impact on our
revenues.
Cost of Goods Sold
The primary components of cost of goods sold from the production of biodiesel are raw
materials (soybean oil, animal fats, corn oil, methanol and other chemicals), energy (natural gas
and electricity), labor and depreciation on process equipment. Our business is sensitive to
feedstock costs. The cost of feedstock is the largest single component of the cost of biodiesel
production, typically accounting for 70-90% of the overall cost of producing biodiesel. Any
fluctuation in the cost of feedstock will alter the return on investment that our members receive.
Changes in the price or supply of feedstock are subject to and determined by market forces and
other factors over which we have no control, such as crop production, carryout, exports, government
policies and programs, and weather. Because biodiesel prices are strongly correlated to diesel fuel
prices, the biodiesel industry is unlike many other industries where finished product prices are
more strongly correlated to changes in production costs. This characteristic of the biodiesel
industry makes it difficult for biodiesel producers to pass along increased feedstock costs and,
therefore, increases in feedstock costs can significantly affect our ability to generate profits.
Cost of goods sold for our products for the year ended September 30, 2009 was $29,795,410,
which is approximately half that of cost of goods sold for the year ended September 30, 2008, which
was equal to $67,000,778. The decrease is primarily attributed to our lowered production rate. As
a percentage of revenues, our cost of goods sold increased slightly from fiscal year 2008 to fiscal
year 2009, which were 99.8% and 102.28%, respectively. This increase was due primarily to the
lowered selling price for our biodiesel.
44
Table of Contents
Our average soybean oil costs for the year ended September 30, 2009 were approximately 30%
lower than soybean oil costs for the year ended September 30, 2008. Likewise, animal fat costs for
the year ended September 30, 2009 were approximately 42% lower than animal fat costs for the fiscal
year ended September 30, 2008. In fiscal year 2009, we also utilized approximately 1.5 million
pounds of corn oil feedstock, which is consistent with the minimal amounts of corn oil used in
fiscal year 2008.
In order to minimize cost of goods sold, we have been increasingly utilizing lower-cost
feedstocks such as animal fats and corn oil in place of higher-cost feedstocks such as soybean oil
during the year ended September 30, 2009 as compared with the same period in 2008. In fiscal year
2008, approximately 68% of the feedstock used in our biodiesel production was animal fats and 32%
was soybean oil. In fiscal year 2009, by comparison, approximately 80% of feedstock used in
biodiesel production was animal fats, and approximately 20% was soybean oil.
In addition, natural gas has recently been available only at prices exceeding historical
averages. We expect continued volatility in the natural gas market. Global demand for natural gas
is expected to continue to increase,
which may further drive up prices. Any ongoing increases in the price of natural gas will increase
our cost of goods sold.
Commodity prices have been extremely volatile over the recent year, increasing by historic
proportions in the summer of 2008 before dropping rapidly over the past several months. Soybean
costs fell to $9.48 per bushel in November 2009, down from a high of approximately $13.30 per
bushel in July 2008, according to the USDAs December 2009 Oil Crop Outlook Report. Soybean oil
prices have followed a similar trend, which according to the USDAs December 2009 Oil Crop Outlook
Report, average soybean oil prices reached a peak of approximately 62.43 cents per pound in June
2008, but have come down to a price of 36.59 cents per pound in November 2009, which is
dramatically lower than the June 2008 peak. The drastic decrease in soybean oil prices is likely
due to the rapid changes in the global economy. The USDA National Weekly Ag Energy Round-Up Report
indicates that as of December 11, 2009, soybean oil prices in Iowa are approximately 35.59 to 38.15
cents per pound, which is up from the price range of 27.96 to 30.72 cents per pound one year ago.
The USDA forecasted that 2009/10 soybean oil prices would range from 35.5 to 38.5 cents per pound.
Accordingly, based on recent trends, management expects that cost of goods sold on the basis of a
per-gallon of soybean oil-based biodiesel sold may decrease below levels experienced in fiscal year
2009. However, management still expects that prices may remain volatile through fiscal year 2010.
It is uncertain to what extent and for how long domestic and global economic conditions may exert
downward pressure on the cost of soybean oil and other commodities. Because it takes more than
seven pounds of soybean oil to make a gallon of biodiesel, price fluctuations can have a
significant affect on our profit margin on each gallon of biodiesel produced and sold. Soybean
crushing, soybean acres planted, and weather conditions could increase volatility in the soybean
oil market. Animal fats prices have also increased significantly, although they still remain lower
than soybean oil prices.
Like soybean oil prices, animal fat costs also peaked in the summer of 2008. Although animal
fat costs did not reach prices as high as soybean oil prices in the summer of 2008, animal fat
costs nonetheless increased well above their historical average. The prices for animal fats tend to
move in relation to the price of other feedstocks such as soybean oil. Accordingly, as soybean oil
prices increase, animal fat costs will also likely increase and vice versa. According to the
USDAs December 2009 Oil Crop Outlook report, lard and edible tallow prices for November 2009 were
estimated at 30.07 cents and 29.65 cents per pound, respectively, which are down from their peak of
52.82 cents and 38.61 cents per pound, respectively, in July 2008. However, management expects that
prices may remain volatile throughout fiscal year 2010, as domestic and global economic conditions
and commodities markets may affect input prices, including animal fats.
Based on recent trends of soybean oil and animal fat costs, we expect that cost of goods sold
on a per-gallon basis may decrease below levels experienced in fiscal year 2009. However,
management still expects that prices may remain volatile through fiscal year 2010. It is uncertain
to what extent and for how long domestic and global economic conditions may exert downward pressure
on the cost of soybean oil and animal fats. We will attempt to utilize feedstocks that provide us
with the greatest margins on the sale of our biodiesel. Nonetheless, even if feedstock costs
continue to drop, decreases in the price at which we may sell our biodiesel and glycerin in the
future could still result in low profit margins, which could have an adverse affect on our net
income.
45
Table of Contents
We experienced a $560,099 net gain during the year ended September 30, 2009 related to our
derivative contracts, which is an increase from the $1,636,163 net loss recognized during the
fiscal year ended September 30, 2008. The decrease in net loss related to hedging is likely due to
reduction in our forward contracts and less volatile market conditions. We enter into option
contracts to reduce the risk caused by market fluctuations of soybean oil and home heating oil.
The contracts are used to fix the purchase price of our anticipated requirements of soybean oil in
production activities and to manage exposure to changes in biodiesel prices. The fair value of the
derivatives is continually subject to change due to the changing market conditions. As the value of
soybean oil and home heating oil fluctuate, the value of our derivative instruments are impacted,
which affects our financial performance. We anticipate continued volatility in our cost of goods
sold due to the timing and changes in value of derivative instruments relative to the cost of the
commodity being hedged.
Operating Expenses
Operating expenses for the year ended September 30, 2009 totaled $1,421,907, which is slightly
lower than operating expenses of $1,729,356 for the same period in 2008. This decrease is largely
due to the decline in our sales volume, which resulted in the marketer fee under our MOSA being
substantially less in 2009 when compared
to 2008. Operating expenses as a percentage of revenues increased slightly from fiscal year 2008
to fiscal year 2009, at 2.58% and 4.88% respectively. The increase in operating expenses as a
percentage of revenues is primarily due to our reduced production and sales price for our products.
We expect that our operating expenses for fiscal 2010 will remain fairly consistent if average
plant production levels remain consistent.
Other Income (Expenses)
Our other income and expenses for the fiscal year ended September 30, 2009 was interest
expense of $1,272,475 and interest income of $36,579, compared to an interest expense of $2,281,776
and interest income of $91,762 in 2008. The interest expense represents interest and amortization
costs. The decrease in interest expense was primarily the result of a decrease in our outstanding
borrowings and a decrease in our average interest rates.
Changes in Financial Condition
The following table highlights the changes in our financial condition from September 30, 2008
to September 30, 2009:
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
Current Assets |
$ | 5,746,294 | $ | 11,178,526 | ||||
Current Liabilities |
$ | 31,016,570 | $ | 35,640,464 | ||||
Members Equity |
$ | 12,281,381 | $ | 15,601,990 |
Current Assets. Current assets totaled $5,746,294 at September 30, 2009 down from
$11,178,526 at September 30, 2008. The decrease during this period is a result of decreased
receivables and depressed inventory values.
Current Liabilities. Total current liabilities totaled approximately $31,016,570 at
September 30, 2009, down slightly from $35,640,464 at September 30, 2008. This decrease was due
largely to the repayment of $3,339,767 of debt and a decrease in accounts payable as a result of a
reduction in production.
Members Equity. Members contributions at both September 30, 2009 and September 30,
2008 were equal to $23,165,422. Total members equity as of September 30, 2009 was $12,281,381,
down from $15,601,990 as of September 30, 2008. The decrease in total members equity is due to a
$3,320,609 loss during fiscal year 2009.
46
Table of Contents
Liquidity and Capital Resources
Cash Flow from Operating Activities. Net cash flow provided by operating activities
for the year ended September 30, 2009 totaled $4,039,052 compared to $15,075 used for the year
ended September 30, 2008. This increase was due to reduced payables and accrued expenses and
increases in hedging activity.
Cash Flow from Investing Activities. Net cash flow used in investing activities for
the year ended September 30, 2009 totaled $239,462, of which $156,301 was for increases in
restricted cash requirements and $83,161 used for capital expenditures for minor improvements to
our plant for efficiency and upgrade purposes.
Cash Flow from Financing Activities. Net cash used in financing activities for the
year ended September 30, 2009 totaled $3,339,767, which was payments on our long-term debt
financing.
Short-Term and Long-Term Debt Sources
In October 2006, we closed on our $34,715,000 debt financing with Bankfirst. The financing
with Bankfirst provided for a $29,715,000 term loan, with an interest rate during construction (the
first 14 months following loan closing) of 0.75% over the Prime Rate as of the effective date
reported in the Money Rates column of The Wall Street Journal. Our construction loan converted to
a term loan in February 2008. Starting on February 1, 2008 and on the 1st day of each month
thereafter, 59 monthly payments of principal and interest (which is prime plus 0.25%) is due and
payable through and including January 1, 2013. Payments are calculated in an amount necessary to
amortize the principal amount of this note plus interest thereon over a 10 year period. The
remaining unpaid principal balance, together with all accrued but unpaid interest, is due and
payable in full on January 1, 2013.
The term loan imposes various covenants upon us which may restrict our operating
flexibility. We are subject to several ratios in the term loan which may limit how we allocate our
sources of funds. The term loan imposes a negative covenant on distributions which may restrict our
ability to distribute earnings to our members. The term loan also requires us to obtain Bankfirsts
permission prior to making any significant changes in our material contracts with third-party
service providers.
In addition, we have a $5,000,000 revolving line of credit with Bankfirst. This loan
provides for the same interest options as under the term loan. Advances under the reducing
revolving credit note are available through the life of the commitment. The commitment reduces by
$900,000 semi-annually beginning July 1, 2012 and continuing through January 1, 2016, with a final
reduction at the expiration of the commitment on July 1, 2016 at which time any outstanding balance
shall be due and payable in full. The note requires interest payments based on unpaid principal.
The interest options are the same as those under the term loan.
We executed a mortgage in favor of Bankfirst creating a first lien on substantially all of our
assets, including our real estate, plant, all personal property located on our property and all
revenues and income arising from the land, plant or personal property for the loan and credit
agreements discussed above. As of the date of this report, we have timely paid all of our monthly
payments under the loan, however, for the September and October payments we made draws from our
debt service reserve for the principal portion of the payments. We began to replenish the draw on
our debt service reserve in December 2009 and anticipate it will be completely replenished in
January 2010. The Loan Agreement currently contains covenants that require a minimum ratio for
current assets to current liabilities (working capital ratio) and a minimum debt coverage and fixed
charge coverage ratios.
On April 2, 2009, we received a written notice of default from Bankfirst (the Notice). The
Notice constituted a notice of default under Section 6.01(b) of the Loan Agreement, which provides
the Company has 30 days to cure the covenant defaults or it will be considered an event of default.
The Notice advises, and the Loan Agreement provides, that upon the occurrence of an event of
default, Bankfirst may exercise a variety of remedies afforded to them under the Loan Agreement, by
applicable law or equity, including without limitation, acceleration of the due date of the unpaid
principal balance of the Loan Agreement and all accrued but unpaid interest thereon. Further,
according to the mortgage and security agreement, Bankfirst may, during an event of default and in
accordance with applicable law, foreclose its mortgage on our real estate and its security interest
in our personal property and exercise any other remedies provided therein. We have not been able to
cure the defaults. Thirty days have passed since we received the Notice and Bankfirst has not
communicated with us in writing further on the matter. In July 2009, however, Bankfirst was seized
by state regulators and the FDIC was named its receiver.
47
Table of Contents
We are currently working with OSM, a bank out of Minneapolis, Minnesota, as an interim
administrative bank to make payments under our Loan Agreement, until permanent assignment of our
Loan Agreement is made. We anticipate that early in the calendar year 2010 Met Life will assume
lead bank status under our Loan Agreement and we will begin making payments to Bankers Trust as the
administrative bank under our Loan Agreement. However, as of the date of this report, we have
received no written notification as to Bankfirsts successor. We have been in discussions with the
group of bank participants in our Loan Agreement regarding our liquidity issues and have received a
written offer sheet from Washington State Bank and Federation Bank, current participants in our
Loan Agreement, for a line of credit of up to $1.5 million. If we closed on a new line of credit,
we anticipate this would improve our liquidity.
While BankFirst did not elect to exercise its remedies under the Loan Agreement, there is no
assurance that the receiver, or our new lead bank, will not accelerate our existing obligations
which could greatly affect our ability to continue as a going concern. In addition, the blenders
credit is set to expire on December 31, 2009 and if it is not extended, we would likely be unable
to produce and sell biodiesel profitably, which would likely result in significant plant shut downs
either on a temporary or permanent basis. These liquidity issues raise doubt about whether we will
continue as a going concern. If our financial condition does not improve substantially, which may
not occur due to our historical performance and the anticipated seasonal decrease in demand for
biodiesel, we will continue to be in violation of these covenants. In addition, our loan contains
an event of default for any material adverse change in our financial condition, and the term
material adverse change is defined in such a way that leaves this determination to the subjective
opinion of our lender. Our term loan is listed as a current liability because we have a going
concern in the notes to our financial statements and generally accepted accounting principals (GAAP)
require long term debt to be listed as a current liability when a company has a going concern
disclosure.
Grants and Government Programs
We entered into a loan with the Iowa Department of Economic Development for $400,000. This
loan is part of the Iowa Department of Economic Developments Value Added Program and $100,000 of
the loan is forgivable and the $300,000 principal amount does not bear interest. The balance at
September 30, 2009 was $225,000.
In addition, on May 14, 2007 we entered into a Railroad Revolving Loan and Grant Program
Agreement with the Iowa Department of Transportation (IDOT) for an amount of up to $168,000 (or
13.3% of the cost for the railroad project, whichever is less) and a loan amount of up to $132,000
(or 10.5% of the cost for the railroad project, whichever is less). Interest on the loan amount is
at 3.67% per year for five years. The balance at September 30, 2009 was $275,478.
Critical Accounting Estimates
Management uses estimates and assumptions in preparing our financial statements in accordance
with generally accepted accounting principles. These estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the
reported revenues and expenses.
Revenue Recognition
Revenue from the production of biodiesel and its co-products is recorded when title transfers
to customers. Biodiesel and its co-products are generally shipped FOB from the plant.
Derivative Instruments and Hedging Activities
Accounting Standards Certification (ASC) Topic No. 815, Derivatives and Hedging Activities, or
ASC 815, requires a company to evaluate its contracts to determine whether the contracts are
derivatives. Certain derivative contracts may be exempt under ASC 815 as normal purchases or normal
sales, which 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. At this time, our forward
contracts related to the purchase of soy oil are considered normal purchases and, therefore, are
exempted from the accounting and reporting requirements of ASC 815.
48
Table of Contents
Commodity Price Risk Protection
We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as
soybean oil, and finished products, such as biodiesel, through the use of derivative instruments.
In practice, as markets move, we actively manage our risk and adjust hedging strategies as
appropriate. Although we believe our hedge positions accomplish an economic hedge against our
future purchases, they do not qualify for hedge accounting, which would match the gain or loss on
our hedge positions to the specific commodity purchase being hedged. We are using fair value
accounting for our hedge positions, which means as the current market price of our hedge positions
changes, the gains and losses are immediately recognized in our cost of goods sold. The immediate
recognition of hedging gains and losses under fair value accounting can cause net income to be
volatile from quarter to quarter due to the timing of the change in value of the derivative
instruments relative to the cost and use of the commodity being hedged.
During the year ended September 30, 2009, the gains/losses on our derivative instruments
relating to certain commodities, including soybean oil and heating oil, was a realized gain of
$692,002 and a change in unrealized loss of $131,903 for a net gain of $560,099. We recognized a
net loss of $1,636,163 during the year ended September 30, 2008, which consisted of a realized loss
of $2,211,551 and a change in unrealized gain of $575,388. The unrealized portion of any hedging
loss is subject to change with market fluctuations and may be offset by future higher-priced
biodiesel sales.
There are several variables that could affect the extent to which our derivative instruments
are impacted by price fluctuations in the cost of soybean oil or biodiesel. However, it is likely
that commodity cash prices will have the greatest impact on the derivative instruments with
delivery dates nearest the current cash price. As we move forward, additional protection may be
necessary. As the prices of these hedged commodities move in reaction to market trends and
information, our statement of operations will be affected depending on the impact such market
movements have on the value of our derivative instruments. Depending on market movements, crop
prospects and weather, these price protection positions may cause immediate adverse effects, but
are expected to produce long-term positive growth for the Company.
Impairment of long-lived assets
Long-lived assets, including property, plant and equipment, are evaluated for impairment on the
basis of undiscounted cash flows whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impaired asset is written down to our
estimated fair market value based on the best information available. Considerable management
judgment is necessary to estimate discounted future cash flows and may differ from actual cash
flows.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of
1934 and are not required to provide information under this item.
49
Table of Contents
ITEM 8. FINANCIAL STATEMENTS.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Members
Iowa Renewable Energy, LLC
Iowa Renewable Energy, LLC
We have audited the balance sheets of 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 Companys 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 Iowa Renewable Energy, LLC as of September 30, 2009 and 2008,
and the results of its operations and its cash flows for the years then ended in conformity with
U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 6 to the financial statements, the Company has suffered
losses from operations and has experienced significant increases in the input costs of its
products. This has created liquidity issues and caused the Company to be in violation of its bank
debt covenants and there is no assurance that such violations will be waived which, together raise
substantial doubt about the Companys ability to continue as a going concern. Managements plans
in regard to these matters are also described in Note 6. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
We were not engaged to examine managements assessment of the effectiveness of Iowa Renewable
Energy, LLCs internal control over financial reporting as of September 30, 2009 included in Item
9AT of the 10-K and, accordingly, do not express an opinion thereon.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
December 29, 2009
50
Table of Contents
Iowa Renewable Energy, LLC
Balance Sheets
September 30, 2009 and 2008
September 30, 2009 and 2008
2009 | 2008 | |||||||
Assets |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 649,297 | $ | 189,474 | ||||
Due from broker |
477,059 | 82,182 | ||||||
Accounts receivable, net of allowance for doubtful
accounts of 2009 $7,218; 2008 none |
1,090,753 | 4,469,451 | ||||||
Derivative financial instruments |
| 65,141 | ||||||
Federal incentive receivable |
146,182 | 747,741 | ||||||
Inventory |
3,265,653 | 5,580,906 | ||||||
Prepaids and other assets |
117,350 | 43,631 | ||||||
Total current assets |
5,746,294 | 11,178,526 | ||||||
Property and Equipment: |
||||||||
Land |
420,000 | 420,000 | ||||||
Plant and processing equipment |
40,742,442 | 40,673,235 | ||||||
Office building, furniture and fixtures |
572,769 | 572,632 | ||||||
Equipment and vehicles |
240,241 | 226,424 | ||||||
41,975,452 | 41,892,291 | |||||||
Accumulated depreciation |
(5,963,978 | ) | (3,313,970 | ) | ||||
36,011,474 | 38,578,321 | |||||||
Other Assets: |
||||||||
Cash, restricted by loan agreement |
1,201,118 | 1,044,817 | ||||||
Financing costs, net |
339,065 | 440,790 | ||||||
1,540,183 | 1,485,607 | |||||||
$ | 43,297,951 | $ | 51,242,454 | |||||
Liabilities and Members Equity |
||||||||
Current Liabilities: |
||||||||
Current maturities of long-term debt |
$ | 30,005,576 | $ | 33,345,343 | ||||
Accounts payable and accrued expenses |
944,232 | 2,295,121 | ||||||
Derivative financial instruments |
66,762 | | ||||||
Total current liabilities |
31,016,570 | 35,640,464 | ||||||
Long-Term Debt |
| | ||||||
Commitments |
||||||||
Members Equity: |
||||||||
Member contributions, net of issuance costs, units
outstanding 2009 and 2008 26,331 |
23,165,422 | 23,165,422 | ||||||
Accumulated (deficit) |
(10,884,041 | ) | (7,563,432 | ) | ||||
12,281,381 | 15,601,990 | |||||||
$ | 43,297,951 | $ | 51,242,454 | |||||
See
Notes to Financial Statements.
51
Table of Contents
Iowa Renewable Energy, LLC
Statements of Operations
Years Ended September 30, 2009 and 2008
Years Ended September 30, 2009 and 2008
2009 | 2008 | |||||||
Revenues: |
||||||||
Sales |
$ | 25,906,537 | $ | 60,328,566 | ||||
Federal incentives |
3,226,067 | 6,806,658 | ||||||
29,132,604 | 67,135,224 | |||||||
Cost of sales |
29,795,410 | 67,000,778 | ||||||
Gross profit (loss) |
(662,806 | ) | 134,446 | |||||
Operating expenses: |
||||||||
General and administrative |
1,383,907 | 1,691,356 | ||||||
Depreciation |
38,000 | 38,000 | ||||||
1,421,907 | 1,729,356 | |||||||
(Loss) before other income (expense) |
(2,084,713 | ) | (1,594,910 | ) | ||||
Other income (expense): |
||||||||
Interest income |
36,579 | 91,762 | ||||||
Interest expense |
(1,272,475 | ) | (2,281,776 | ) | ||||
Net (loss) |
$ | (3,320,609 | ) | $ | (3,784,924 | ) | ||
Weighted average units outstanding |
26,331 | 26,331 | ||||||
Net (loss) per unit basic and diluted |
$ | (126.11 | ) | $ | (143.74 | ) | ||
See
Notes to Financial Statements.
52
Table of Contents
Iowa Renewable Energy, LLC
Statements of Changes in Members Equity
Years Ended September 30, 2009 and 2008
Years Ended September 30, 2009 and 2008
Member | Accumulated | Total Members | ||||||||||||||
Member Units | Contributions | Deficit | Equity | |||||||||||||
Balance, September 30, 2007 |
26,331 | $ | 23,165,422 | $ | (3,778,508 | ) | $ | 19,386,914 | ||||||||
Net (loss) |
| | (3,784,924 | ) | (3,784,924 | ) | ||||||||||
Balance, September 30, 2008 |
26,331 | 23,165,422 | (7,563,432 | ) | 15,601,990 | |||||||||||
Net (loss) |
| | (3,320,609 | ) | (3,320,609 | ) | ||||||||||
Balance, September 30, 2009 |
26,331 | $ | 23,165,422 | $ | (10,884,041 | ) | $ | 12,281,381 | ||||||||
See Notes to Financial Statements.
53
Table of Contents
Iowa Renewable Energy, LLC
Statements of Cash Flows
Years Ended September 30, 2009 and 2008
Years Ended September 30, 2009 and 2008
2009 | 2008 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net (loss) |
$ | (3,320,609 | ) | $ | (3,784,924 | ) | ||
Adjustments to reconcile net (loss) to net cash
provided by operating activities: |
||||||||
Depreciation |
2,650,008 | 2,650,008 | ||||||
Amortization |
101,725 | 101,723 | ||||||
Unrealized (gain) loss on derivative financial instruments |
131,903 | (575,388 | ) | |||||
Change in working capital components: |
||||||||
(Increase) decrease in due from broker |
(394,877 | ) | 1,255,678 | |||||
Decrease in accounts receivable |
3,980,257 | 1,219,351 | ||||||
(Increase) decrease in inventory |
2,315,253 | (1,765,184 | ) | |||||
(Increase) in prepaids and other assets |
(73,719 | ) | (6,599 | ) | ||||
Increase (decrease) in accounts payable and accrued expenses |
(1,350,889 | ) | 920,410 | |||||
Net cash provided by operating activities |
4,039,052 | 15,075 | ||||||
Cash Flows from Investing Activities: |
||||||||
Purchase and construction of property and equipment |
(83,161 | ) | (22,481 | ) | ||||
Sales tax and utitlity refund from construction of property and equipment |
| 813,390 | ||||||
(Increase) in cash restricted |
(156,301 | ) | (1,044,817 | ) | ||||
Net cash used in investing activities |
(239,462 | ) | (253,908 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Proceeds from long-term borrowings |
| 1,717,442 | ||||||
Payment on long-term borrowings |
(3,339,767 | ) | (2,014,657 | ) | ||||
Net cash used in financing activities |
(3,339,767 | ) | (297,215 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
459,823 | (536,048 | ) | |||||
Cash and cash equivalents: |
||||||||
Beginning |
189,474 | 725,522 | ||||||
Ending |
$ | 649,297 | $ | 189,474 | ||||
Supplemental Disclosure of Cash Flow Information,
cash payments for interest |
$ | 1,119,767 | $ | 2,287,429 |
See Notes to Financial Statements.
54
Table of Contents
Iowa Renewable Energy, LLC
Notes to Financial Statements
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
Iowa Renewable Energy, LLC (the Company), located in Washington, Iowa, was formed in April 2005 to
pool investors to build a biodiesel manufacturing plant with an annual capacity of 30 million
gallons. The Company was in the development stage until July 2007, when it commenced operations.
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 those
estimates.
Concentrations of credit risk: The Companys 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.
Cash and cash equivalents: The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents.
Restricted cash: Includes deposits to custodial accounts held by our lender. Debt service
reserve: Commencing one month following the conversion date, the Company shall make monthly
deposits to a debt service reserve until such time as the balance equals $1,319,265. Monthly
deposits shall consist of not less than one-third of all available monthly projected EBITDA.
Capital improvements reserve: Commencing one month after the conversion date, the Company shall
make deposits into an account held by the Lender. The fund will be used to fund capital
improvements. During the term of the loan, the capital improvements reserve must be maintained at
$125,000.
Accounts receivable: Accounts receivable are presented at face value, net of the allowance
for doubtful accounts. The allowance for doubtful accounts is established through provisions
charged against income and is maintained at a level believed adequate by management to absorb
estimated bad debts based on historical experience and current economic conditions. The provision
for bad debts charged to expense was $7,218 and $135,170 for the years ended September 30, 2009 and
2008, respectively.
The Companys policy is to charge simple interest on trade receivables past due balances; accrual
of interest is discontinued when management believes collection is doubtful. Receivables are
considered past due based upon payment terms set forth at the date of the related sale. The Company
had no receivables accruing interest at September 30, 2009 or 2008
Inventory: Inventory is valued at the lower of cost or market using the first-in, first
out (FIFO) method. Inventory consists of the following as of September 30, 2009 and 2008:
2009 | 2008 | |||||||
Raw material |
$ | 1,418,828 | $ | 2,695,569 | ||||
Finished goods |
1,846,825 | 2,885,337 | ||||||
$ | 3,265,653 | $ | 5,580,906 | |||||
55
Table of Contents
Iowa Renewable Energy, LLC
Notes to Financial Statements
Organizational costs and startup costs: The Company expenses all organizational and
startup costs as incurred.
Property and equipment: Property and equipment is stated at cost. Depreciation of such
amounts commenced when
the plant began operations. Depreciation is computed using the straight-line method over the
following estimated useful lives:
Years | ||||
Plant and process equipment |
10 20 | |||
Office building |
10 20 | |||
Office equipment |
3 7 | |||
Other equipment and vehicles |
3 7 |
Maintenance and repairs are expensed as incurred; major improvements and betterments are
capitalized.
The Company reviews its property and equipment for impairment whenever events indicate that the
carrying amount of the asset may not be recoverable. An impairment loss is recorded when the sum of
the future cash flows is less than the carrying amount of the asset. The amount of the loss is
determined by comparing the fair market values of the asset to the carrying amount of the asset. No
loss has been recorded during the years ended September 30, 2009 or 2008.
Offering costs: The Company classifies all costs directly related to raising capital as
deferred offering costs until the capital is raised, at which point the costs were reclassified as
an offset to equity as issuance costs.
Financing costs: Deferred financing costs associated with the construction and revolving
loans and the $34,715,000 construction loan (Note 4) include expenditures directly related to
securing debt financing. These costs are being amortized using the effective interest method over
the 6-year term of the related debt agreement.
Derivative instruments: The Company has entered into derivative contracts to hedge its
exposure to price risk related to forecasted soybean oil purchases and forecasted biodiesel sales.
These derivative contracts are to be accounted for under Accounting Standards Codification (ASC)
Topic No. 815, Derivatives and Hedging. ASC 815 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in other contracts, and
for hedging activities. It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction.
Although the Company believes its derivative positions are economic hedges, none have been
designated as a hedge for accounting purposes and derivative positions are recorded on the balance
sheet at their fair market value, with changes in fair value recognized in current period earnings.
The following amounts have been included in cost of goods sold for the years ended September 30,
2009 and 2008:
2009 | 2008 | |||||||
Realized (gain) loss |
$ | (692,002 | ) | $ | 2,211,551 | |||
Change in unrealized (gain) loss |
131,903 | (575,388 | ) | |||||
Net (gain) loss |
$ | (560,099 | ) | $ | 1,636,163 | |||
Revenue recognition: Revenue from the production of biodiesel and related products is
recorded upon transfer of the risks and rewards of ownership and delivery to customers. Interest
income is recognized as earned.
56
Table of Contents
Iowa Renewable Energy, LLC
Notes to Financial Statements
Federal incentive payments and receivables: Revenue from federal incentive programs is
recorded when the Company has sold blended biodiesel and satisfied the reporting requirements under
the applicable program. When it is uncertain that the Company will receive full allocation and
payment due under the federal incentive program, it
derives an estimate of the incentive revenue for the relevant period based on various factors
including the most recently used payment factor applied to the program. The estimate is subject to
change as management becomes aware of increases or decreases in the amount of funding available
under the incentive programs or other factors that affect funding or allocation of funds under such
programs.
Cost of sales: The primary components of cost of sales from the production of biodiesel
products are raw materials (soybean oil, animal fats, hydrochloric acid, methanol, sodium
methylate, and chemicals), energy (natural gas and electricity), and labor. Cost of sales detail
for the years ended September 30, 2009 and 2008 is as follows:
Cost of Sales | 2009 Dollars | 2009 Percentage | 2008 Dollars | 2008 Percentage | ||||||||||||
Input costs (soy oil, chemicals, etc.) |
$ | 24,580,763 | 82.50 | % | $ | 58,780,600 | 87.73 | % | ||||||||
Plant wages and salaries |
733,760 | 2.46 | 824,139 | 1.23 | ||||||||||||
Utilities and wastee disposal |
1,055,769 | 3.4 | 1,847,708 | 2.76 | ||||||||||||
Fees-procurement |
142,591 | 0.48 | 253,547 | 0.38 | ||||||||||||
(Gain) loss on derivative financial
instruments |
(560,099 | ) | (1.88 | ) | 1,636,163 | 2.44 | ||||||||||
Depreciation |
2,612,008 | 8.77 | 2,612,008 | 3.90 | ||||||||||||
Maint., supplies and other expenses |
1,230,618 | 4.13 | 1,046,613 | 1.56 | ||||||||||||
Total cost of sales |
$ | 29,795,410 | 100.00 | % | $ | 67,000,778 | 100.00 | % | ||||||||
The negative margin in 2009 was in part due to our marketer committing to indexed contracts that
produced unfavorable margins, volatility in raw materials pricing and low production volumes. These
factors were significant components of the negative margin.
Shipping and handling costs: Shipping and handling costs are expensed as incurred and are
included in the cost of sales.
Income taxes: The Company is organized as a limited liability company which is accounted
for like a partnership for federal and state income tax purposes and generally does not incur
income taxes. Instead, the Companys earnings and losses are included in the income tax returns of
its members. Therefore, no provision or liability for federal or state income taxes has been
included in these financial statements.
Earnings (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 estimated fair value of financial instruments was
determined by reference to various market data and other valuation techniques as appropriate. The
carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses approximate their fair values because of the short maturity of these financial
instruments. The carrying value of the debt also approximates fair value as the interest rate
reprices when market interest rates change. The fair values of the derivate instruments are based
on quoted prices in active exchange-traded or over-the-counter markets.
The Company follows the guidance set forth in ASC Topic 820 for assets and liabilities recognized
at fair value on a recurring basis. ASC 820 establishes a framework for measuring fair value and
requires enhanced disclosures about assets and liabilities carried at fair value.
As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to
transfer a liability in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants at the measurement date. ASC 820 establishes a fair
value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels
as follows:
Level 1 Quoted prices are available in active markets for identical assets or liabilities as of
the reported date. The types of assets and liabilities included in Level 1 are highly liquid and
actively traded instruments with quoted
prices, such as commodity derivative contracts listed on the Chicago Board of Trade.
57
Table of Contents
Iowa Renewable Energy, LLC
Notes to Financial Statements
Level 2 Pricing inputs are other than quoted prices in active markets, but are either directly or
indirectly observable as of the reported date. The types of assets and liabilities included in
Level 2 are typically either comparable to actively traded securities or contracts or priced with
models using highly observable inputs.
Level 3 Significant inputs to pricing have little or no observability as of the reporting date.
The types of assets and liabilities included in Level 3 are those with inputs requiring significant
management judgment or estimation, such as the complex and subjective models and forecasts used to
determine the fair value of financial transmission rights.
The following table presents the fair value hierarchy for those assets and liabilities measured at
fair value on a recurring basis as of September 30, 2009. As required by ASC 820, financial assets
and liabilities are classified in their entirety based on the lowest level of input that is
significant to the fair value measurement. The Companys assessment of the significance of a
particular input to the fair value measurement requires judgment and may affect the valuation of
fair value assets and liabilities and their placement within the fair value hierarchy levels.
Total Carrying | Significant other | Significant | ||||||||||||||
Value at | Quoted prices in | observable | unobservable | |||||||||||||
September 30, | active markets | inputs | inputs | |||||||||||||
2009 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Liabilities |
||||||||||||||||
Derivative financial instruments
liabilities |
$ | 66,762 | $ | 66,762 | $ | | $ | |
The Company enters into various commodity derivative instruments, including forward contracts,
futures, options and swaps. The fair value of the Companys commodity derivatives is determined
using unadjusted quoted prices for identical instruments on the applicable exchange in which the
Company transacts. When quoted prices for identical instruments are not available, the Company uses
forward price curves derived from market price quotations. Market price quotations are obtained
from independent energy brokers, exchanges, direct communication with market participants and
actual transactions executed by the Company. Market price quotations for certain inputs are
generally readily obtainable for the applicable term of the Companys outstanding commodity
derivative instruments and, therefore, the Companys forward price curves for those locations and
periods reflect observable market quotes.
Subsequent events: The Company has considered subsequent events through December 29, 2009,
the date of issuance, in preparing the financial statements and notes thereto.
Recently adopted accounting standards: Effective with the quarter ended June 30, 2009, the
Company adopted ASC Topic 825, Interim Disclosures about Fair Value of Financial Instruments and it
did not have a material impact on its financial position or results of operations. ASC 825 requires
disclosures about fair value of financial instruments in interim and annual financial statements.
ASC 825 became effective for periods ending after June 15, 2009.
Effective with the quarter ended June 30, 2009, the Company adopted ASC Topic 855, Subsequent
Events and it did not have a material impact on its financial position or results of operations.
ASC 855 establishes general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of SFAS No. 162 (SFAS 168).
Under SFAS 168, the FASB Accounting Standards Codification (Codification) will become the source
of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules
and interpretive releases of the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the Codification will
supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered
non-SEC accounting literature not included in the Codification will become
non-authoritative. SFAS 168 is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. In the FASBs view, the issuance of SFAS 168 and the
Codification will not change GAAP, except for those nonpublic nongovernmental entities that must
now apply the American Institute of Certified Public Accountants Technical Inquiry Service Section
5100, Revenue Recognition, paragraphs 38-76. The adoption of SFAS 168 did not have a material
impact on our financial position or results of operations.
58
Table of Contents
Iowa Renewable Energy, LLC
Notes to Financial Statements
Note 2. Major Customer and Related Party
Iowa Renewable Energy, LLC entered into a marketing agreement with Renewable Energy Group (REG),
where REG makes efforts to market and sell all of the biodiesel produced. Sales to REG for the
years ended September 30, 2009 and 2008 were approximately $25.9 million and $60.3 million,
respectively. Related accounts receivable from REG as of September 30, 2009 and 2008 were
approximately $1.1 million and $4.5 million, respectively.
Iowa Renewable Energy, LLC also entered into procurement and management agreements with REG to
supply IRE with feedstocks and chemical inputs necessary for production and to manage operations.
These marketing, procurement and management agreements will expire on July 31, 2010; however, the
agreement will renew annually unless terminated by either party upon one years prior written
notice. Fees under this agreement are based on the number of biodiesel gallons produced and in
addition the agreement provides for payment of a yearly bonus based on the Companys net income.
Total fees expensed under the agreement for the years ended September 30, 2009 and 2008 were
$541,932 and $923,687, respectively.
REG provided the notice of termination of the agreement due to changes in the biodiesel market
since the agreements were originally signed. REG has proposed that the parties review and cooperate
to negotiate a new contract on terms mutually beneficial to the Company and REG; however, there is
no guarantee that a new contract will be signed. The Company is also exploring other options for
the marketing of their biodiesel, in the event a new contract is not signed. They may be unable to
find a new company to provide these management and operational services, or they may not enter into
a new agreement on favorable terms. Any lack of a provider for these services would have a negative
impact on our operations and financial position.
Note 3. Members Equity
The Company was formed on April 14, 2005 to have a perpetual life. The Company has one class of
membership unit with each unit representing a pro rata ownership interest in the Companys capital,
profits, losses and distributions. Income and losses are allocated to all members in proportion to
units held.
The Company was initially capitalized by 12 members of the original board of directors,
contributing an aggregate of $240,000 for 480 units. The Company was further capitalized by 78
members contributing an aggregate of $2,440,000 in exchange for 4,880 units. These units were
issued pursuant to a private placement memorandum, limited to Iowa residents in which the Company
offered a maximum of 6,000 units at a cost of $500 per unit for a maximum offering of $3,000,000,
with all funds collected being considered at-risk capital. Each investor was required to purchase a
minimum of 50 units for $25,000, with the option to purchase additional units in increments of one
unit for $500 thereafter up to a maximum purchase by a single investor of 100 units for $50,000.
Additionally, a total of 500 units were issued to the members of an entity related to the Company
through common ownership in exchange for project development services provided pursuant to a
consulting agreement. The private placement memorandum for the seed round offering was closed on
November 30, 2005.
In April 2006, the Company issued an Iowa registered offering of membership units. The intrastate
offering was set for a minimum of 17,595 membership units up to a maximum of 25,095 units for sale
at $1,000 per unit, for a minimum offering amount of $17,595,000 and a maximum offering amount of
$25,095,000. The minimum purchase requirements were 25 units for a minimum investment of $25,000.
The Company began the intrastate offering on April 17, 2006 which was completed on May 1, 2006. A
total of 19,371 membership units were issued to 508 members amounting to $19,371,000 of gross
proceeds.
59
Table of Contents
Iowa Renewable Energy, LLC
Notes to Financial Statements
In November 2006 the directors exercised 1,100 units at $500 per unit. 100 units were unexercised
and expired. In accordance with the Loan agreement, referenced in Note 4 below, the options funds
were used for construction contract obligations prior to the initial draw on the loan in December
2006.
Note 4. Long-Term Debt
Long-term debt consists of the following as of September 30, 2009 and 2008:
2009 | 2008 | |||||||
Note payable to Marshall Bank Group for construction loan (A) |
$ | 29,505,098 | $ | 32,760,343 | ||||
Note payable to the Iowa Department of Economic Development (B) |
225,000 | 285,000 | ||||||
Note payable to the Iowa Department of Transportation (C) |
275,478 | 300,000 | ||||||
$ | 30,005,576 | $ | 33,345,343 | |||||
Due to the liquidity issues addressed in Note 6, the debt has been classified as current.
(A) | On October 26, 2006, the Company entered into a $34,715,000 construction-term loan agreement
which was used to complete the biodiesel project. The loan consisted of two phases: a
construction phase where the Company made periodic requests for fund advances to meet
construction obligations and at the completion of construction, the loan converted to a
senior debt instrument. The note bears interest at prime plus .25% (3.5% as of September 30,
2009 and 5.25% as of September 30, 2008) and is due in monthly principal and interest payments
of $373,000. The Company was in violation of the debt covenants at September 30, 2009 and on
April 2, 2009 received a written notice of default from the lender (See Note 6). |
Debt service reserve: Commencing one month following the conversion date, the Company shall
make monthly deposits to a debt service reserve until such time as the balance equals $1,319,265.
Monthly deposits shall consist of not less than one-third of all available monthly projected
EBITDA.
Capital improvements reserve: Commencing one month after the conversion date, the Company
shall make deposits into a custodial account held by the Lender. The fund will be used to fund
capital improvements. During the term of the loan, the capital improvements reserve must be
maintained at $125,000.
Sinking fund: Commencing one month after the conversion date, one-third of all monthly
projected EBITDA shall be applied to reduce loan principal. At the point the outstanding principal
loan balance is reduced to $20,182,750 no additional sinking fund deposits will be required.
(B) | The Company has a $300,000 loan agreement and a $100,000 forgivable loan agreement with the
Iowa Department of Economic Development. The $300,000 loan is noninterest-bearing and due in
monthly payments of $5,000 beginning December 2006 for a term of 60 months with a balance as
of September 30, 2009 and 2008 of $125,000 and $185,000, respectively. Borrowings under this
agreement are collateralized by substantially all of the Companys assets and will be
subordinate to the $34,715,000 of financial institution debt. The $100,000 loan is forgivable
upon the completion of 36 months of the 60 month term. |
The $100,000 loan will be forgiven if the Company complies with certain employment and
production criteria defined in the agreement. In the event of noncompliance or default, the
loan will be repaid over a two-year period starting with the date of noncompliance,
including interest at 6%. |
(C) | The Company has a $132,000 loan agreement and a $168,000 forgivable grant agreement with the
Iowa Department of Transportation. The $132,000 loan bears interest at 3.67% beginning June
2008 and is due in semi-annual payments of $14,569 beginning December 2008 for a term of 60
months. The balance at September 30, 2009 was $107,478. Borrowings under this agreement are
collateralized by substantially all of the Companys assets and is not subordinate to the
$34,715,000 of financial instrument debt. The $168,000 grant is forgivable upon completion of
the loan agreement. |
60
Table of Contents
Iowa Renewable Energy, LLC
Notes to Financial Statements
(D) | In July 2009, the FDIC seized Marshall Bank First. Marshall Bank First had served as
Lead Bank for the
purposes of loan administration as described in item (A) above. In August the FDIC assigned
OSM as the
lead bank for administration of the Long-Term debt until a permanent lead bank could be
assigned. Management anticipates that Met Life will be assigned as the permanent lead bank
and that Bankers Trust will be assigned as the permanent administration bank, however, as of
the date of this filing, the Company has not been notified in writing regarding the
assignment of the permanent lead or permanent administration bank. |
Maturities with long-term debt are as follows:
Year ending September 30: |
||||
2010 |
$ | 3,308,977 | ||
2011 |
3,316,875 | |||
2012 |
3,377,751 | |||
2013 |
20,001,973 | |||
$ | 30,005,576 | |||
Note. 5 Lease Commitment and Other Contingencies
The Company leases a copier under a long-term operating lease that will expire in December 2010.
The lease requires payments of $275 per month plus applicable taxes.
Minimum lease payments under these operating leases for future years are as follows:
Year ending September 30: |
||||||||
2010 |
$ | 3,304 | ||||||
2011 |
1,377 | |||||||
$ | 4,681 | |||||||
The European Union is currently leveling tariffs on biofuels exported from the United States due to
subsidies paid on biofuels. These tariffs went into effect March 13, 2009. In July 2009, the
European Commission decided to extend these tariffs beyond their initial July 2009 expiration date
until 2014. The Company will likely face increased competition for sales of its biodiesel and
international demand for its product will likely decrease as a result of these tariffs. If any
governmental supports are modified or removed and decreased demand for the Companys biodiesel
results, its profitability will be reduced. Because biodiesel has historically been more expensive
to produce than diesel fuel, the biodiesel industry has depended on governmental incentives that
have effectively brought the price of biodiesel more in line with the price of diesel fuel to the
end user. These incentives have supported a market for biodiesel that might not exist without the
incentives. The most significant of these incentives for biodiesel is the blenders tax credit
which provides a $1.00 tax credit per gallon of pure biodiesel, or B100, to the first blender of
biodiesel with petroleum based diesel fuel. The blenders tax credit will expire on December 31,
2009 subject to any action Congress may take in 2010. The elimination or reduction of tax
incentives to the biodiesel industry could likely result in the Companys inability to produce and
sell biodiesel profitably.
61
Table of Contents
Iowa Renewable Energy, LLC
Notes to Financial Statements
Note 6. Going Concern
The accompanying financial statements have been prepared assuming that the Company will
continue as a going concern. Through September 30, 2009, the Company has generated accumulated
losses of $10,884,041, has experienced significant volatility in its input costs and undertaken
significant borrowings to finance the construction of the biodiesel plant. The loan agreements with
the Companys lender contains covenants that require a minimum ratio of current assets to current
liabilities (working capital ratio) minimum debt coverage and fixed charge coverage ratios. The
Company is not in compliance with these covenants at September 30, 2009 and it is projected that
the Company will fail to comply with one or more of the loan covenants throughout fiscal 2010.
Failure to comply with these loan covenants constitutes an event of default under the Companys
loan agreements which, at the election of the lender, could result in the acceleration of the
unpaid principal loan balance and accrued interest under the loan agreements or the loss of the
assets securing the loan in the event the lender elected to foreclose its lien or security interest
in such assets. In addition, the Companys loan agreement allows the lender to consider the Company
in default of the loan at any point for poor financial performance. These liquidity issues raise
doubt about whether the Company will continue as a going concern.
The Company has been in communication with its lender as to the steps it needs to take to
resolve this situation, but there can be no assurance that the lender will waive the Companys
noncompliance with any one or more of the loan covenants. The Companys ability to continue as a
going concern is dependent on the Companys ability to comply with the loan covenants and the
lenders willingness to waive any noncompliance with such covenants. Management anticipates that if
additional capital is necessary to comply with its loan covenants or to otherwise fund operations,
the Company may pursue strategies that could include issuing additional membership units through
one or more private placements, or to solicit a sale or merger of the Company with other strategic
partners. However, there is no assurance that the Company would be able to raise the desired
capital. The Company could elect to reduce its production capacity through the remaining winter
months by scaling back on biodiesel production or temporarily shutting down the biodiesel plant
depending on the Companys cash situation and its ability to purchase raw materials to operate the
plant. The Company may also seek to produce biodiesel on a toll basis where biodiesel would be
produced using raw materials provided by someone else. Finally, the blenders credit is set to
expire on December 31, 2009 and if it is not extended, the Company would likely be unable to
produce and sell biodiesel profitably, which would likely result in significant plant shut downs
either on a temporary or permanent basis.
62
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
McGladrey & Pullen, LLP is our independent registered public accounting firm at the present
time. The Company has had no disagreements with its auditors.
ITEM 9AT. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Our management, including our chief executive officer (the principal executive officer),
Michel Bohannan, along with our chief financial officer (the principal financial officer), Todd
Willson, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as
of September 30, 2009. Based on a review and evaluation, these officers believe that our
disclosure controls and procedures are 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.
Managements Report on Internal Control over Financial Reporting
Our management, including our chief executive officer and our chief financial officer, is
responsible for establishing and maintaining adequate internal control over financial reporting for
the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the Companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the Companys board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with Generally
Accepted Accounting Principles and includes those policies and procedures that:
| Pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the Company; |
| Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with Generally Accepted Accounting
Principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and |
| Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Companys assets that could have a
material effect on the financial statements. |
Our management assessed the effectiveness of our internal control over financial reporting as
of September 30, 2009. In making this assessment, the Companys management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on this assessment, our management concluded that, as of
September 30, 2009, our integrated controls over financial reporting were not effective because of
the material weakness discussed below.
Managements evaluation of the design and operating effectiveness of our internal controls
over financial reporting identified a material weakness with respect to a deficiency in the
operation of our controls, such that our internal control over financial reporting does not operate
as designed or the person performing the control does not possess the necessary authority or
competency to perform the control effectively. Our current chief financial officer is relatively
new to the position. Thus, we had several adjustments to our financial statements during the
period covered by this report which impacted our closing process and delayed the preparation of our
financial statements, including all required disclosures. In addition to this material weakness,
we noted significant deficiencies in our lack of segregation of duties, due to one person being
primarily responsible for all of our accounting activities. We are compensating for this
deficiency by close supervision and review by our board of directors.
63
Table of Contents
A material weakness is defined as a significant deficiency or combination of significant
deficiencies that results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected on a timely basis. A
significant deficiency is a deficiency or a combination of deficiencies in internal control over
financial reporting that is less severe than a material weakness, yet important enough to merit
attention by those responsible for oversight of our financial reporting.
We have taken the following steps to remediate the material weakness related to the operation of
our controls:
| We continue to provide training, oversight and guidance for our chief
financial officer; and |
| We have hired external assistance with our financial reporting. |
This annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to provide only
managements report in this annual report.
Changes in Internal Control Over Financial Reporting
Our management, consisting our chief executive officer and our chief financial officer, have
reviewed and evaluated any changes in our internal control over financial reporting that occurred
as of September 30, 2009 and there has been no change that has materially affected or is reasonably
likely to materially affect our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
The information required by this Item is incorporated by reference to the definitive proxy
statement for our 2010 annual Meeting of Members to be filed with the Securities and Exchange
Commission within 120 days after the end of our 2009 fiscal year. This proxy statement is referred
to in this report as the 2010 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the 2010 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBER
MATTERS.
The information required by this Item is incorporated by reference to the 2010 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated by reference to the 2010 Proxy
Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item is incorporated by reference to the 2010 Proxy
Statement.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The following exhibits are filed as part of, or are incorporated by reference into, this
report:
Method of | ||||||
Exhibit No. | Description | Filing | ||||
31.1 | Certificate pursuant to 17 CFR 240 13a-14(a)
|
* | ||||
31.2 | Certificate pursuant to 17 CFR 240 13a-14(a)
|
* | ||||
32.1 | Certificate pursuant to 18 U.S.C. Section 1350
|
* | ||||
32.2 | Certificate pursuant to 18 U.S.C. Section 1350
|
* |
(*) | Filed herewith. |
64
Table of Contents
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
IOWA RENEWABLE ENERGY, LLC |
||||
Date: December 29, 2009 | /s/ Mike Bohannan | |||
Mike Bohannan | ||||
Chairman and President | ||||
Date: December 29, 2009 | /s/ Todd Willson | |||
Todd Willson | ||||
Chief Financial Officer |
In accordance with the Exchange Act, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: December 29, 2009 | /s/ Mike Bohannan | |||
Mike Bohannan | ||||
Chairman and President | ||||
Date: December 29, 2009 | /s/ Mark Cobb | |||
Mark Cobb | ||||
Vice Chairman and Director | ||||
Date: December 29, 2009 | /s/ Dick Gallagher | |||
Dick Gallagher | ||||
Secretary and Director | ||||
Date: December 29, 2009 | /s/ Warren L. Bush | |||
Warren L. Bush, Director | ||||
Date: December 29, 2009 | /s/ William J. Horan | |||
William J. Horan, Director | ||||
Date: December 29, 2009 | /s/ Edwin J. Hershberger | |||
Edwin J. Hershberger, Director | ||||
Date: December 29, 2009 | /s/ John Heisdorffer | |||
John Heisdorffer, Director | ||||
Date: December 29, 2009 | /s/ William J. Pim | |||
William J. Pim, Director | ||||
Date: December 29, 2009 | /s/ Denny Mauser | |||
Denny Mauser, Director |
65