Attached files
file | filename |
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EX-32 - EX-32 - Advanced BioEnergy, LLC | c56331exv32.htm |
EX-31.2 - EX-31.2 - Advanced BioEnergy, LLC | c56331exv31w2.htm |
EX-31.1 - EX-31.1 - Advanced BioEnergy, LLC | c56331exv31w1.htm |
Table of Contents
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED: DECEMBER 31, 2009
Commission file number: 000-52421
ADVANCED BIOENERGY, LLC
(Exact name of Registrant as Specified in its Charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
20-2281511 (I.R.S. Employer Identification No.) |
10201 Wayzata Boulevard, Suite 250
Minneapolis, Minnesota 55305
(763) 226-2701
(Address, including zip code, and telephone number,
including area code, of Registrants Principal Executive Offices)
Minneapolis, Minnesota 55305
(763) 226-2701
(Address, including zip code, and telephone number,
including area code, of Registrants Principal Executive Offices)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files.)
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(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). Yes o No þ
As of February 15, 2010, the number of outstanding units was 17,814,180.
ADVANCED BIOENERGY, LLC
FORM 10-Q
Index
FORM 10-Q
Index
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
ADVANCED BIOENERGY, LLC & SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in Thousands)
Consolidated Balance Sheets
(Dollars in Thousands)
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 29,408 | $ | 26,367 | ||||
Receivables: |
||||||||
Trade accounts receivable |
12,456 | 9,613 | ||||||
Due from broker |
597 | | ||||||
Other receivables |
4,257 | 3,090 | ||||||
Derivative financial instrument |
614 | | ||||||
Inventories |
10,598 | 7,618 | ||||||
Prepaid expenses |
2,953 | 2,242 | ||||||
Current portion of restricted cash |
1,017 | 6,767 | ||||||
Total current assets |
61,900 | 55,697 | ||||||
Property and equipment, net |
197,298 | 203,364 | ||||||
Other assets: |
||||||||
Restricted cash |
1,153 | 1,146 | ||||||
Other assets |
2,113 | 2,146 | ||||||
Total Assets |
$ | 262,464 | $ | 262,353 | ||||
LIABILITIES AND MEMBERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 5,343 | $ | 6,057 | ||||
Accrued expenses |
5,032 | 5,490 | ||||||
Current portion of long-term debt |
148,650 | 146,303 | ||||||
Total current liabilities |
159,025 | 157,850 | ||||||
Deferred income |
5,386 | 5,554 | ||||||
Long-term debt |
68,635 | 76,625 | ||||||
Other liabilities |
702 | 535 | ||||||
Members equity: |
||||||||
Members capital, no par value,
20,000,000 units authorized;
17,814,180 and 15,985,295 issued and
outstanding and 0 and 971,003 units
subscribed for at December 31, 2009
and September 30, 2009, respectively |
161,165 | 160,392 | ||||||
Retained deficit |
(132,449 | ) | (138,603 | ) | ||||
Accumulated other comprehensive loss |
| | ||||||
Total members equity |
28,716 | 21,789 | ||||||
Total liabilities and members equity |
$ | 262,464 | $ | 262,353 | ||||
See notes to consolidated financial statements.
Table of Contents
ADVANCED BIOENERGY, LLC & SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
(Dollars in thousands, except per unit data)
(Unaudited)
Consolidated Statements of Operations and Comprehensive Loss
(Dollars in thousands, except per unit data)
(Unaudited)
Quarter Ended | ||||||||
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Net sales |
||||||||
Ethanol and related products |
$ | 96,006 | $ | 98,513 | ||||
Other |
250 | 341 | ||||||
Total net sales |
96,256 | 98,854 | ||||||
Cost of goods sold |
84,128 | 98,778 | ||||||
Gross profit |
12,128 | 76 | ||||||
Selling, general and administrative |
2,097 | 2,492 | ||||||
Operating income (loss) |
10,031 | (2,416 | ) | |||||
Other income (expense) |
(9 | ) | 90 | |||||
Interest income |
41 | 79 | ||||||
Interest expense |
(3,909 | ) | (8,461 | ) | ||||
Net income (loss) |
$ | 6,154 | $ | (10,708 | ) | |||
Other comprehensive income (loss): |
||||||||
Interest rate swap obligation |
| 1,786 | ||||||
Comprehensive income (loss) |
$ | 6,154 | $ | (8,922 | ) | |||
Basic & diluted weighted average units outstanding |
17,673,982 | 11,929,944 | ||||||
Income
(loss) per unit basic and diluted |
$ | .35 | $ | (0.90 | ) |
See notes to consolidated financial statements.
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Table of Contents
ADVANCED BIOENERGY, LLC & SUBSIDIARIES
Consolidated Statements of Changes in Members Equity
For the Quarter Ended December 31, 2009
(Dollars in thousands)
(Unaudited)
Consolidated Statements of Changes in Members Equity
For the Quarter Ended December 31, 2009
(Dollars in thousands)
(Unaudited)
Member | Member | Retained | ||||||||||||||
Units | Capital | Deficit | Total | |||||||||||||
MEMBERS EQUITY September 30, 2009 |
15,985,295 | $ | 160,392 | $ | (138,603 | ) | $ | 21,789 | ||||||||
Cumulative effect of change in accounting
principle-October 1, 2009 reclassification of
embedded feature of equity-linked financial
instrument to derivative warrant liability |
| (489 | ) | | (489 | ) | ||||||||||
Issuance of previously subscribed units |
971,003 | | | | ||||||||||||
Unit compensation expense |
| 11 | | 11 | ||||||||||||
Put options exercised |
(2,000 | ) | (3 | ) | | (3 | ) | |||||||||
Units issued private placement offering (net) |
859,882 | 1,254 | | 1,254 | ||||||||||||
Net income |
| | 6,154 | 6,154 | ||||||||||||
MEMBERS EQUITY December 31, 2009 |
17,814,180 | $ | 161,165 | $ | (132,449 | ) | $ | 28,716 | ||||||||
See notes to consolidated financial statements.
3
Table of Contents
ADVANCED BIOENERGY, LLC & SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Quarter Ended | ||||||||
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Cash flows from operating activities |
||||||||
Net income (loss) |
$ | 6,154 | $ | (10,708 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
||||||||
Depreciation |
5,338 | 6,479 | ||||||
Amortization of deferred financing costs |
33 | 263 | ||||||
Amortization of debt discount |
263 | | ||||||
Amortization of deferred revenue |
(168 | ) | | |||||
Amortization of lease liability |
(95 | ) | | |||||
Unit compensation expense |
11 | 58 | ||||||
Termination and accrual of interest rate swap settlement charges |
| 4,213 | ||||||
Change in risk management activities |
(614 | ) | (1,242 | ) | ||||
Changes in working capital components: |
||||||||
Receivables |
(3,507 | ) | 3,301 | |||||
Inventories |
(2,980 | ) | (4,314 | ) | ||||
Prepaid expenses |
(711 | ) | (138 | ) | ||||
Accounts payable |
(714 | ) | (448 | ) | ||||
Accrued expenses |
2,057 | 1,442 | ||||||
Net cash provided by (used in) operating activities |
5,067 | (1,094 | ) | |||||
Cash flows from investing activities: |
||||||||
Purchase of property and equipment |
(372 | ) | (144 | ) | ||||
Change in other assets |
| (226 | ) | |||||
Decrease in cash held in escrow |
5,743 | 1,551 | ||||||
Net cash provided by investing activities: |
5,371 | 1,181 | ||||||
Cash flows from financing activities |
||||||||
Payments on debt |
(8,648 | ) | (2,652 | ) | ||||
Proceeds from issuance of units |
1,254 | | ||||||
Repurchase of units |
(3 | ) | (6 | ) | ||||
Net cash (used in) financing activities |
(7,397 | ) | (2,658 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
3,041 | (2,571 | ) | |||||
Beginning cash and cash equivalents |
26,367 | 14,762 | ||||||
Ending cash and cash equivalents |
$ | 29,408 | $ | 12,191 | ||||
Supplemental disclosure of non cash transactions |
||||||||
Warrant obligation recognized as liability |
$ | 489 | $ | | ||||
Other receivable offset against equipment |
1,100 | | ||||||
Accrued interest at HGF transferred to debt |
2,516 | | ||||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 1,256 | $ | 3,603 |
See notes to consolidated financial statements.
4
Table of Contents
ADVANCED BIOENERGY, LLC & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
(Unaudited)
1. Organization and Significant Accounting Policies
The consolidated financial statements include the accounts of Advanced BioEnergy, LLC (ABE)
and its wholly owned subsidiaries, ABE Fairmont, LLC (ABE Fairmont) ABE Heartland, LLC (f/k/a HGF
Acquisition, LLC), Dakota Fuels, Inc. and Heartland Grain Fuels LP (HGF). All intercompany
balances and transactions have been eliminated in consolidation. The interim financial statements
should be read in conjunction with the audited financial statements and notes thereto, contained in
the Companys Annual Report on Form 10-K for the year ended September 30, 2009. The financial
information as of December 31, 2009 and the results of operations for the quarter ended December
31, 2009 are not necessarily indicative of the results for the fiscal year ending September 30,
2010.
The Company currently operates three ethanol production facilities in the U.S. with a combined
production capacity of 195 million gallons per year. ABE Fairmont commenced operations at the 110
million gallon facility in Fairmont, Nebraska in October 2007. The Company acquired HGF and its
existing facilities in Aberdeen and Huron, SD in November 2006 and HGF commenced operations at the
new 44 million gallon Aberdeen facility in Aberdeen, South Dakota in January 2008.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with original maturities of three months
or less to be cash equivalents. The Companys cash balances are maintained in bank depositories and
periodically exceed federally insured limits. The Company has not experienced losses in these
accounts. Under the bank suspension imposed by the default on the HGF senior credit agreement,
HGFs operating accounts require bank approval before withdrawals can be processed, but continue to
be used for normal operations of HGF and therefore are grouped with cash and cash equivalents. The
Companys restricted cash includes cash held for debt service.
Fair Value of Financial Instruments
Financial instruments include cash, cash equivalents and restricted cash, interest rate swaps,
derivative financial instruments, accounts receivable, accounts payable, accrued expenses and
long-term debt. The fair value of the long-term debt is estimated based on anticipated interest
rates which management believes would currently be available to the Company for similar issues of
debt, taking into account the current credit risk of the Company and other market factors. The
Company believes the carrying value of the debt instruments at ABE and ABE Fairmont further
described in Note 4 approximate fair value. The Company believes it is not practical to estimate
the fair value of the HGF debt instruments due to their default status. The fair value of all other
financial instruments is estimated to approximate carrying value due to the short-term nature of
these instruments.
Fair Value Measurements
In determining fair value of its derivative financial instruments and warrant liabilities, the
Company uses various methods including market, income and cost approaches. Based on these
approaches, the Company often utilizes certain assumptions that market participants would use in
pricing the asset or liability, including assumptions about risk and/or the risks inherent in the
inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or
generally unobservable inputs. Financial assets and liabilities carried at fair value will be
classified and disclosed in one of the following three fair value hierarchy categories.
Level 1: Valuations for assets and liabilities traded in active markets from readily available
pricing sources for market transactions involving identical assets or liabilities.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets.
Valuations are obtained from third-party pricing services for identical or similar assets or
liabilities.
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Level 3: Valuations incorporate certain assumptions and projections in determining the fair
value assigned to such assets or liabilities.
Commodity futures and exchange-traded commodity options contracts are reported at fair value
utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an
independent pricing service. The fair value measurements consider observable data that may include
dealer quotes and live trading levels from the CBOT and NYMEX markets.
The following table summarizes financial assets and financial liabilities measured at the
approximate fair value on December 31, 2009, utilized to measure fair value (amounts in thousands):
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets Derivative Financial
Instruments |
$ | 614 | $614 | | | |||||||||||
Liabilities Warrant Derivative |
$ | 488 | | | $ | 488 |
The stock warrants issued contain a strike price adjustment feature, as described in Note 5 in
the Notes to the Consolidated Financial Statements. We calculated the fair value of the warrants
using the Black-Scholes valuation model. During the three months ended December 31, 2009, we
recognized an unrealized gain of $1,000 related to the change in the fair value of the warrant
derivative liability.
The assumptions used in the Black-Scholes valuation model were as follows:
December 31, | ||||
2009 | ||||
Market value |
$ | 1.50 | (1) | |
Expected volatility |
110.6 | % | ||
Expected life (years) |
2.375 | |||
Risk free interest rate |
1.063 | % | ||
Forfeiture rate |
| |||
Dividend rate |
|
(1) | Market value based on recent unit transactions. |
The following table reflects the activity for liabilities measured at fair value using Level 3
inputs for the three months ended December 31, 2009 (amounts in thousands):
Initial
recognition of
warrant derivative
as of October 1, 2009 |
$ | 489 | ||
Unrealized gain
related to the
change in fair
value |
(1 | ) | ||
Balance as of
December 31, 2009 |
$ | 488 | ||
Derivative Instruments/Due From Broker
On occasion, the Company has entered into derivative contracts to hedge the Companys exposure
to price risk related to future corn purchases and future ethanol sales. Accounting for derivative
contracts 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
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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 current outstanding 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.
Receivables
Credit sales are made to a few customers with no collateral required. Trade receivables
are carried at original invoice amount less an estimate made for doubtful receivables based on a
review of all outstanding amounts on a monthly basis. Management determines the allowance for
doubtful accounts by regularly evaluating individual receivables and considering a customers
financial condition, credit history and current economic conditions. Receivables are written off if
deemed uncollectible. Recoveries of receivables previously written off are recorded when received.
At December 31, 2009, the Company had $4.0 million of other receivables from the Nebraska
Advantage Act that when collected is required to be remitted to PJC Capital, unless the secured
term loan note has been paid in full.
Inventories
Corn, chemicals, supplies, work in process, ethanol and distillers grains inventories are
stated at the lower of cost or market on a weighted cost basis.
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation computed using the
straight-line method over the estimated useful lives:
Buildings |
40 Years | |||
Process equipment |
10 Years | |||
Office equipment |
5-7 Years |
Maintenance and repairs are charged to expense as incurred; major improvements and betterments
are capitalized. Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount on the asset may not be recoverable. An impairment
loss is recognized when estimated undiscounted future cash flows from operations are less than the
carrying value of the asset group. An impairment loss is measured by the amount by which the
carrying value of the asset exceeds the estimated fair value on that date.
Revenue Recognition
Revenue from the production of ethanol and related products is recorded when title transfers
to customers. Ethanol and related products are generally shipped free on board (FOB) shipping
point. Interest income is recognized as earned. In accordance with the Companys agreements for the
marketing and sale of ethanol and related products, commissions due to the marketers are deducted
from the gross sale price at the time of payment.
Shipping Costs
The Company classifies shipping costs as a component of cost of goods sold in the consolidated
statements of operations.
Income (Loss) Per Unit
Basic and diluted income (loss) per unit is computed using the weighted-average number of
vested units outstanding during the period. Unvested units are considered unit equivalents and are
considered in the diluted
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income per unit computation, but have not been included in the computations of diluted loss
per unit as their effect would be anti-dilutive.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in
accordance with generally accepted accounting principles. Those estimates and assumptions affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual results could differ from those
estimates.
2. Inventories
A summary of inventories is as follows (in thousands):
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
Corn |
$ | 3,009 | $ | 1,341 | ||||
Chemicals |
989 | 489 | ||||||
Work in process |
1,943 | 1,893 | ||||||
Ethanol |
2,321 | 1,678 | ||||||
Distillers grain |
476 | 412 | ||||||
Supplies and parts |
1,860 | 1,805 | ||||||
Total |
$ | 10,598 | $ | 7,618 | ||||
3. Property and Equipment (in thousands)
A summary of property and equipment is as follows (in thousands):
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
Land |
$ | 3,962 | $ | 3,962 | ||||
Buildings |
21,295 | 21,295 | ||||||
Process equipment |
215,051 | 215,820 | ||||||
Office equipment |
1,265 | 1,273 | ||||||
Construction in process |
129 | 81 | ||||||
241,702 | 242,430 | |||||||
Accumulated depreciation |
(44,404 | ) | (39,066 | ) | ||||
Property and equipment, net |
$ | 197,298 | $ | 203,364 | ||||
4. Long Term Debt
Long-Term debt consists of the following (in thousands, except percentages):
December 31, | December 31, | September 30, | ||||||||||
2009 | 2009 | 2009 | ||||||||||
Interest Rate | Principal Amount | Principal Amount | ||||||||||
ABE Fairmont senior credit
facility variable |
3.64 | % | $ | 52,850 | $ | 55,450 | ||||||
ABE Fairmont senior credit facility
fixed |
7.53 | % | 20,000 | 20,000 | ||||||||
ABE Fairmont seasonal line variable |
3.34 | % | 3,000 | 3,000 | ||||||||
ABE Fairmont subordinate exempt
facilities bonds fixed |
6.75 | % | 7,000 | 7,000 | ||||||||
HGF senior credit facility fixed |
8.50 | % | 87,979 | 87,979 | ||||||||
HGF working capital fixed |
8.50 | % | 7,100 | 7,100 | ||||||||
HGF subordinated solid waste
facilities revenue bonds fixed |
8.25 | % | 19,000 | 19,000 | ||||||||
HGF notes payable fixed |
8.27 | % | 4,213 | 4,213 | ||||||||
HGF accrued interest |
12,433 | 9,917 | ||||||||||
ABE PJC Capital note fixed |
10.0 | % | 3,710 | 9,269 | ||||||||
Total outstanding |
217,285 | 222,928 | ||||||||||
Less: Amounts due within one year |
(148,650 | ) | (146,303 | ) | ||||||||
Long-term debt |
$ | 68,635 | $ | 76,625 | ||||||||
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The estimated maturities of debt at December 31, as follows (in thousands):
2010 |
$ | 148,650 | ||
2011 |
11,215 | |||
2012 |
11,215 | |||
2013 |
11,215 | |||
2014 |
12,065 | |||
Thereafter |
22,925 | |||
Total debt |
$ | 217,285 | ||
Senior Credit Facility for the Fairmont Plant
ABE Fairmont has a senior credit facility with Farm Credit consisting of a $58.3 million term
loan, known as term loan A and a $25.0 million revolving term loan, known as term loan B. Farm
Credit also extended a $6.0 million revolving seasonal line for financing eligible grain inventory
and equity in CBOT futures positions, which expires April 1, 2010.
At December 31, 2009, ABE Fairmont had $47.9 million outstanding on term loan A. ABE Fairmont
must make quarterly principal installments of $2.6 million through February 2014, followed by a
final installment in an amount equal to the remaining unpaid term loan A principal balance on May
2014. For each fiscal year ending September 30, 2010 through 2012, ABE Fairmont must pay an
additional amount equal to the lesser of $8.0 million or 75% of its free cash flow. At December 31,
2009, ABE Fairmont had $25.0 million outstanding on the revolving term loan B. On the earlier of
December 1, 2014 or nine months following complete repayment of term loan A, ABE Fairmont will
begin repayment of revolving term loan B in $5.0 million semi-annual principal payments. ABE
Fairmont pays interest monthly at 7.53% on $20.0 million and a variable rate based on the 30 day
LIBOR rate on the remaining outstanding debt.
ABE Fairmont drew $3.0 million under the revolving seasonal line and had $3.0 million
remaining available at December 31, 2009. Farm Credit also extended a $2.0 million revolving credit
facility for financing third party letters of credit, which expires in February 2012. ABE Fairmont
issued a letter of credit in connection with a rail car lease effectively reducing the financing
available from the $2.0 million revolving credit facility by $911,000.
The loans are secured by a first mortgage on all of ABE Fairmonts real estate and a lien on
all of ABE Fairmonts personal property. While the credit facilities are outstanding, ABE Fairmont
is subject to certain restrictive loan covenants, including but not limited to, minimum working
capital, net worth and debt service coverage ratios, as well as limitations on capital expenditures
and distributions.
Fillmore County Subordinate Exempt Facilities Revenue Bonds for the Fairmont plant
ABE Fairmont has $7.0 million of subordinate exempt facilities revenue bonds outstanding under
a subordinated loan and trust agreement with the County of Fillmore, Nebraska and Wells Fargo, N.A.
The loan agreement is collateralized by the Fairmont plant assets. ABE Fairmonts repayment of the
loan and the security for the loan are subordinate to its senior credit facility. Annual principal
payments of $815,000 are required starting in December 2010 through December 2016, with the
remainder due December 2017. ABE Fairmont is making semi-annual interest payments.
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Senior Credit Agreement for the South Dakota Plants
HGF has not made its scheduled principal and interest payments on its $88.0 million senior
credit facility or interest payments on its outstanding $7.1 million working capital line since
October 2008 during which time it has been operating under a bank suspension. HGF previously
entered into interest rate swaps with a notional amount of $66.0 million to lock in interest rates
on its floating rate debt. As a result of the defaults on the senior credit facility, the interest
rate swaps were terminated in December 2008 and the fair value of the swaps were recorded as a $4.2
million note payable which continues to accrue interest at 8.27%.
During the default period HGF has been accruing interest at the default rate of 8.50% on the
senior credit facility and had $11.6 million of accrued but unpaid interest on its facilities at
December 31, 2009. As a result of the defaults all principal amounts owed on the senior credit
facility have been classified as current debt in this report.
Subordinate Solid Waste Facilities Revenue Bonds
The $19.0 million Brown County Revenue Bonds were issued pursuant to a bond trust indenture
with maturities of $5.8 million in January 2016; $6.3 million in January 2017, and $6.9 million in
January 2018, with interest rates of 8.25%. At December 31, 2009, HGF had accrued $784,000 of
unpaid interest on the Revenue Bonds. The revenue bonds are secured by a pledge to the trustee of a
continuing security interest and lien in all of the estate, right, title and interest of HGF and
ABE Heartland. In addition, HGF has granted a subordinate mortgage lien and security interest in
its existing facilities to the trustee to secure the payment of the obligations of HGF.
The defaults on the senior credit facility also represented a default on the revenue bonds
and all principal amounts owed on the revenue bonds have been classified as current debt in this
report.
HGF Restructuring
In September 2009, HGFs senior lenders commenced discussion with the Company to explore
alternatives to foreclosing on the Companys equity interest in HGF, including a restructuring of
the terms of the current borrowing arrangements with those lenders. These discussions are ongoing,
and the Company intends to pursue with HGFs senior lenders, as well as the subordinated revenue
bond holders, a restructuring of the current lending arrangements for HGF that will permit the
Company to maintain a significant portion of its ownership of those facilities. Nonetheless, there
can be no assurance that the Company will be successful in restructuring its current lending
arrangements or, if an agreement is reached, whether the terms of any such agreement may permit the
Company to retain a significant ownership interest in HGF. If the Company is unable to successfully
restructure the obligations to HGFs senior lenders, ABE may be obligated to transfer its equity
interest in HGF to the senior lenders and subordinated revenue bond holders.
PJC
Capital Secured Note Advanced BioEnergy LLC
The Company issued a $9.8 million note to PJC Capital, LLC (the PJC Capital Note) in August
2009, which accrues interest at 10%, requires monthly payments totaling $50,000 and matures on
October 1, 2012. The Company subsequently received $4.4 million from units issued in connection
with its private offering, which were remitted as principal payments on the PJC Capital Note. In
October 2009, the Company remitted $1.7 million of funds previously used to collateralize a letter
of credit to PJC Capital. The PJC Capital Note balance at December 31, 2009 was $3.7 million. The
restructured note requires the Company to remit future tax reimbursements from the Nebraska
Advantage Act, ABE Fairmont annual dividends and proceeds from the sale of future units to PJC
Capital until the PJC Capital Note is paid in full.
5. Members Equity and Subsequent Events Private Offering
Private Offering
In October 2009, the Company completed a private offering in which it raised $7.4 million in
net proceeds from the issuance of 5,164,218 units, of which, the Company received net proceeds of
$4.7 million from the issuance of 3,333,333 units to Hawkeye Energy Holdings, LLC (Hawkeye). and
$1.4 million from 971,003 units
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subscribed for by certain accredited investors prior to September 30, 2009. In October 2009,
the Company received an additional $1.3 million in net proceeds from the issuance of 859,882 units.
Investment by Hawkeye Energy Holdings, LLC
In the event that the Company at any time prior to October 21, 2010 issue additional units for
less than $1.50 per unit, the Company has agreed to issue Hawkeye such additional number of units
as it would have purchased had their subscription price been for such lower offering price.
Warrants
In connection with the PJC Capital Note, the Company issued 532,671 warrants to purchase
units of the Company. The warrants have an exercise price of $1.50 per unit and expire in October
2014. The warrants contain a strike price adjustment feature, which upon adoption of recent
accounting guidance, resulted in the instruments no longer being considered indexed to the
Companys own stock. Accordingly, the classification and the related accounting for these warrants
changed (from equity to liability) on October 1, 2009. As of that date, the Company reclassified
$489,000 from equity to a liability representing the fair value of the warrants, based on $.92 per
warrant, as calculated using the BlackScholes valuation model. During the three months ended
December 31, 2009, the liability was adjusted for the change in fair value of the warrants and the
Company recorded an unrealized gain of $1,000. A liability of $488,000 related to the stock
warrants is included in other liabilities in our consolidated balance sheet as of December 31,
2009.
6. Major Customers
HGF currently has an ethanol product off-take agreement with Gavilon pursuant to which it is
required to sell its output of ethanol produced at the plants, less certain E-85 and local
promotion retained product, at accepted bid prices per gallon less a commission. ABE Fairmont also
had an agreement with Gavilon which terminated effective December 31, 2009. ABE Fairmont entered
into a new marketing agreement with Hawkeye Gold which became effective on January 1, 2010. Hawkeye
Gold is an affiliate of Hawkeye. The marketing agreement with Hawkeye Gold requires, among other
things, that ABE Fairmont must sell, and Hawkeye Gold must purchase, all of the denatured fuel
grade ethanol produced by ABE Fairmont. The initial term of the agreement is for two years, and
provides for automatic renewal for successive 18 month terms unless either party provides written
notice of nonrenewal at least 180 prior to the end of any term.
ABE Fairmont is currently self-marketing the distillers grains it produces. HGF is party to a
co-product marketing agreement with Dakotaland Feeds, LLC, whereby Dakotaland Feeds markets the
local sale of ethanol co-products produced at the South Dakota plants to third parties for an
agreed upon commission.
Sales and receivables from the Companys major customers were as follows (in thousands):
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Gavilon Ethanol |
||||||||
Three month revenues |
$ | 81,188 | $ | 77,609 | ||||
Receivable balance |
10,158 | 5,935 | ||||||
Dakotaland HGF Distiller Grains |
||||||||
Three month revenues |
6,079 | 4,942 | ||||||
Receivable balance |
586 | 755 |
7. Risk Management
The Company is exposed to a variety of market risks, including the effects of changes in
commodity prices and interest rates. These financial exposures are monitored and managed by the
Company as an integral part of its overall risk management program. The Companys risk management
program seeks to reduce the potentially adverse effects that the volatility of these markets may
have on its current and future operating results. To reduce these effects, the Company generally
attempts to fix corn purchase prices and related sale prices of ethanol and
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distillers grains, with forward purchase and sales contracts to reduce volatility in future
operating margins. In addition to holding call options to purchase 2.7 million bushels of corn and
entering into contracts to purchase 4.9 million bushels of corn in which the futures price was not
locked, the Company had entered into the following fixed price forward contracts at December 31,
2009 (in thousands):
Commodity | Quantity | Amount | Period Covered | |||||||||
Corn purchase contracts |
5,521 bushels | $ | 19,987 | March 2010 | ||||||||
Ethanol sales contracts |
24,215 gallons | 44,228 | March 2010 | |||||||||
Dried distiller grains sale contracts |
50 tons | 5,483 | March 2010 |
Forward contracts noted above are deemed normal purchases and normal sales and, therefore
are not marked to market in the Companys financial statements. When forward contracts are not
available at competitive rates, the Company may engage in hedging activities using exchange traded
futures contracts, OTC futures options or OTC swap agreements.
The following table represents the approximate amount of realized and unrealized gains
(losses) and changes in fair value recognized in earnings on commodity contracts for the quarters
ended December 31, 2009 and 2008 and the fair value of future contracts as of December 31, 2009 and
September 30, 2009 (in thousands):
Income Statement | Realized | Unrealized | Total Gain | |||||||||||||
Derivatives not designated as hedging
instruments: |
Classification | Gain (Loss) | Gain (Loss) | (Loss) | ||||||||||||
Commodity Contracts
for the quarter
ending December 31,
2009 |
Cost of Goods Sold | $ | 56 | 614 | 670 | |||||||||||
Commodity Contracts
for the quarter
ending December 31,
2008 |
Cost of Goods Sold | $ | (3,111 | ) | (27 | ) | (3,138 | ) |
Balance Sheet | ||||||||||||
Classification | December 31, 2009 | September 30, 2009 | ||||||||||
Futures contracts through March 2010 |
Current Assets | $ | 614 | |
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Information Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements regarding our business,
financial condition, results of operations, performance and prospects. All statements that are not
historical or current facts are forward-looking statements and are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve known and unknown risks, uncertainties and other factors, many of which may be beyond our
control that may cause our actual results, performance or achievements to be materially different
from any future results, performances or achievements expressed or implied by the forward-looking
statements. Certain of these risks and uncertainties are described in the Risk Factors section of
our Annual Report on Form 10-K for the year ended September 30, 2009. These risks and uncertainties
include, but are not limited to, the following:
| we are in default under various existing debt financing agreements; | |
| our planned operations require additional liquidity that may not be available; | |
| our operational results are subject to fluctuations in the prices of grain, utilities and ethanol, which are affected by various factors including weather, production levels, supply, demand, changes in technology and government support and regulations; | |
| margins can be volatile and can evaporate, which may impact our ability to meet current obligations and debt service requirements at our operating entities; | |
| our hedging transactions and mitigation strategies could materially harm our results; |
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| cash distributions depend upon our future financial and operational performance and will be affected by debt covenants, reserves and operating expenditures; | |
| current governmental mandated tariffs, credits and standards may be reduced or eliminated and legislative acts taken by state governments such as California, related to low carbon fuels that include the effects caused by indirect land use, may have an adverse effect on our business; | |
| alternative fuel additives may be developed that are superior to or cheaper than ethanol; | |
| transportation, storage and blending infrastructure may become impaired, preventing ethanol from reaching markets; | |
| our operation facilities may experience technical difficulties and not produce the gallons of ethanol as expected; and | |
| our units are subject to a number of transfer restrictions and no public market exists for our units and none is expected to develop. |
You can identify forward-looking statements by terms such as anticipates, believes,
could, estimates, expects, intends, may, plans, potential, predicts, projects,
should, will, would, and similar expressions intended to identify forward-looking statements.
Forward-looking statements reflect our current views with respect to future events, are based on
assumptions, and are subject to risks and uncertainties. Given these uncertainties, you should not
place undue reliance on these forward-looking statements. Also, forward-looking statements
represent our estimates and assumptions only as of the date of this report. Except as required by
law, we assume no obligation to update any forward-looking statements publicly, or to update the
reasons actual results could differ materially from those anticipated in any forward-looking
statements, even if new information becomes available in the future. Readers are urged to carefully
review and consider the various disclosures made by us in this report and in our other reports
filed from time to time with the Securities and Exchange Commission that advise interested parties
of the risks and factors that may affect our business.
General
The following discussion and analysis provides information which management believes is
relevant to an assessment and understanding of our consolidated financial condition and results of
operations. This discussion should be read in conjunction with the consolidated financial
statements included herewith and notes to the consolidated financial statements thereto.
Overview
Advanced BioEnergy, LLC (Company, we, Advanced BioEnergy or ABE) was formed in 2005 as
a Delaware limited liability company. Our business consists of producing ethanol and co-products,
including wet, modified and dried distillers grains. Ethanol is a renewable, environmentally clean
fuel source that is produced at numerous facilities in the United States, mostly in the Midwest. In
the U.S., ethanol is produced primarily from corn and then blended with unleaded gasoline in
varying percentages. The ethanol industry in the U.S. has grown significantly over the last few
years as its use reduces harmful auto emissions, enhances octane ratings of the gasoline with which
it is blended, offers consumers a cost-effective choice, and decreases the amount of crude oil the
U.S. needs to import from foreign sources. Ethanol is most commonly sold as E10, the 10 percent
blend of ethanol for use in all American automobiles. Increasingly, ethanol is also available as
E85, a higher percentage ethanol blend for use in flexible fuel vehicles.
To execute our business plan, we entered into financial arrangements to build and operate
ethanol production facilities in Fairmont, Nebraska, and we separately acquired HGF in November
2006, which owned existing ethanol production facilities in Aberdeen and Huron, South Dakota.
Construction of our Fairmont, Nebraska plant began in June 2006 and operations commenced at the
plant in November 2007. Construction of our expansion facility in Aberdeen, South Dakota began in
April 2007 and operations commenced in January 2008. Our production operations are carried out
primarily through our operating subsidiaries, ABE Fairmont which owns and operates the Fairmont,
Nebraska plant and HGF, which owns and operates ethanol facilities in Aberdeen and Huron, South
Dakota.
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HGF has not made its scheduled principal and interest payments on its $88.0 million
senior credit facility or interest payments on its outstanding $7.1 million working capital line
since October 2008 during which time it has been operating under a bank suspension. On March 31,
2009 WestLB, as administrative agent for HGFs senior credit facility, disclosed its intent to
foreclose on 100% of ABEs equity interest in HGF. At such time, ABE did not intend to object to
the foreclosure. The Companys Form 10-Q for the fiscal quarters ending March 30, 2009 and June 30,
2009 reflected HGF as discontinued operations.
In September 2009, HGFs senior lenders commenced discussions with the Company to explore
alternatives to foreclosing on ABEs equity interest in HGF, including a restructuring of the terms
of the current borrowing arrangements with those lenders. These discussions are ongoing, and we
intend to pursue with HGFs senior lenders, as well as the subordinated revenue bond holders, a
restructuring of the current lending arrangements for HGF that may permit the Company to maintain a
significant portion of its ownership of those facilities. Nonetheless, there can be no assurance
that the Company will be successful in restructuring its current lending arrangements or, if an
agreement is reached, whether the terms of any such agreement will permit the Company to retain a
significant ownership interest in HGF. If we are unable to successfully restructure the obligations
to HGFs senior lenders, ABE may be obligated to transfer its equity interest in HGF to the senior
lenders and subordinated revenue bond holders.
Operating segments are defined as components of an enterprise for which separate financial
information is available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources in assessing performance. The Companys plants are managed and
reported as one operating segment.
DRY MILL PROCESS
Dry mill ethanol plants produce ethanol by predominantly processing corn. Other possible feeds
are sorghum, milo, or other cellulosic materials. The corn is received by truck, then weighed and
unloaded in a receiving building. It is then transported to storage silos. Thereafter, it is
transferred to a scalper to remove rocks, cobs, and other debris before it is fed to a hammer mill
where it is ground into flour and conveyed into a slurry tank. Water, heat and enzymes are added to
the flour in the slurry tank to start the process of converting starch from the corn into sugar.
The slurry is pumped to a liquefaction tank where additional enzymes are added. These enzymes
continue the starch to sugar conversion. The grain slurry is pumped into fermenters, where yeast is
added, to begin the batch fermentation process. Fermentation is the process of the yeast converting
the sugar into alcohol and carbon dioxide. After the fermentation is complete, a vacuum
distillation system removes the alcohol from the grain mash. The 95% (190 proof) alcohol from the
distillation process is then transported to a molecular sieve system where it is dehydrated to 100%
alcohol (200 proof). The 200 proof alcohol is then pumped to storage tanks and blended with a
denaturant, usually gasoline. The 200 proof alcohol and 2-2.5% denaturant constitute denatured fuel
ethanol.
Corn mash left over from distillation is pumped into a centrifuge for dewatering. The liquid
from the centrifuge, known as thin stillage, is then pumped from the centrifuges to an evaporator
where it is dried into thick syrup. The solids that exit the centrifuge, known as the wet cake, are
conveyed to the dryer system. Syrup is added to the wet cake as it enters the dryer, where moisture
is removed. The process produces distillers dried grains with solubles, which is used as a high
protein/fat animal feed supplement.
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FACILITIES
The table below provides a summary of our ethanol plants in operation as of February 10, 2010:
Estimated | ||||||||||||||||||||
Estimated | Annual | Estimated | ||||||||||||||||||
Annual | Distillers | Annual | ||||||||||||||||||
Ethanol | Grains | Corn | ||||||||||||||||||
Production(1) | Production(2) | Processed | Primary | |||||||||||||||||
Location | (Million gallons) | (Tons) | (Million bushels) | Energy Source | Builder | |||||||||||||||
Fairmont, NE |
110 | 334,000 | 39.3 | Natural Gas | Fagen | |||||||||||||||
Aberdeen, SD (2) |
9 | 27,000 | 3.2 | Natural Gas | Broin | |||||||||||||||
Aberdeen, SD (2) |
44 | 134,000 | 15.7 | Natural Gas | ICM | |||||||||||||||
Huron, SD |
32 | 97,000 | 11.4 | Natural Gas | ICM | |||||||||||||||
Consolidated |
195 | 592,000 | 69.6 |
(1) | Our plants produce and sell wet, modified wet and dried distillers grains. The stated quantities are on a fully dried basis operating at nameplate capacity. | |
(2) | Our plant at Aberdeen consists of two separate production facilities which operate on a separate basis. |
We believe that each of the operating facilities is in adequate condition to meet our current
and future production goals. We also believe that these plants are adequately insured for
replacement cost plus related disruption expenditures.
The senior creditor of the Fairmont plant is secured by a first mortgage on the plant real
estate and a security interest lien on the sites personal property. We also granted a subordinate
lien and security interest to the trustee of the subordinated exempt facilities revenue bonds used
to finance the Fairmont plant. We pledged a first-priority security interest and first lien on
substantially all assets of the South Dakota plants to the collateral agent for the senior creditor
of these plants and a continuing security interest in and lien on substantially all of the assets
of the South Dakota plants to the trustee of the subordinated solid waste facilities revenue bonds
used to finance the South Dakota plants. HGF is currently in default under its senior and
subordinated loan agreements, and is discussing with its lenders alternatives to foreclosing on the
collateral securing its obligations under those agreements.
HGF currently has an ethanol product off-take agreement with Gavilon pursuant to which it is
required to sell its output of ethanol produced at the plants, less certain E-85 and local
promotion retained product, at accepted bid prices per gallon less a commission. ABE Fairmont also
had an agreement with Gavilon which terminated effective December 31, 2009. ABE Fairmont entered
into a new marketing agreement with Hawkeye Gold which became effective on January 1, 2010. Hawkeye
Gold is an affiliate of Hawkeye. The marketing agreement with Hawkeye Gold requires, among other
things, that ABE Fairmont must sell, and Hawkeye Gold must purchase, all of the denatured fuel
grade ethanol produced by ABE Fairmont. The initial term of the agreement is for two years, and
provides for automatic renewal for successive 18 month terms unless either party provides written
notice of nonrenewal at least 180 prior to the end of any term.
We currently sell 77.2% of our distillers grains production as dried which has an indefinite
life and can be transported by truck or rail, 5.1% as modified distillers grains and 17.7% as wet.
Wet and modified distillers grains can only be marketed locally and regionally through truck
markets and have a shelf lives of 10 days and 3 weeks, respectively. ABE Fairmont is self-marketing
the distillers grains it produces. HGF is party to a co-product marketing agreement with Dakotaland
Feeds, LLC, whereby Dakotaland Feeds markets the local sale of distiller grains produced at the
South Dakota plants to third parties for an agreed upon commission. Selling prices for distillers
grains are seasonal, declining in the spring and summer seasons as cattle return to pasture grazing
thereby decreasing demand for animal feed.
Plan of Operations Through September 30, 2010
Our primary focus the next twelve months is continuing with operational improvements at each
of our operating facilities. These operational improvements include exploring methods to improve
ethanol yield per bushel and by product production, increasing production capacity at each of our
plants, continuing our emphasis on safety and environmental regulation, reducing our operating
costs and optimizing our margin opportunities through prudent risk management policies.
Another primary focus for the Company will be to finalize and complete a restructuring of the
current HGF loans with the senior and subordinate lenders.
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RESULTS OF OPERATIONS
Quarter Ended December 31, 2009 Compared to Quarter Ended December 31, 2008
The following table reflects quantities of our products sold at average net prices as well as
bushels of corn ground and therms of gas burned at average costs for the three months ended
December 31, 2009 and 2008:
Three Months Ended | Three Months Ended | |||||||||||||||
December 31, 2009 | December 31, 2008 | |||||||||||||||
Sold/Consumed | Average | Sold/Consumed | Average | |||||||||||||
(In thousands) | Net Price/Cost | (In thousands) | Net Price/Cost | |||||||||||||
Ethanol (gallons) |
49,651 | $ | 1.66 | 44,729 | $ | 1.76 | ||||||||||
Dried distillers grains (tons) |
115 | 92.72 | 84 | 145.41 | ||||||||||||
Wet distillers grains (tons) |
88 | 35.67 | 145 | 52.41 | ||||||||||||
Corn (bushels) |
17,998 | $ | 3.47 | 16,518 | $ | 4.29 | ||||||||||
Gas (mmbtus) |
1,377 | 4.48 | 1,254 | 5.51 |
Net Sales
Net sales for quarter ended December 31, 2009 were $96.3 million compared to $98.9 million for
the quarter ended December 31, 2008, a decrease of $2.6 million or 2.6%. The decrease in revenues
was due to a decrease in average prices of ethanol and distillers grains of 5.7% and 36.2%,
respectively. During the fiscal quarters ending December 31, 2009 and 2008, 85.4% and 79.9%,
respectively, of our net sales were derived from the sale of ethanol and our remaining net sales
were derived from the sale of distillers grains. Gallons sold increased 4.9 million or 11.0% from
the prior year quarter, due to production improvements at all facilities.
Cost of Goods Sold
Costs of goods sold for the quarter ending December 31, 2009 were $84.1 million, compared to
$98.8 million for the quarter ending December 31, 2008, a decrease of $14.7 million or 14.9%. Costs
of goods sold included a corn related hedging gain of $670,000 in the quarter ended December 31,
2009 and a loss of $3.1 million in the quarter ended December 31, 2008. Corn costs represented
74.2% and 71.7% of cost of sales for the fiscal quarters ending December 31, 2009 and 2008.
Physically delivered corn costs decreased 19.1% from $4.29 per bushel in the quarter ending
December 31, 2008 to $3.47 per bushel for the quarter ending December 31, 2009. The decrease in
corn cost per bushel was due to favorable crop conditions in 2009, additional acreage and less
international demand. Natural gas costs represented 7.3% and 7.0% of cost of sales for the fiscal
quarters ending December 31, 2009 and 2008. Our average gas prices decreased from $5.51 per mmbtu
in the quarter ending December 31, 2008 to $4.48 per mmbtu in the quarter ending December 31, 2009.
Gross Profit
Our gross profit for the quarter ending December 31, 2009 was $12.1 million, compared to gross
profit of $76,000 for the quarter ending December 31, 2008. The increase was primarily due to the
increased production, the decrease in the corn costs, along with an improvement in corn related
hedging results.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses are comprised of recurring administrative
personnel compensation, legal, technology, consulting, insurance and accounting fees as well as
certain non-recurring charges. Overall selling, general and administrative costs declined
approximately $395,000, or 15.9%, to $2.1 million for the quarter ending December 31, 2009.
Selling, general and administrative expenses as a percentage of sales have declined from 2.5% the
quarter-ended December 31, 2008 to 2.2% in 2009.
Interest Expense
Interest expense for the quarter ending December 31, 2009 was $3.9 million, compared to $8.5
million for the quarter ended December 31, 2008, a decrease of $4.6 million. In the quarter ended
December 31, 2008, we recorded an interest charge of $4.2 million in connection with the
cancellation of the $66 million of interest rate swaps. These swaps were terminated as a result of
defaulting on HGFs senior credit facility.
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TRENDS AND UNCERTAINTIES IMPACTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS
Overview
In the first eleven months of 2009 the United States consumed 9.9 billion gallons of ethanol
representing approximately 5% of the finished motor gasoline gallons consumed. The United States
produced 9.7 billion gallons of ethanol in the first eleven months of 2009 and imported the
remainder. Ethanol is currently blended with gasoline to meet regulatory standards, as a clean air
additive, an octane enhancer, a fuel extender and a gasoline alternative.
Our operations are highly dependent on commodity prices, especially prices for corn, ethanol,
distillers grains and natural gas. As a result of price volatility for these commodities, our
operating results may fluctuate substantially. The price and availability of corn are subject to
significant fluctuations depending upon a number of factors that affect commodity prices in
general, including crop conditions, weather, federal policy and foreign trade. Because the market
price of ethanol is not always directly related to corn prices, at times ethanol prices may lag
movements in corn prices and compress the overall margin structure at the plants. As a result,
operating margins may become negative and we may be forced to shut down the plants.
We focus on locking in margins based on the cash flows model that continually monitors market
prices of corn, natural gas and other input costs against prices for ethanol and distillers grains
at each of our production facilities. We create offsetting positions by using a combination of
derivative instruments, fixed-price purchases and sales, or a combination of strategies in order to
manage risk associated with commodity price fluctuations. Our primary focus is not to manage
general price movements, for example minimize the cost of corn consumed, but rather to lock in
favorable margins whenever possible.
In the quarter ended December 31, 2009, the average Opis Spot Ethanol Assessment was $2.03 per
gallon and the average NYMEX RBOB was $1.94 per gallon, or approximately $.09 per gallon below
ethanol prices. We believe additional ethanol supply from existing plants that were temporarily
taken off-line may come on-line in the near future and blenders will approach the 10% federal blend
wall, which may reduce wholesale ethanol prices compared to gasoline.
Federal policy has a significant impact on ethanol market demand. Ethanol blenders
benefit from incentives that encourage usage and a tariff on imported ethanol that supports the
domestic industry. Additionally, the renewable fuels standard (RFS) mandates increased level of
usage of both corn-based and cellulosic ethanol. Any adverse ruling on, or legislation affecting,
RFS mandates in the future could have an adverse impact on short-term ethanol prices and our
financial performance in the future. Growth Energy, an ethanol industry trade organization, has
requested a waiver from the EPA to increase the amount of ethanol blended into gasoline from the 10
percent blend up to a 15 percent blend (E15). We feel there is a strong possibility to see
increased blends without having to increase the RFS mandate.
We believe the ethanol industry expand due to these federal mandates and policies. However, we
expect the rate of industry expansion to slow significantly because the lack of available capital
to finance new construction. In addition, state regulatory activity may also negatively impact the
consumption of corn-based ethanol in certain domestic markets, such as California, due to low
carbon fuel standards that take into consideration the effects caused by indirect land use.
The ethanol industry and our business depend upon continuation of the federal and state
ethanol supports such as RFS, the Volumetric Ethanol Excise Tax Credit (VEETC) and import
tariffs. These government incentives have supported a market for ethanol that might disappear
without the incentives. Alternatively, the government incentives may be continued at lower levels
than those at which they currently exist. The elimination or reduction of the federal ethanol
supports would make it more costly for us to sell our ethanol and would likely reduce our net
income.
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The Renewable Fuels Standard
The RFS is a national program that imposes requirements with respect to the amount of
renewable fuel produced and used. The RFS was revised by the Environmental Protection Agency
(EPA) in May 2009 (RFS2) and applies to refineries, blenders, distributors and importers. We
believe the RFS2 program will increase the market for renewable fuels, such as ethanol, as a
substitute for petroleum-based fuels. The RFS2 requires that 12.95 billion gallons be sold or
dispensed in 2010, increasing to 36 billion gallons by 2022, representing 11% of the anticipated
gasoline and diesel consumption. In 2010, RFS2 requires refiners and importers to blend renewable
fuels totaling at least 8.25% of total fuel volume, of which 7.4% of total fuel volume can be
derived from corn-based ethanol.
The following chart illustrates the potential United States ethanol demand based on the
schedule of minimum usage established by the program through the year 2022 (in billions of
gallons).
RFS Requirement | ||||||||||||||||||||
Total Renewable | Cellulosic | Biodiesel | That Can Be Made | |||||||||||||||||
Fuel | Ethanol Minimum | Minimum | Advanced | With Corn Based | ||||||||||||||||
Year | Requirement | Requirement | Requirement | Biofuel | Ethanol | |||||||||||||||
2010
|
12.95 | .10 | .65 | 0.20 | 12.00 | |||||||||||||||
2011
|
13.95 | .25 | .80 | 0.30 | 12.60 | |||||||||||||||
2012
|
15.20 | .50 | 1.00 | 0.50 | 13.20 | |||||||||||||||
2013
|
16.55 | 1.00 | | 1.75 | 13.80 | |||||||||||||||
2014
|
18.15 | 1.75 | | 2.00 | 14.40 | |||||||||||||||
2015
|
20.50 | 3.00 | | 2.50 | 15.00 | |||||||||||||||
2016
|
22.25 | 4.25 | | 3.00 | 15.00 | |||||||||||||||
2017
|
24.00 | 5.50 | | 3.50 | 15.00 | |||||||||||||||
2018
|
26.00 | 7.00 | | 4.00 | 15.00 | |||||||||||||||
2019
|
28.00 | 8.50 | | 4.50 | 15.00 | |||||||||||||||
2020
|
30.00 | 10.50 | | 4.50 | 15.00 | |||||||||||||||
2021
|
33.00 | 13.50 | | 4.50 | 15.00 | |||||||||||||||
2022
|
36.00 | 16.00 | | 5.00 | 15.00 |
The RFS2 program is expected to go into effect in 2010 and require certain gas emission
reductions for the entire lifecycle production of fuels compared to petroleum fuels produced in
2005. The greenhouse gas reduction requirement generally doesnt apply to facilities that commenced
construction prior to December 2007. If this changes and our Fairmont plant must meet the standard,
it may impact the way we procure feed stock and market and transport our products.
Blending Incentives (VEETC)
Under VEETC, the full federal excise tax of 18.4 cents per gallon of gasoline is collected on
all gasoline and allocated to the highway trust fund. In addition, a volumetric ethanol excise tax
credit of 45.0 cents per gallon is provided for ethanol blended at 10% and expires on December 31,
2010. Refiners and gasoline blenders apply for this credit for all ethanol blended with all
gasoline, diesel and ethyl tertiary butyl ether, known as ETBE, including ethanol in E85 (an 85%
ethanol fuel blend) and E20 (a 20% ethanol fuel blend).
Imported Ethanol Tariffs
There is a 54.0 cent per gallon tariff on imported ethanol which expires on January 1, 2011.
Ethanol imports from 24 countries in Central America and the Caribbean region are exempted from the
tariff under the Caribbean Basin Initiative or CBI, which provides that specified nations may
export an aggregate of 7% of U.S. ethanol production per year into the U.S., with additional
exemptions from ethanol produced from feedstock in the Caribbean region over the 7% limit. Ethanol
imported from Caribbean basin countries may be a less expensive alternative to domestically
produced ethanol. The U.S. International Trade Commission announced the 2009 CBI import quota is
452 million gallons of ethanol.
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COMPETITION
Ethanol
The ethanol we produce is similar to ethanol produced by other plants. The RFA reports that as
of October 2009, current U.S. ethanol production capacity is 13.1 billion gallons per year. On a
national level there are numerous other production facilities with which we are in direct
competition, many of whom have greater resources than we do. The largest ethanol producers include
Abengoa Bioenergy Corp., Archer Daniels Midland Company, Cargill, Incorporated, Green Plains
Renewable Energy, Inc., POET, LLC and Valero Renewable Fuels. Producers of this size may have an
advantage over us from economies of scale and negotiating position with purchasers. We market our
ethanol primarily on a regional and national basis. We believe that we are able to reach the best
available markets through the use of experienced ethanol marketers and by the rail delivery methods
we utilize. Our plants compete with other ethanol producers on the basis of price, and, to a lesser
extent, delivery service. We believe that we can compete favorably with other ethanol producers due
to our proximity to ample grain, natural gas, electricity and water supplies at favorable prices as
well as unit train capability that can reach the west coast markets at favorable rates.
Distillers Grains
Sales of distillers grains have represented 14.6% and 20.1% of our revenues for the quarters
ended December 31, 2009 and 2008. When the plants are operating at capacity they produce
approximately 592,000 tons of dried distillers grains equivalents per year, approximately 17 pounds
per bushel of corn. Distillers grains are a high-protein, high-energy animal feed supplement
primarily marketed to the dairy and beef industry, as well as the poultry and swine markets. Dry
mill ethanol processing creates three forms of distillers grains: wet distillers grains with
solubles, known as wet distillers grains, modified wet distillers grains with solubles, known as
modified distillers grains, and dry distillers grains with solubles. Wet and modified distillers
grains have been dried to approximately 64% and 44% moisture levels respectively and have a shelf
life of approximately 10 days and are predominately sold to nearby markets. Dried distillers grains
have been dried to 13% moisture, have an almost indefinite shelf life and may be sold and shipped
to any market regardless of its proximity to an ethanol plant.
We compete with other ethanol producers in the sales of distillers grains as well as a number
of large and smaller suppliers of competing animal feed. We believe the principal competitive
factors are price, proximity to purchasers and product quality. As of December 2009, Nebraska had
23 ethanol plants producing an aggregate of 1.6 billion gallons of ethanol per year, and South
Dakota had 16 ethanol plants producing an aggregate of 1.0 billion gallons of ethanol per year,
including our plants. Most of these plants produce distillers grains.
We currently sell 77.2% of our distillers grains production as dried which has an indefinite
life and can be transported by truck or rail, 5.1% as modified distillers and 17.7% as wet.
LIQUIDITY AND CAPITAL RESOURCES
Financing and Existing Debt Obligations
Our business activities and plant operations are conducted through Advanced BioEnergy, ABE
Fairmont and HGF. The liquidity and capital resources for each entity are based on the entitys
existing financing arrangements and capital structure. ABE Fairmont and HGF both have traditional
project financing in place including senior secured financing, working capital facilities and
subordinate exempt facilities revenue bonds. There are provisions preventing cross default or
collateralization between operating entities. Advanced BioEnergy is highly restricted in its
ability to utilize the cash and other financial resources of each subsidiary for the benefit of
Advanced BioEnergy or other subsidiaries with the exception of allowable distributions as defined
in the separate financing agreements.
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Advanced BioEnergy, LLC
ABE had cash and cash equivalents of $3.4 million on hand at December 31, 2009. The PJC
Capital Note had an outstanding balance of $3.7 million at December 31, 2009, accrues interest at
10%, requires monthly payments totaling $50,000 and matures on October 1, 2012. The PJC Capital
Note requires the Company to forward future tax reimbursements from the Nebraska Tax Advantage Act,
ABE Fairmont annual dividends, and proceeds from the future issuance of units to PJC Capital, until
the PJC Capital Note is paid in full.
The Company believes it can service the remainder of the obligation through Nebraska Advantage
Act tax refunds, cash on hand and/or distributions from ABE Fairmont. At December 31, 2009 the
company recorded a Nebraska Advantage Act receivable of $4.0 million and anticipates receiving the
funds in December 2010.
ABE Fairmont
ABE Fairmont had cash and cash equivalents of $16.1 million and restricted cash of $1.4
million on hand at December 31, 2009. The restricted cash is held in escrow for future debt service
payments. As of December 31, 2009, ABE Fairmont had $72.9 million in senior secured credit and $7.0
million of subordinate exempt facilities revenue bonds outstanding. ABE Fairmont is required to
make monthly interest payments on its senior secured credit and semi-annual interest payments on
its outstanding subordinate exempt revenue bonds. ABE Fairmont is required to make quarterly
principal payments of $2.6 million on its senior secured credit. Annual principal payments of
$815,000 on the subordinate exempt facilities revenue bonds commence in December 2010.
ABE Fairmont anticipates using available cash and working capital to fund current operations,
invest in capital equipment and make required debt service payments on its debt. ABE Fairmont is
allowed to make cash distributions to its parent company (Advanced BioEnergy, LLC) if ABE Fairmont
meets all conditions required in its senior secured credit agreement at the end of a fiscal year.
This annual distribution is limited to 40% of net income calculated in accordance with generally
accepted accounting principals and other terms contained in its senior secured credit agreement.
The distribution is subject to the completion of ABE Fairmonts financial statement audit and upon
making any distribution, ABE Fairmont must remain in compliance with all loan covenants and terms
and conditions of the senior secured credit agreement. ABE Fairmonts senior secured credit
agreement also requires an annual cash sweep subject to a free cash flow calculation as defined in
its senior secured credit agreement. This cash sweep requires ABE Fairmont for each fiscal year
ending in 2010 through 2012, to make a payment equal to the lesser of $8.0 million or 75% of its
free cash flow after distributions, not to exceed $16.0 million in the aggregate for all of these
cash flow payments.
We believe ABE Fairmont has sufficient financial resources available to fund current
operations and capital expenditure requirements for at least the next 12 months. In addition to the
cash on hand, ABE Fairmont has a $6.0 million revolving credit facility for financing eligible
grain inventory and equity in Chicago Board of Trade futures positions, which expires April 1,
2010. The Company has drawn $3 million on the revolving credit facility at December 31, 2009 and
had $3 million remaining available. ABE Fairmont also has a $2.0 million revolving credit facility
for financing third party letters of credit, which expires in February 2012. ABE Fairmont issued a
letter of credit in connection with a rail car lease reducing the financing available from the $2.0
million revolving credit facility by $911,000.
ABE Fairmonts senior secured credit facility agreement contains financial and
restrictive covenants including limitations on additional indebtedness, restricted payments, the
incurrence of liens and transactions with affiliates and sales of assets. In addition, the senior
secured credit facility requires ABE Fairmont to comply with certain financial covenants, including
maintaining monthly minimum working capital, monthly minimum net worth and
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annual debt service coverage ratios and capital expenditure limitations. ABE Fairmont was in
compliance with all covenants at December 31, 2009.
Heartland Grain Fuels
HGF had cash and cash equivalents of $9.9 million and $801,000 of cash restricted for debt
service payments. HGF has not made its scheduled principal and interest payments on the $88.0
million senior credit facility or interest payments on the outstanding $7.1 million working capital
line since October 2008. During the default period, HGF has been accruing interest at the default
rate of 8.5%. As a result of the defaults all principal amounts owed on the senior credit facility
have been classified as current debt in this report.
HGF previously entered into interest rate swaps with a notional amount of $66.0 million to
lock in interest rates on its floating rate debt. As a result of the defaults on the senior credit
facility, the interest rate swaps were terminated in December 2008 and the fair value of the swaps
were recorded as a note payable which continues to accrued interest at 8.27%.
The $19.0 million Brown County Revenue Bonds were issued pursuant to a bond trust indenture
with maturities of $5.8 million in January 2016, $6.3 million in January 2017, and $6.9 million in
January 2018 with an interest rate of 8.25%. The defaults on the senior credit facility also
represented a default on the revenue bonds and all principal amounts owed on the revenue bonds have
been classified as current debt in this report.
In September 2009, HGFs senior lenders commenced discussion with the Company to explore
alternatives to foreclosing on ABEs equity interest in HGF, including a restructuring of the terms
of the current borrowing arrangements with those lenders. These discussions are ongoing, and we
intend to pursue with HGFs senior lenders, as well as the subordinated revenue bond holders, a
restructuring of the current lending arrangements for HGF that will permit the Company to maintain
a significant portion of its ownership of those facilities. Nonetheless, there can be no assurance
that the Company will be successful in restructuring its current lending arrangements or, if an
agreement is reached, whether the terms of any such agreement will permit the Company to retain a
significant ownership interest in HGF. If we are unable to successfully restructure the obligations
to HGFs senior lenders, ABE may be obligated to transfer its equity interest in HGF to the senior
lenders and subordinated revenue bond holders.
CREDIT ARRANGEMENTS
Long-term debt consists of the following (in thousands, except percentages):
December 31, | December 31, | September 30, | ||||||||||
2009 | 2009 | 2009 | ||||||||||
Interest Rate | Principal Amount | Principal Amount | ||||||||||
ABE Fairmont senior credit
facility variable |
3.64 | % | $ | 52,850 | $ | 55,450 | ||||||
ABE Fairmont senior credit facility
fixed |
7.53 | % | 20,000 | 20,000 | ||||||||
ABE Fairmont seasonal line variable |
3.34 | % | 3,000 | 3,000 | ||||||||
ABE Fairmont subordinate exempt
facilities bonds fixed |
6.75 | % | 7,000 | 7,000 | ||||||||
HGF senior credit facility fixed |
8.50 | % | 87,979 | 87,979 | ||||||||
HGF working capital fixed |
8.50 | % | 7,100 | 7,100 | ||||||||
HGF subordinated solid waste
facilities revenue bonds fixed |
8.25 | % | 19,000 | 19,000 | ||||||||
HGF notes payable fixed |
8.27 | % | 4,213 | 4,213 | ||||||||
HGF accrued interest |
12,433 | 9,917 | ||||||||||
ABE PJC Capital note fixed |
10.0 | % | 3,710 | 9,269 | ||||||||
Total outstanding |
217,285 | 222,928 | ||||||||||
Less: Amounts due within one year |
(148,650 | ) | (146,303 | ) | ||||||||
Long-term debt |
$ | 68,635 | $ | 76,625 | ||||||||
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The estimated maturities of debt at December 31, as follows (in thousands): |
2010 |
$ | 148,650 | ||
2011 |
11,215 | |||
2012 |
11,215 | |||
2013 |
11,215 | |||
2014 |
12,065 | |||
Thereafter |
22,925 | |||
Total debt |
$ | 217,285 | ||
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Note 1 to our consolidated financial statements contains a summary of our significant
accounting policies, many of which require the use of estimates and assumptions. Accounting
estimates are an integral part of the preparation of financial statements and are based upon
managements current judgment. We used our knowledge and experience about past events and certain
future assumptions to make estimates and judgments involving matters that are inherently uncertain
and that affect the carrying value of our assets and liabilities. We believe that of our
significant accounting policies, the following are noteworthy because changes in these estimates or
assumptions could materially affect our financial position and results of operations:
Fair Value of Financial Instruments
Financial instruments include cash, cash equivalents and restricted cash, interest rate swaps,
derivative financial instruments, accounts receivable, accounts payable, accrued expenses and
long-term debt. The fair value of the long-term debt is estimated based on anticipated interest
rates which management believes would currently be available to the Company for similar issues of
debt, taking into account the current credit risk of the Company and other market factors. The
Company believes the carrying value of the debt instruments at ABE Fairmont and the PJC
Capital Note approximate fair value. The Company believes it is not practical to estimate the
fair value of the HGF debt instruments due to their default status. The fair value of all other
financial instruments is estimated to approximate carrying value due to the short-term nature of
these instruments.
Derivative Instruments/Due From Broker
On occasion, the Company has entered into derivative contracts to hedge the Companys exposure
to price risk related to future corn purchases and future ethanol sales. Accounting for derivative
contracts 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.
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Inventories
Corn, chemicals, supplies, work in process, ethanol and distillers grains inventories are
stated at the lower of cost or market on a weighted cost basis.
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation computed using the
straight-line method over the estimated useful lives:
Buildings |
40 Years | |||
Process equipment |
10 Years | |||
Office equipment |
5-7 Years |
Maintenance and repairs are charged to expense as incurred; major improvements and betterments
are capitalized. Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount on the asset may not be recoverable. An impairment
loss is recognized when estimated undiscounted future cash flows from operations are less than the
carrying value of the asset group. An impairment loss is measured by the amount by which the
carrying value of the asset exceeds the estimated fair value on that date.
Revenue Recognition
Revenue from the production of ethanol and related products is recorded when title transfers
to customers. Ethanol and related products are generally shipped free on board (FOB) shipping
point. Interest income is recognized as earned. In accordance with the Companys agreements for the
marketing and sale of ethanol and related products, commissions due to the marketers are deducted
from the gross sale price at the time of payment.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
GOVERNMENT PROGRAMS, TAX CREDITS AND TAX INCREMENT FINANCING
We have applied for income and sales tax incentives available under a Nebraska Advantage Act
Project Agreement. We anticipate receiving up to 10% of the investment in the Nebraska plant
through the recovery of certain sales taxes paid on construction costs and future purchases, as
well as reductions in income taxes over the next 13 years. Under the Nebraska Advantage Act, we
also anticipate recovery of 5% of the annual costs of the newly created employment positions,
pursuant to offsets to future payroll taxes. Although we may apply under several programs
simultaneously and may be awarded grants or other benefits from more than one program, some
combinations of programs are mutually exclusive. Under some state and federal programs, awards are
not made to applicants in cases where construction on the project has started prior to the award
date. There is no guarantee that applications will result in awards of grants or credits or
deductions.
In December 2006 we received net proceeds of $6.7 million from tax incremental financing from
the Village of Fairmont, Nebraska. We anticipate paying off the outstanding obligation with future
property tax payments, assessed on the Fairmont plant.
The State of South Dakota pays an incentive to operators of ethanol plants to encourage the
growth of the ethanol industry. The Huron plant is eligible to receive an aggregate of $10 million,
payable up to $1 million per year. The amounts are dependent on annual allocations by the State of
South Dakota and the number of eligible plants. HGF generally received a payment between $700,000
and $800,000 for the Huron plant per year and expects this incentive to terminate for the plant in
2011.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We consider market risk to be the impact of adverse changes in market prices on our results of
operations. We are subject to significant market risk with respect to the price of ethanol and
corn. For the quarter ended December 31, 2009, sales of ethanol represented 85.4% of our total
revenues and corn costs represented 74.2% of total cost of goods sold. In general, ethanol prices
are affected by the supply and demand for ethanol, the cost of ethanol production, the availability
of other fuel oxygenates, the regulatory climate and the cost of alternative fuels such as
gasoline. The price of corn is affected by weather conditions and other factors affecting crop
yields, farmer planting decisions and general economic, market and regulatory factors. At December
31, 2009, the price per gallon of ethanol and the cost per bushel of corn on the Chicago Board of
Trade, or CBOT, were $1.95 and $4.14, respectively.
We are also subject to market risk on the selling prices of our distiller grains, which
represent 14.6% of our total revenues. These prices fluctuate seasonally when the price of corn or
other cattle feed alternatives fluctuate in price. The dried distiller grain spot price for local
customers was $112 per ton at December 31, 2009.
We are also subject to market risk with respect to our supply of natural gas that is consumed
in the ethanol production process. Natural gas costs represented 7.3% of total cost of sales for
the quarter ended December 31, 2009. The price of natural gas is affected by weather conditions and
general economic, market and regulatory factors. At December 31, 2009, the price of natural gas on
the NYMEX was $5.57 per mmbtu.
To reduce price risk caused by market fluctuations in the cost and selling prices of related
commodities, we have entered into forward purchase/sale contracts and derivative transactions. At
December 31, 2009 we guaranteed prices for our ethanol representing 49.7% of our ethanol gallons
sold through March 2010 by entering into flat priced contracts. At December 31, 2009 we had entered
into forward sale contracts representing 33% of our expected distiller grain production and we had
entered into forward purchase contracts representing 31.7% of our current corn requirements through
March 2010. At December 31, 2009, our January gas usage prices were fixed with our natural gas
providers.
The following represents a sensitivity analysis that estimates our annual exposure to market
risk with respect to our current corn and natural gas requirements and ethanol sales. Market risk
is estimated as the potential impact on operating income resulting from a hypothetical 10% change
in the current ethanol, distiller grains, corn, and natural gas prices. The results of this
analysis, which may differ from actual results, are as follows:
Estimated | ||||||||||||||||||||
at Risk | Hypothetical | Change in Annual | ||||||||||||||||||
Volume(1) | Change in | Spot | Operating Income | |||||||||||||||||
(In millions) | Units | Price | Price(2) | (In millions) | ||||||||||||||||
Ethanol |
98.1 | gallons | 10.0 | % | $ | 1.95 | $ | 19.1 | ||||||||||||
Distiller grains |
.39 | tons | 10.0 | % | 112 | 4.4 | ||||||||||||||
Corn |
47.5 | bushels | 10.0 | % | 4.14 | 24.9 | ||||||||||||||
Natural gas |
3.5 | btus | 10.0 | % | 5.57 | 2.0 |
(1) | The volume of ethanol at risk is based on the assumption that we will enter into contracts for 49.7% of our expected annual gallons capacity of 195 million gallons. The volume of distiller grains at risk is based on the assumption that we will enter into contracts for 33.8% of our expected annual distiller grain production of 592,000 tons. The volume of corn is based on the assumption that we will enter into forward contracts for 31.7% of our estimated current 69.6 million bushel annual requirement. The volume of natural gas at risk is based on the assumption that we will continue to lock in one months gas usage. | |
(2) | Current spot prices include the CBOT price per gallon of ethanol and the price per bushel of corn, the NYMEX price per mmbtu of natural gas and our listed local advertised dried distillers grain price per ton as of December 31, 2009. |
INTEREST RATE/FOREIGN EXCHANGE RISK
Our future earnings may be affected by changes in interest rates due to the impact those
changes have on our interest expense on borrowings under our credit facilities. As of December 31,
2009, we had $55.9 million of outstanding borrowings with variable interest rates. With each 1% change in interest rates our
annual interest would change by $559,000.
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We have no international sales. Substantially all of our purchases are denominated in U.S.
dollars. Therefore we do not consider future earnings subject to foreign exchange risk.
IMPACT OF INFLATION
We believe that inflation has not had a material impact on our results of operations since
inception. We cannot assure you that inflation will not have an adverse impact on our operating
results and financial condition in future periods.
Item 4T. Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our chief executive officer, who is also our chief
financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our chief executive
officer, who is also our chief financial officer, concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by us in reports that
we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission rules and forms.
There were no changes in our internal controls over financial reporting during our most recently
completed fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In June 2009, Revis Stephenson, the Companys former director and chairman of the board and
former chief executive officer, filed a demand for arbitration with the American Arbitration
Association alleging that the Company breached its employment agreement with Mr. Stephenson when it
terminated his employment in January 2009. Mr. Stephenson is seeking additional compensation,
including but not limited to two years of compensation and benefits. The Company filed an answer
in July 2009 and discovery is ongoing. The arbitration has been scheduled for September 2010.
Item 1A. Risk Factors
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On October 15, 2009, we sold an aggregate of 60,488 units to Ethanol Capital Partners, L.P.
Series T and Ethanol Capital Partners, L.P. Series R, each of which are affiliates of Clean Energy
Capital, LLC, one of our largest unitholders. These units were sold as part of the private offering
we previously reported on a Current Report on Form 8-K dated as of October 9, 2009 (Form 8-K).
The issuance of these units was exempt from the registration requirements of the Securities Act of
1933, as amended (the Act), in accordance with Section 4(2) of the Act and Regulation D under the
Act.
We had reasonable grounds to believe that each of Ethanol Capital Partners, L.P. Series T and
Ethanol Capital Partners, L.P. Series R was an accredited investor within the meaning of Rule 501
of Regulation D. In addition, each investor was provided access to business and financial
information about us and represented that it is capable of bearing the economic risk of the
investment. Each certificate evidencing securities issued to the investors included a legend to the
effect that the units were not registered under the Securities Act of 1933 and could not be resold
absent registration or the availability of an applicable exemption from registration. No general
solicitation or advertising was used in connection with the transactions.
Other than the sales described above and the sales previously reported on the Form 8-K, we had
no other sales of equity securities that were not registered under the Act during the period
covered by this report.
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Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits filed herewith are set forth on the Exhibit Index filed as a part of this report
beginning immediately following the signatures.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ADVANCED BIOENERGY, LLC |
||||
Date: February 16, 2010 | By: | /s/ Richard R. Peterson | ||
Richard R. Peterson | ||||
Chief Executive Officer, President, Chief Financial Officer and Director |
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EXHIBIT INDEX
Exhibit | ||||||
No. | Description | Method of Filing | ||||
3.1 | Certificate of Formation
|
Incorporated by reference to Exhibit 2.1 to the Registrants Current Report on Form 8-K, filed on November 8, 2006 | ||||
3.2 | Third Amended and Restated
Operating Agreement of the
Registrant dated as of February
1, 2006 as amended on September
18, 2009
|
Incorporated herein by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K, filed on September 24, 2009 | ||||
31.1 | Rule 13a-14(a)/15d-14(a)
Certification by Principal
Executive Officer
|
Filed Electronically | ||||
31.2 | Rule 13a-14(a)/15d-14(a)
Certification by Principal
Financial and Accounting
Officer
|
Filed Electronically | ||||
32 | Section 1350 Certifications
|
Filed Electronically |