Attached files
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EX-32.1 - RED TRAIL ENERGY, LLC | v184750_ex32-1.htm |
EX-31.1 - RED TRAIL ENERGY, LLC | v184750_ex31-1.htm |
EX-32.2 - RED TRAIL ENERGY, LLC | v184750_ex32-2.htm |
EX-31.2 - RED TRAIL ENERGY, LLC | v184750_ex31-2.htm |
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, DC
20549
FORM 10-Q
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2010
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR
THE TRANSITION PERIOD FROM
TO
COMMISSION
FILE NUMBER: 000-52033
RED TRAIL ENERGY,
LLC
(Exact
name of registrant as specified in its charter)
NORTH
DAKOTA
|
76-0742311
|
|
(State
or other jurisdiction
of
incorporation or organization)
|
(IRS
Employer
Identification
No.)
|
P.O. Box
11
3682
Highway 8 South
Richardton,
ND 58652
(Address
of principal executive offices)
(701) 974-3308
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes þ No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
o Yes o No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filter or a smaller reporting company. See
definition of “large accelerated filer,” accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check
one):
Large
accelerated filer o
Accelerated filer o
Non-accelerated filer þ Smaller
Reporting Company o
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
o Yes þ No
As of May
13, 2010, the Company has outstanding 40,193,973 Class A Membership
Units.
RED TRAIL
ENERGY, LLC
FORM 10-Q
QUARTERLY REPORT FOR THE QUARTER ENDED
MARCH 31,
2010
TABLE OF
CONTENTS
PART
I — FINANCIAL INFORMATION
|
1
|
Item
1. – CONDENSED FINANCIAL STATEMENTS
|
1
|
CONDENSED
BALANCE SHEETS
|
1
|
CONDENSED
STATEMENTS OF OPERATIONS
|
2
|
CONDENSED
STATEMENTS OF CASH FLOWS
|
3
|
NOTES
TO CONDENSED FINANCIAL STATEMENTS
|
4
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
|
15
|
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
|
15
|
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
25
|
ITEM
4T. CONTROLS AND PROCEDURES
|
26
|
PART
II — OTHER INFORMATION
|
27
|
ITEM
1. LEGAL PROCEEDINGS
|
27
|
ITEM
1A. RISK FACTORS
|
27
|
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
27
|
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
|
27
|
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
28
|
ITEM
5. OTHER INFORMATION
|
28
|
ITEM
6. EXHIBITS
|
28
|
SIGNATURES
|
29
|
EXHIBIT
INDEX
|
30
|
PART
I — FINANCIAL INFORMATION
Item 1.
– CONDENSED FINANCIAL STATEMENTS
RED
TRAIL ENERGY, LLC
CONDENSED
BALANCE SHEETS
March
31, 2010
|
||||||||
(Unaudited)
|
December 31, 2009
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and equivalents
|
$ | 12,589,232 | $ | 13,214,091 | ||||
Restricted
cash - collateral
|
750,000 | 750,000 | ||||||
Restricted
cash - margin account
|
203,612 | 1,467,013 | ||||||
Accounts
receivable
|
2,248,322 | 2,635,775 | ||||||
Derivative
instruments, at fair value
|
276,635 | 129,063 | ||||||
Inventory
|
6,602,827 | 6,993,031 | ||||||
Prepaid
expenses
|
206,865 | 195,639 | ||||||
Total
current assets
|
22,877,493 | 25,384,612 | ||||||
Property,
Plant and Equipment
|
||||||||
Land
|
351,280 | 351,280 | ||||||
Plant
and equipment
|
79,253,921 | 79,199,850 | ||||||
Land
improvements
|
3,970,500 | 3,970,500 | ||||||
Buildings
|
5,312,995 | 5,312,995 | ||||||
Construction
in progress
|
41,280 | ― | ||||||
88,929,976 | 88,834,625 | |||||||
Less
accumulated depreciation
|
18,884,570 | 17,419,043 | ||||||
Net
property, plant and equipment
|
70,045,406 | 71,415,582 | ||||||
Other
Assets
|
||||||||
Investment
in RPMG
|
605,000 | 605,000 | ||||||
Patronage
equity
|
309,990 | 192,207 | ||||||
Deposits
|
80,000 | 80,000 | ||||||
Total
other Assets
|
994,990 | 877,207 | ||||||
Total
Assets
|
$ | 93,917,889 | $ | 97,677,401 | ||||
LIABILITIES
AND MEMBERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Current
maturities of long-term debt
|
$ | 12,600,000 | $ | 6,500,000 | ||||
Accounts
payable
|
6,264,272 | 7,605,302 | ||||||
Accrued
expenses
|
3,331,790 | 2,634,534 | ||||||
Derivative
instruments, at fair value
|
― | 806,490 | ||||||
Accrued
loss on firm purchase commitments
|
102,000 | ― | ||||||
Interest
rate swaps, at fair value
|
2,322,867 | 2,360,686 | ||||||
Total
current liabilities
|
24,620,929 | 19,907,012 | ||||||
Other
Liabilities
|
||||||||
Contracts
payable
|
275,000 | 275,000 | ||||||
Long-Term
Debt
|
32,162,105 | 43,620,025 | ||||||
Commitments
and Contingencies
|
||||||||
Members'
Equity
|
36,859,855 | 33,875,364 | ||||||
Total
Liabilities and Members' Equity
|
$ | 93,917,889 | $ | 97,677,401 |
Notes to
Unaudited Condensed Financial Statements are an integral part of this
Statement.
1
RED TRAIL ENERGY,
LLC
CONDENSED
STATEMENTS OF OPERATIONS
Three Months Ended
March 31, 2010
(Unaudited)
|
Three Months Ended
March 31, 2009
(Unaudited)
|
|||||||
Revenues
|
||||||||
Ethanol,
net of changes in fair value of derivative
instruments
|
$ | 23,784,165 | $ | 16,904,002 | ||||
Distillers
grains
|
5,102,726 | 3,991,611 | ||||||
Total
Revenue
|
28,886,891 | 20,895,613 | ||||||
Cost
of Goods Sold
|
||||||||
Cost
of goods sold, net of changes in fair value of derivative
instruments
|
23,606,550 | 18,391,358 | ||||||
Loss
on firm purchase commitments
|
102,000 | 274,000 | ||||||
Lower
of cost or market adjustment for inventory on hand
|
20,000 | 767,000 | ||||||
Depreciation
|
1,450,442 | 1,470,219 | ||||||
Total
Cost of Goods Sold
|
25,178,992 | 20,902,577 | ||||||
Gross
Margin (Loss)
|
3,707,899 | (6,964 | ) | |||||
General
and Administrative
|
640,155 | 781,009 | ||||||
Operating
Income (Loss)
|
3,067,744 | (787,973 | ) | |||||
Interest
Expense
|
1,088,919 | 1,305,222 | ||||||
Other
Income, net
|
1,005,667 | 42,221 | ||||||
Net
Income (Loss)
|
$ | 2,984,492 | $ | (2,050,974 | ) | |||
Wtd
Avg Units Outstanding - Basic
|
40,193,973 | 40,188,973 | ||||||
Net
Income (Loss) Per Unit - Basic
|
$ | 0.07 | $ | (0.05 | ) | |||
Wtd
Avg Units Outstanding - Diluted
|
40,193,973 | 40,188,973 | ||||||
Net
Income (Loss) Per Unit - Diluted
|
$ | 0.07 | $ | (0.05 | ) |
Notes to
Unaudited Condensed Financial Statements are an integral part of this
Statement.
2
RED TRAIL ENERGY,
LLC
CONDENSED
STATEMENTS OF CASH FLOWS
Three months ended
March 31, 2010
(Unaudited)
|
Three months ended
March 31, 2009
(Unaudited)
|
|||||||
Cash
Flows from Operating Activities
|
||||||||
Net
income (loss)
|
$ | 2,984,492 | $ | (2,050,974 | ) | |||
Adjustment
to reconcile net income (loss) to net cash provided by
|
||||||||
operating
activities:
|
||||||||
Depreciation
|
1,465,526 | 1,484,564 | ||||||
Amortization
and write-off of debt financing costs
|
― | 567,385 | ||||||
Change
in fair value of derivative instruments
|
(954,062 | ) | (266,214 | ) | ||||
Unrealized
loss on firm purchase commitments
|
102,000 | 274,000 | ||||||
Change
in fair value of interest rate swap
|
323,614 | 165,675 | ||||||
Equity-based
compensation
|
― | 5,000 | ||||||
Noncash
patronage equity
|
(117,783 | ) | ― | |||||
Changes
in assets and liabilities
|
||||||||
Restricted
cash - margin account
|
1,263,401 | 399,281 | ||||||
Accrued
loss on firm purchase commitments
|
― | (1,426,800 | ) | |||||
Accounts
receivable
|
387,453 | (114,806 | ) | |||||
Inventory
|
390,204 | (1,567,962 | ) | |||||
Prepaid
expenses
|
(11,226 | ) | 4,329,948 | |||||
Accounts
payable
|
(1,341,030 | ) | 256,635 | |||||
Accrued
expenses
|
697,256 | (720,448 | ) | |||||
Cash
settlements on interest rate swap
|
(361,433 | ) | (20,085 | ) | ||||
Net
cash provided by operating activities
|
4,828,412 | 1,315,199 | ||||||
Cash
Flows from Investing Activities
|
||||||||
Investment
in RPMG
|
― | (58,181 | ) | |||||
Refund
of sales tax on fixed assets
|
― | 55,260 | ||||||
Capital
expenditures
|
(95,351 | ) | (1,582 | ) | ||||
Net
cash used in investing activities
|
(95,351 | ) | (4,503 | ) | ||||
Cash
Flows from Financing Activities
|
||||||||
Debt
repayments
|
(5,357,920 | ) | (1,249,007 | ) | ||||
Proceeds
from long-term debt
|
― | 2,500,000 | ||||||
Net
cash provided by (used in) financing activities
|
(5,357,920 | ) | 1,250,993 | |||||
Net
Increase (Decrease) in Cash and Equivalents
|
(624,859 | ) | 2,561,689 | |||||
Cash
and Equivalents - Beginning of Period
|
13,214,091 | 4,433,839 | ||||||
Cash
and Equivalents - End of Period
|
$ | 12,589,232 | $ | 6,995,528 | ||||
Supplemental
Disclosure of Cash Flow Information
|
||||||||
Interest
paid
|
$ | 1,153,966 | $ | 917,762 | ||||
SUPPLEMENTAL
DISCLOSURE OF NON-CASH
|
||||||||
INVESTING
AND FINANCING ACTIVITIES
|
||||||||
Write-off
of debt issuance costs
|
$ | ― | $ | 517,823 | ||||
Investment
in RPMG included in accounts payable
|
$ | ― | $ | 58,181 |
Notes to
Unaudited Condensed Financial Statements are an integral part of this
Statement.
3
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009
NOTES
TO CONDENSED FINANCIAL STATEMENTS
The
accompanying condensed unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”). Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted as permitted by such rules and regulations. These financial statements
and related notes should be read in conjunction with the financial statements
and notes thereto included in the Company’s audited financial statements for the
year ended December 31, 2009, contained in the Company’s Annual Report on
Form 10-K.
In the
opinion of management, the interim condensed financial statements reflect all
adjustments considered necessary for fair presentation. The adjustments made to
these statements consist only of normal recurring
adjustments. Operating results for the periods presented are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2010.
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature
of Business
Red Trail
Energy, LLC, a North Dakota limited liability company (the “Company”), owns and
operates a 50 million gallon annual name-plate production ethanol plant
near Richardton, North Dakota (the “Plant”).
Accounting
Estimates
Management
uses estimates and assumptions in preparing these financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported revenues and
expenses. Significant items subject to such estimates and assumptions include
the useful lives of property, plant and equipment; valuation of derivatives,
inventory, patronage equity and analysis used in evaluating purchase
commitments; analysis of intangibles impairment, the analysis of long-lived
assets impairment and other contingencies. Actual results could
differ from those estimates.
Reclassifications
The
presentation of certain items in the financial statements for the three months
ended March 31, 2009 have been changed to conform to the classifications used in
2010. These reclassifications had no effect on members’ equity, net
income (loss) or operating cash flows as previously reported.
Restricted
Cash
The
Company is required to restrict cash for use as collateral on two letters of
credit issued in relation to its distilled spirits and grain warehouse
bonds. As of March 31, 2010 and December 31, 2009, the total amount
of restricted cash related to these bonds was $750,000. The Company
also had cash restricted to meet its hedge account requirements. The
total amount of cash restricted in its hedge account was approximately $204,000
and $1.5 million as of March 31, 2010 and December 31, 2009,
respectively.
Net Income (Loss) Per
Unit
Net
income (loss) per unit is calculated on a basic and fully diluted basis using
the weighted average units outstanding during the period. No diluted
units were outstanding as of March 31, 2010. For the period ended
March 31, 2009, 70,000 equivalent units outstanding were not included as they
would be anti-dilutive.
4
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009
Fair Value of Financial
Instruments
On
January 1, 2008, the Company adopted guidance for accounting for fair value
measurements of financial assets and financial liabilities and for fair value
measurements of nonfinancial items that are recognized or disclosed at fair
value in the financial statements on a recurring basis. On January 1, 2009, the
Company adopted guidance for fair value measurement related to nonfinancial
items that are recognized and disclosed at fair value in the financial
statements on a nonrecurring basis. The guidance establishes a fair
value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to measurements involving significant
unobservable inputs (Level 3 measurements). The three levels of the fair value
hierarchy are as follows:
|
·
|
Level
1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities that the Company has the ability to access at the
measurement date.
|
|
·
|
Level
2 inputs are inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly or
indirectly.
|
|
·
|
Level
3 inputs are unobservable inputs for the asset or
liability.
|
The level
in the fair value hierarchy within which a fair measurement in its entirety
falls is based on the lowest level input that is significant to the fair value
measurement in its entirety.
The fair
value of the Company’s cash and equivalents, accounts receivable, accounts
payable, derivative instruments and other working capital accounts approximate
their carrying value due to their short-term nature. The
Company evaluated the fair value of its long-term debt at March 31, 2010 and
December 31, 2009 and the fair value approximated the carrying value (see Note 6
for additional information).
2. CONCENTRATIONS
Coal
Coal is
an important input to our manufacturing process. We entered into a
new two year agreement with Westmoreland Coal Sales Company (“Westmoreland”) to
supply PRB coal through 2011. Whether the Plant runs long-term on
lignite or PRB coal, there can be no assurance that the coal we need will always
be delivered as we need it, that we will receive the proper size or quality of
coal or that our coal combustor will always work properly with lignite or PRB
coal. Any disruption could either force us to reduce our operations or shut down
the Plant, both of which would reduce our revenues.
We
believe we could obtain alternative sources of PRB or lignite coal if necessary,
though we could suffer delays in delivery and higher prices that could hurt our
business and reduce our revenues and profits. We believe there is sufficient
supply of coal from the PRB coal regions in Wyoming and Montana to meet our
demand for PRB coal. We also believe there is sufficient supply of
lignite coal in North Dakota to meet our demand for lignite coal.
If there
is an interruption in the supply or quality of coal for any reason, we may be
required to halt production. If production is halted for an extended period of
time, it may have a material adverse affect on our operations, cash flows and
financial performance.
In
addition to coal, we could use natural gas as a fuel source if our coal supply
is significantly interrupted. There is a natural gas line within three miles of
our Plant and we believe we could contract for the delivery of enough natural
gas to operate our Plant at full capacity. Natural gas tends to be significantly
more expensive than coal and we would also incur significant costs to adapt our
power systems to natural gas. Because we are already operating on coal, we do
not expect to need natural gas unless coal interruptions impact our
operations.
Sales
We are
substantially dependent upon RPMG for the purchase, marketing and distribution
of our ethanol. RPMG purchases 100% of the ethanol produced at our Plant, all of
which is marketed and distributed to its customers. Therefore, we are highly
dependent on RPMG for the successful marketing of our ethanol. In the event that
our relationship with RPMG is interrupted or terminated for any reason, we
believe that we could locate another entity to market the
ethanol. However, any interruption or termination of this
relationship could temporarily disrupt the sale and production of ethanol and
adversely affect our business and operations and potentially result in a higher
cost to the Company.
5
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009
We are
substantially dependent on CHS for the purchase, marketing and distribution of
our DDGS. CHS purchases 100% of the DDGS produced at the Plant (approximately
13% of our total revenue), all of which are marketed and distributed to its
customers. Therefore, we are highly dependent on CHS for the successful
marketing of our DDGS. In the event that our relationship with CHS is
interrupted or terminated for any reason, we believe that another entity to
market the DDGS could be located. However, any interruption or termination of
this relationship could temporarily disrupt the sale and production of DDGS and
adversely affect our business and operations.
3. DERIVATIVE
INSTRUMENTS
From time
to time the Company enters into derivative transactions to hedge its exposures
to interest rate and commodity price fluctuations. The Company does not enter
into derivative transactions for trading purposes.
The
Company provides qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of gains
and losses from derivative instruments, and disclosures about
credit-risk-related contingent features in derivative
agreements.
As of
March 31, 2010, the Company had entered into interest rate swap agreements along
with corn and ethanol derivative instruments. The Company
records its derivative financial instruments as either assets or
liabilities at fair value in the statement of financial
position. Derivatives qualify for treatment as hedges when there is a
high correlation between the change in fair value of the derivative instrument
and the related change in value of the underlying hedged item. Based upon the
exposure being hedged, the Company may designate its hedging instruments as a
fair value hedge, a cash flow hedge or a hedge against foreign currency
exposure. The Company formally documents, designates, and assesses
the effectiveness of transactions that receive hedge accounting initially and on
an on-going basis. The Company does not currently have any derivative
instruments that are designated as effective hedging instruments for accounting
purposes.
Commodity
Contracts
As part
of its hedging strategy, the Company may enter into ethanol and corn
commodity-based derivatives in order to protect cash flows from fluctuations
caused by volatility in commodity prices in order to protect gross profit
margins from potentially adverse effects of market and price volatility on
ethanol sales and corn purchase commitments where the prices are set at a future
date. These derivatives are not designated as effective hedges for
accounting purposes. For derivative instruments that are not accounted for as
hedges, or for the ineffective portions of qualifying hedges, the change in fair
value is recorded through earnings in the period of change. Ethanol derivative
fair market value gains or losses are included in the results of operations and
are classified as revenue and corn derivative changes in fair market value are
included in cost of goods sold.
As
of:
|
March
31, 2010
|
December
31, 2009
|
||||||||||||||||
Contract
Type
|
#
of
Contracts
|
Notional
Amount
(Qty)
|
Fair
Value
|
#
of
Contracts
|
Notional
Amount
(Qty)
|
Fair
Value
|
||||||||||||
Corn
futures
|
19
|
95,000
|
bushels
|
$
|
15,750
|
82
|
410,000
|
bushels
|
$
|
129,063
|
||||||||
Ethanol
swap contracts
|
52
|
748,800
|
gallons
|
260,885
|
530
|
7,632,000
|
gallons
|
(806,490
|
)
|
|||||||||
Total
fair value
|
$
|
276,635
|
$
|
(677,427
|
)
|
Amounts
are recorded separately on the balance sheet - negative numbers represent
liabilties
None of
the commodity contracts in place at March 31, 2010 and 2009 were designated as
effective hedges for accounting purposes. As such, the change in fair value of
the commodity contracts in place at March 31, 2010 and 2009 have been recorded
in the results of operations and classified as stated above.
Interest
Rate Contracts
The
Company manages its floating rate debt using interest rate swaps. The Company
has entered into fixed rate swaps to alter its exposure to the impact of
changing interest rates on its results of operations and future cash outflows
for interest. Fixed rate swaps are used to reduce the Company’s risk of the
possibility of increased interest costs. Interest rate swap contracts are
therefore used by the Company to separate interest rate risk management from the
debt funding decision.
6
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009
The
Company had approximately $30.1 million and $30.8 million of notional amount
outstanding in swap agreements, as of March 31, 2010 and December 31, 2009,
respectively that exchange variable interest rates (one-month LIBOR and
three-month LIBOR) for fixed interest rates over the terms of the
agreements. At March 31, 2010 and December 31, 2009, the fair value of the
interest rate swaps totaled approximately $2.3 million and $2.4 million,
respectively, and is included in current liabilities. These agreements are not
designated as an effective hedge for accounting purposes and the change in fair
market value and associated net settlements are recorded in interest expense.
The swaps mature in April 2012.
The
Company recorded net settlements of approximately $361,000 and $20,000 for the
three months ended March 31, 2010 and 2009, respectively. See Note 5 for a
description of these agreements.
The
following tables provide details regarding the Company’s derivative financial
instruments at March 31, 2010 and December 31, 2009:
Derivatives not designated as hedging instruments
for accounting purposes
|
||||||||
Balance Sheet - as of March 31,
2010
|
Asset
|
Liability
|
||||||
Derivative
instruments, at fair value
|
$ | 276,635 | $ | ― | ||||
Interest
rate swaps, at fair value
|
― | 2,322,867 | ||||||
Total
derivatives not designated as hedging instruments for accounting
purposes
|
$ | 276,635 | $ | 2,322,867 |
Balance Sheet - as of December 31,
2009
|
Asset
|
Liability
|
||||||
Derivative
instruments, at fair value
|
$ | 129,063 | $ | 806,490 | ||||
Interest
rate swaps, at fair value
|
― | 2,360,686 | ||||||
Total
derivatives not designated as hedging instruments for accounting
purposes
|
$ | 129,063 | $ | 3,167,176 |
Statement of Operations
(Income)/expense
|
Location of gain
(loss) recognized in
income
|
Amount of gain (loss)
recognized in income
during the three months
ended March 31, 2010
|
Amount of gain (loss)
recognized in income
during the three months
ended March 31, 2009
|
|||||||
Corn
derivative instruments
|
Cost
of goods sold
|
$ | 140,832 | $ | 487,932 | |||||
Ethanol
derivative instruments
|
Revenues
|
1,487,829 | ― | |||||||
Interest
rate swaps
|
Interest
expense
|
(323,614 | ) | (165,675 | ) | |||||
Total
|
$ | 1,305,047 | $ | 322,257 |
4.
INVENTORY
Inventory
is valued at lower of cost or market. Inventory values as of March 31, 2010 and
December 31, 2009 were as follows:
As
of
|
March
31, 2010
|
December
31, 2009
|
||||||
Raw
materials, including corn, chemicals and supplies
|
$ | 5,522,134 | $ | 4,921,532 | ||||
Work
in process
|
603,042 | 642,701 | ||||||
Finished
goods, including ethanol and distillers grains
|
477,651 | 1,428,798 | ||||||
Total
inventory
|
$ | 6,602,827 | $ | 6,993,031 |
Lower of
cost or market adjustments for the three months ended March 31, 2010 and 2009
were as follows:
For
the three months ended March 31,
|
2010
|
2009
|
||||||
Loss
on firm purchase commitments
|
$ | 102,000 | $ | 274,000 | ||||
Lower
of cost or market adjustment for inventory on hand
|
20,000 | 767,000 | ||||||
Total
lower of cost or market adjustments
|
$ | 122,000 | $ | 1,041,000 |
7
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009
The
Company has entered into forward corn purchase contracts under which it is
required to take delivery at the contract price. At the time the contracts were
created, the price of the contract price approximated market price. Subsequent
changes in market conditions could cause the contract prices to become higher or
lower than market prices. As of March 31, 2010, the average price of corn
purchased under fixed price contracts, that had not yet been delivered, was
slightly above market price. Based on this information, the Company accrued an
estimated loss of firm purchase commitments of $102,000 for the three months
ended March 31, 2010. The Company also recorded a loss on firm purchase
commitments of approximately $274,000 for the three month period ended March 31,
2009. The loss is recorded in “Loss on firm purchase commitments” on the
statements of operations. The amount of the loss was determined by applying a
methodology similar to that used in the impairment valuation with respect to
inventory. Given the uncertainty of future ethanol prices, this loss may or may
not be recovered, and further losses on the outstanding purchase commitments
could be recorded in future periods.
The
Company recorded inventory valuation impairments of $20,000 and $767,000 for the
three months ended March 31, 2010 and 2009, respectively. The impairments were
attributable primarily to decreases in market prices of corn and ethanol. The
inventory valuation impairment was recorded in “Lower of cost or market
adjustment for inventory on hand” on the statement of operations.
5.
BANK FINANCING
Long-term
debt consists of the following:
As
of
|
March
31, 2010
|
December
31, 2009
|
||||||
Notes
payable under loan agreement to bank, see details below
|
$ | 39,198,555 | $ | 44,541,350 | ||||
Subordinated
notes payable, see details below
|
5,525,000 | 5,525,000 | ||||||
Capital
lease obligations (Note 7)
|
38,550 | 53,675 | ||||||
Total
Long-Term Debt
|
44,762,105 | 50,120,025 | ||||||
Less
amounts due within one year
|
12,600,000 | 6,500,000 | ||||||
Total
Long-Term Debt Less Amounts Due Within One Year
|
$ | 32,162,105 | $ | 43,620,025 | ||||
Scheduled maturities for the twelve months ended
March 31
|
||||||||
2011
+
|
$ | 12,600,000 | ||||||
2012
|
5,844,533 | |||||||
2013
|
26,301,417 | |||||||
2014
|
15,611 | |||||||
2015
|
544 | |||||||
Thereafter
|
― | |||||||
Total
|
$ | 44,762,105 |
+ -
Scheduled current maturities for the twelve months ended March 31, 2010 include
the full outstanding balance of our subordinated debt which has a maturity date
of March 2011. However, the subordination agreement requires the bank to provide
us written consent to make any principal payments to the subordinated debt
holders however we have not received such consent as of March 31,
2010.
As of
March 31, 2010, the Company was in compliance with all of its debt
covenants.
The
Company is subject to a number of covenants and restrictions in connection with
its credit facilities, including:
|
•
|
Providing the bank with current
and accurate financial
statements;
|
|
•
|
Maintaining certain financial
ratios, minimum net worth, and working
capital;
|
|
•
|
Maintaining adequate
insurance;
|
|
•
|
Not making, or allowing to be
made, any significant change in the Company’s business or tax
structure;
|
|
•
|
Needing
bank approval for capital expenditures in excess of $500,000;
and
|
8
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009
|
•
|
Limiting
the Company’s ability to make distributions to
members.
|
The
construction loan agreement with the bank also contains a number of events of
default (including violation of our loan covenants) which, if any of them were
to occur, would give the bank certain rights, including but not limited
to:
|
•
|
Declaring all the debt owed to
the bank immediately due and payable;
and
|
|
•
|
Taking possession of all of the
Company’s assets, including any contract
rights.
|
The bank
could then sell all of the Company’s assets or business and apply any proceeds
to repay their loans. The Company would continue to be liable to repay any loan
amounts still outstanding.
Credit
Agreement
In
December 2005, the Company entered into a credit agreement with First
National Bank of Omaha providing for a total credit facility of approximately
$59,712,000 for the purpose of funding the construction of the Plant. The
construction loan agreement requires the Company to maintain certain financial
ratios and meet certain non-financial covenants. The construction loan agreement
is secured by substantially all of the assets of the Company and includes the
terms as described below.
The
Company entered into the seventh amendment to its loan agreements (“Seventh
Amendment”) in March of 2010 (effective as of December 31, 2009). The Seventh
Amendment changed certain definitions and covenant ratios within the financial
covenants that allowed the Company to meet those covenants as of December 31,
2009 as well as waived all prior covenant violations. The Seventh Amendment also
calls for an additional principal payment that approximates an increase in our
interest rate spread to 500 basis points over certain LIBOR rates.
Interest
expense as shown on the statement of operations is composed of the
following:
Interest Expense
|
For the three months
ended March 31,
2010
|
For the three months
ended March 31, 2009
|
||||||
Interest
expense on long-term debt
|
$ | 765,305 | $ | 572,163 | ||||
Amortization/write-off
of deferred financing costs
|
― | 567,385 | ||||||
Change
in fair value of interest rate swaps
|
(37,819 | ) | 145,589 | |||||
Net
settlements on interest rate swaps
|
361,433 | 20,085 | ||||||
Total
interest expense
|
$ | 1,088,919 | $ | 1,305,222 |
Construction
Loan
The
Company had four long-term notes (collectively the “Term Notes” or each a “Term
Note”) in place as of March 31, 2010. Three of the Term Notes were established
in conjunction with the termination of the original construction loan agreement
on April 16, 2007. The fourth Term Note was entered into during December 2007
(the “December 2007 Fixed Rate Note”) when the Company entered into a second
interest rate swap agreement which effectively fixed the interest rate on an
additional $10 million of debt. The Construction Loan Agreement requires the
Company to maintain certain financial ratios and meet certain non-financial
covenants. Each Term Note has specific interest rates and terms as described
below.
9
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009
Term
Notes - Construction Loan
Outstanding
Balance
|
Estimated
|
|||||||||||||||||||||||||
(Millions)
|
Interest
Rate
|
Range
of Estimated
|
Final
|
|||||||||||||||||||||||
March
31,
|
December
|
March
31,
|
December
|
Quarterly
Principal
|
Payment
|
|||||||||||||||||||||
Term
Note
|
2010
|
31,
2009
|
2010
|
31,
2009
|
Payment
Amounts
|
(millions)
|
Notes
|
|||||||||||||||||||
Fixed
Rate Note
|
$ | 23.00 | $ | 23.60 | 6.00 | % | 6.00 | % |
$560,000
- $630,000
|
$ | 18.30 |
1,
2, 4
|
||||||||||||||
Variable
Rate Note
|
1.60 | 2.10 | 6.00 | % | 6.00 | % |
$1,600,000
|
1.60 |
1,
2, 3, 5
|
|||||||||||||||||
Long-Term
Revolving Note
|
5.88 | 10.00 | 6.00 | % | 6.00 | % |
$550,000
- $610,000
|
1.20 |
1,
2, 6, 7, 8
|
|||||||||||||||||
2007
Fixed Rate Note
|
8.55 | 8.80 | 6.00 | % | 6.00 | % |
$200,000
- $235,000
|
6.80 |
1,
2, 5
|
Notes
1 - The
scheduled maturity date is April 2012
2 - Range
of estimated quarterly principal payments is based on principal balances and
interest rates as of March 31, 2010
3 -
|
Quarterly
payments of $634,700 are applied first to interest on the Long-Term
Revolving Note, next to accrued interest on the Variable Rate Note and
finally to principal on the Variable Rate Note. Variable Rate Note was
paid off in April 2010 as Excess Cash Flow payment was applied to the
Variable Rate Note.
|
4 -
Interest rate based on 5.0% over three-month LIBOR with a 6% minimum, reset
quarterly
5 -
Interest rate based on 5.0% over three-month LIBOR with a 6% minimum, reset
quarterly
6 -
Interest rate based on 5.0% over one-month LIBOR with a 6% minimum, reset
monthly
7 -
Principal payments would be made on the Long-Term Revolving Note once the
Variable Rate Note is paid in full. Any principal applied to the Long-Term
Revolving Note reduces the amount available under the revolver.
8 - Funds
withheld from the plant's design builder (approx $4.1 million) which were
previously set aside in a money market account were applied to the Long-Term
Revolving Note in March 2010 pursuant to the terms of the 7th Amendment to the
Company's Loan Agreement. Accordingly, the payment amounts above take into
account the application of those funds which may ultimately be paid to the
design builder depending upon the terms of any resolution of the
dispute.
Interest Rate Swap
Agreements
In
December 2005, the Company entered into an interest rate swap transaction
that effectively fixed the interest rate at 8.08% on the outstanding principal
of the Fixed Rate Note. In December 2007, the Company entered into a second
interest rate swap transaction that effectively fixed the interest rate at
7.695% on the outstanding principal of the December 2007 Fixed Rate
Note.
The
interest rate swaps were not designated as either a cash flow or fair value
hedge. Fair value adjustments and net settlements are recorded in interest
expense.
Letters of
Credit
The
Company also issued two new letters of credit during the second quarter of 2009
in conjunction with the issuance of its grain warehouse and distilled spirits
bonds. The letters of credit were issued in the amount of $500,000 and $250,000,
respectively.
Subordinated
Debt
As part
of the Construction Loan Agreement, the Company entered into three separate
subordinated debt agreements totaling $5,525,000 and received funds from these
debt agreements during 2006. Interest is charged at a rate of 2.0% over the
Variable Rate Note interest rate (a total of 8% and 6.4825% at March 31, 2010
and 2009, respectively) and has a scheduled maturity of March 2011. The
outstanding balance of the subordinated debt has been included in our current
debt maturities, as noted above. However, the subordination agreement requires
the Bank to provide consent to make principal payments to the subordinated debt
holders but the Company has not received such consent. Interest is compounding
with any unpaid interest converted to principal. The balance outstanding on
these loans was $5,525,000 as of March 31, 2010 and December 31,
2009.
10
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009
6.
FAIR VALUE MEASUREMENTS
The
following table provides information on those assets and liabilities that are
measured at fair value on a recurring basis as of March 31, 2010 and December
31, 2009, respectively. Money market funds shown below are included in cash and
equivalents on the balance sheet.
Fair Value Measurement
Using
|
||||||||||||||||||||
Carrying
Amount as of
March 31, 2010
|
Fair Value as of
March 31, 2010
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||||||
Assets
|
||||||||||||||||||||
Money
market funds
|
$ | 901,344 | $ | 901,344 | $ | 901,344 | $ | ― | $ | ― | ||||||||||
Derivative
instruments
|
276,635 | 276,635 | 276,635 | ― | ― | |||||||||||||||
Total
|
$ | 1,177,979 | $ | 1,177,979 | $ | 1,177,979 | $ | ― | $ | ― | ||||||||||
Liabilities
|
||||||||||||||||||||
Interest
rate swaps
|
$ | 2,322,867 | $ | 2,322,867 | $ | ― | $ | 2,322,867 | $ | ― | ||||||||||
Total
|
$ | 2,322,867 | $ | 2,322,867 | $ | ― | $ | 2,322,867 | $ | ― |
Fair Value Measurement
Using
|
||||||||||||||||||||
Carrying
Amount as of
December 31,
2009
|
Fair Value as of
December 31,
2009
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||||||
Assets
|
||||||||||||||||||||
Money
market funds
|
$ | 5,010,325 | $ | 5,010,325 | $ | 5,010,325 | $ | ― | $ | ― | ||||||||||
Derivative
instruments
|
129,063 | 129,063 | 129,063 | ― | ― | |||||||||||||||
Total
|
$ | 5,139,388 | $ | 5,139,388 | $ | 5,139,388 | $ | ― | $ | ― | ||||||||||
Liabilities
|
||||||||||||||||||||
Interest
rate swaps
|
$ | 2,360,686 | $ | 2,360,686 | $ | ― | $ | 2,360,686 | $ | ― | ||||||||||
Derivative
instruments
|
806,490 | 806,490 | 806,490 | ― | ― | |||||||||||||||
Total
|
$ | 3,167,176 | $ | 3,167,176 | $ | 806,490 | $ | 2,360,686 | $ | ― |
The fair
value of the money market funds and corn and ethanol derivative instruments is
based on quoted market prices in an active market. The fair value of the
interest rate swap instruments are determined by using widely accepted valuation
techniques including discounted cash flow analysis on the expected cash flows of
each instrument. The analysis of the interest rate swap reflects the contractual
terms of the derivatives, including the period to maturity and uses observable
market-based inputs and uses the market standard methodology of netting the
discounted future fixed cash receipts and the discounted expected variable cash
payments. The variable cash payments are based on an expectation of future
interest rates derived from observable market interest rate curves.
Financial Instruments Not Measured
at Fair Value
The
estimated fair value of the Company’s long-term debt, including the short-term
portion, at March 31, 2010 approximated the carrying value of $44.6 million. The
Company had negotiated an amendment to its loan agreements during 2009 that set
an interest rate floor of 6% which was the interest rate in effect at March 31,
2010 and was thought to approximate the market interest rate for this debt. The
estimated fair value of the Company’s long-term debt, including the short-term
portion, at December 31, 2009 approximated its carrying value of $50 million.
Fair value was estimated using estimated market interest rates as of March 31,
2010 and December 31, 2009. The fair values and carrying values consider the
terms of the related debt and exclude the impacts of debt discounts and
derivative/hedging activity.
11
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009
7.
LEASES
The
Company leases equipment under operating and capital leases through 2015. The
Company is generally responsible for maintenance, taxes, and utilities for
leased equipment. Equipment under operating lease includes a locomotive and rail
cars. Rent expense for operating leases was approximately $130,000 and $102,000
for the three months ended March 31, 2010 and 2009, respectively. Equipment
under capital leases consists of office equipment and plant
equipment.
Equipment
under capital leases is as follows at:
As
of
|
March
31, 2010
|
December
31, 2009
|
||||||
Equipment
|
$ | 219,476 | $ | 219,476 | ||||
Accumulated
amortization
|
69,059 | 63,248 | ||||||
Net
equipment under capital lease
|
$ | 150,417 | $ | 156,228 |
At March
31, 2010, the Company had the following minimum commitments, which at inception
had non-cancelable terms of more than one year. Amounts shown below are for the
12 months period ending March 31:
Operating
Leases
|
Capital
Leases
|
|||||||
2011
|
$ | 505,260 | $ | 30,731 | ||||
2012
|
483,190 | 3,354 | ||||||
2013
|
378,200 | 3,354 | ||||||
2014
|
31,200 | 3,354 | ||||||
2015
|
31,200 | 560 | ||||||
Thereafter
|
15,600 | ― | ||||||
Total
minimum lease commitments
|
$ | 1,444,650 | 41,353 | |||||
Less
amount representing interest
|
2,803 | |||||||
Present
value of minimum lease commitments included in the preceding current
liabilities
|
$ | 38,550 |
8.
MEMBERS’ EQUITY
The
Company has one class of membership units, Class A Membership Units (the
“Units”), with each Unit representing a pro rata ownership interest in the
Company’s capital, profits, losses and distributions. There were 40,193,973
Units outstanding as of March 31, 2010 and December 31, 2009,
respectively.
On April
8, 2010, the board of governors of Red Trail Energy, LLC announced its intent to
engage in a reclassification and reorganization of the Company’s membership
units. The proposed transaction will provide for the reclassification
of the Company’s membership units into three separate and distinct
classes.
If the
proposed reclassification is approved by the Company’s members, we expect that
each member of record holding 50,000 or more units will receive one Class A unit
for each common equity unit held by such unit holder prior to the
reclassification; each member of record holding 10,001 to 49,999 units will
receive one Class B unit for each common equity unit held by such unit holder
immediately prior to the reclassification; and each member of record holding
10,000 or fewer units will receive one Class C unit for each common equity unit
held by such unit holder immediately prior to the reclassification.
If the
Company’s members approve the proposed amendment to the Company’s operating
agreement and member control agreement and the reclassification is implemented,
the Company anticipates having fewer than 300 unit holders of record of its
common equity units and fewer than 500 unit holders of record of each of the
additional classes, which would enable the Company to voluntarily terminate the
registration of its units under the Securities and Exchange Act of
1934.
We expect
that the classes of units will be distinguished from one another based on voting
rights. If the Company’s members approve the proposed amendment to
the Company’s operating agreement and member control agreement and the
reclassification is implemented, we expect that Class A unit holders would be
entitled to vote on all matters for which unit holder approval is required under
the Company’s operating agreement, member control agreement or state law; Class
B unit holders would be entitled to vote on the election of the Company’s
governors and the voluntary dissolution of the Company; and Class C unit holders
would be entitled to vote only on the voluntary dissolution of the
Company.
12
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009
The Board
intends to have members vote on this proposed transaction at its Annual Meeting.
The date of this meeting has yet to be determined but is expected to be held
later in 2010 (August – October). This proposed reclassification is subject to
the affirmative vote of 2/3 of the Units outstanding. Members may vote their
units in person by attending the annual meeting, or by mailing their completed
proxy if they are unable or do not wish to attend. The Company is in the process
of preparing a preliminary proxy statement regarding the proposed
reclassification described above for SEC review and will file a definitive proxy
statement upon completion of SEC review. A definitive proxy statement containing
detailed information about the proposed reclassification will be sent to the
members prior to the special meeting of members.
9.
COMMITMENTS AND CONTINGENCIES
Design-Build
Agreement
The
Company signed a design-build agreement (the “Design-Build Agreement”) with
Fagen, Inc. (“Fagen”) in September 2005 to design and build the Plant at a total
contract price of approximately $77 million. The Company has remaining payments
under the Design-Build Agreement of approximately $3.9 million. This payment has
been withheld pending satisfactory resolution of a punch list of items,
including a major issue with the coal combustor experienced during start up. The
Plant was originally designed to be able to run on lignite coal. During the
first four months of operation, however, the Plant experienced numerous shut
downs related to running on lignite coal. In April 2007, the Company switched to
using Powder River Basin (“PRB”) coal as its fuel source and has not experienced
a single shut down related to coal quality. The Company continues to work with
Fagen to find a solution to these issues. An amount approximately equal to the
final payment has been set aside is currently being used to pay down the
Company’s Long-Term Revolving Note. The funds may be released upon resolution of
this issue pending bank approval.
Firm Purchase Commitments
for Corn
To ensure
an adequate supply of corn to operate the Plant, the Company enters into
contracts to purchase corn from local farmers and elevators. At March 31, 2010
and 2009, the Company had various fixed price and basis contracts for the
purchase of approximately 927,000 and 1.9 million bushels of corn, respectively.
Using the stated contract price for the fixed price contracts and using market
prices as of the respective date for the basis contracts, the Company had
commitments of approximately $3.3 million and $7.9 million, respectively,
related to the bushels under contract.
13
RED TRAIL
ENERGY, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIODS ENDED MARCH 31, 2010 AND DECEMBER 31, 2009
10. RELATED-PARTY
TRANSACTIONS
The
Company has balances and transactions in the normal course of business with
various related parties for the purchase of corn, sale of distillers grains and
sale of ethanol. The related parties include Unit holders, members of the board
of governors of the Company, Greenway Consulting, LLC (“Greenway”) and RPMG,
Inc. (“RPMG”). The Company also has a note payable to Greenway and pays Greenway
for consulting fees (recorded in general and administrative expense).
Significant related party activity affecting the financial statements are as
follows:
March 31, 2010
|
December 31, 2009
|
|||||||
Balance
Sheet
|
||||||||
Accounts
receivable
|
$ | 1,611,781 | $ | 2,155,238 | ||||
Accounts
payable
|
1,386,341 | 1,164,218 | ||||||
Notes
payable
|
1,525,000 | 1,525,000 | ||||||
For
the three months
ended
March 31,
2010
|
For
the three months
ended
March 31,
2009
|
|||||||
Statement
of Operations
|
||||||||
Revenues
|
$ | 22,964,373 | $ | 17,484,495 | ||||
Cost
of goods sold
|
864,837 | 697,310 | ||||||
General
and administrative
|
49,898 | 106,715 | ||||||
Inventory
Purchases
|
$ | 1,325,545 | $ | 1,513,137 |
14
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We
prepared the following discussion and analysis to help you better understand our
financial condition, changes in our financial condition, and results of
operations for the three months ended March 31, 2010, compared to the same
period of the prior fiscal year. This discussion should be read in conjunction
with our interim condensed financial statements and notes included in
Item 1 of Part 1 of this Quarterly Report, and the audited condensed
financial statements and notes thereto contained in Item 8 and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
contained in Item 7 of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2009.
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
This
Quarterly Report contains forward-looking statements within the meaning of
Section 21E of the Exchange Act. Forward-looking statements are all statements
other than statements of historical fact, including without limitation those
statements that are identified by the words “anticipates,” “believes,”
“continue,” “could,” “estimates,” “expects,” “future,” “hope,”
“intends,” “may,” “plans,” “potential,” “predicts,” “should,”
“target,” and similar expressions, and include statements concerning plans,
objectives, goals, strategies, future events or performance, and underlying
assumptions (many of which are based, in turn, upon further assumptions) and
other statements that are other than statements of historical facts. From time
to time, the Company may publish or otherwise make available forward-looking
statements of this nature, including statements contained within this
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Forward-looking
statements involve risks and uncertainties, which could cause actual results or
outcomes to differ materially from those expressed. Forward-looking statements
in this Quarterly Report include, but are not limited to, our expectations
regarding future revenues and expenses, the effect of state and federal low
carbon fuel or ethanol blending regulations on our operations and revenues,
Plant downtime, capital expenditures, our compliance with loan covenants,
reinstatement of our line of credit, interest costs, interest income, receipt of
grant income, receipt of state incentive plan payments, linkage of ethanol and
corn prices in the future, ethanol and distillers grain prices, corn costs,
increased yields from production, the implementation of our corn procurement
program, the possible installation of corn oil extraction equipment, hedging
strategies, corn usage and ethanol production, general and administrative costs,
chemical and denaturant costs, expected savings from our coal unloading
facility, our profit projections for the rest of 2010, and our ability to fund
our operations and capital expenditures from our existing cash flows. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties.
Nonetheless, the Company's expectations, beliefs or projections may not be
achieved or accomplished. Forward-looking statements are subject to known
and unknown risks and uncertainties, including those risks described in
“Item 1A - Risk Factors” of our Annual Report on Form 10-K as updated in
Part II, Item 1A of this Quarterly Report.
Any
forward-looking statement contained in this document speaks only as of the date
on which the statement is made, and the Company undertakes no obligation to
update any forward-looking statement or statements to reflect events or
circumstances that occur after the date on which the statement is made or to
reflect the occurrence of unanticipated events. New factors emerge from time to
time, and it is not possible for management to predict all of the factors, nor
can it assess the effect of each factor on the Company's business or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statement. All
forward-looking statements, whether written or oral and whether made by or on
behalf of the Company, are expressly qualified by the risk factors and
cautionary statements in this Quarterly Report, including statements contained
within “Part II, Item 1A – Risk Factors,” and in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2009, and include:
|
·
|
Fluctuations
in the price and market for ethanol and distillers
grains;
|
|
·
|
Availability
and costs of products and raw materials, particularly corn and
coal;
|
|
·
|
Changes
in the environmental regulations that apply to our plant operations and
our ability to comply with such
regulations;
|
|
·
|
Ethanol
supply exceeding demand and corresponding ethanol price reductions
impacting our ability to operate profitably and maintain a positive spread
between the selling price of our products and our raw material
costs;
|
15
|
·
|
Our
ability to generate and maintain sufficient liquidity to fund our
operations, meet debt service requirements and necessary capital
expenditures;
|
|
·
|
Our
ability to continue to meet our loan
covenants;
|
|
·
|
Limitations
and restrictions contained in the instruments and agreements governing our
indebtedness;
|
|
·
|
Results
of our hedging transactions and other risk management
strategies;
|
|
·
|
Changes
in plant production capacity, variations in actual ethanol and distillers
grains production from expectations or technical difficulties in operating
the plant;
|
|
·
|
Changes
in our business strategy, capital improvements or development
plans;
|
|
·
|
Changes
in interest rates and the availability of credit to support capital
improvements, development, expansion and
operations;
|
|
·
|
Our
ability to market and our reliance on third parties to market our
products;
|
|
·
|
Changes
in or elimination of governmental laws, tariffs, trade or other controls
or enforcement practices that currently benefit the ethanol industry
including:
|
|
o
|
national,
state or local energy policy – examples include legislation already passed
such as the California low-carbon fuel standard as well as potential
legislation in the form of carbon cap and
trade;
|
|
o
|
federal
and state ethanol tax incentives;
|
|
o
|
legislation
mandating the use of ethanol or other oxygenate
additives;
|
|
o
|
state
and federal regulation restricting or banning the use of
MTBE;
|
|
o
|
environmental
laws and regulations that apply to our plant operations and their
enforcement; or
|
|
o
|
reduction
or elimination of tariffs on foreign
ethanol.
|
|
·
|
The
development of infrastructure related to the sale and distribution of
ethanol including:
|
|
o
|
expansion
of rail capacity,
|
|
o
|
possible
future use of ethanol dedicated pipelines for
transportation,
|
|
o
|
increases
in truck fleets capable of transporting ethanol within localized
markets,
|
|
o
|
additional
storage facilities for ethanol, expansion of refining and blending
facilities to handle ethanol,
|
|
o
|
growth
in service stations equipped to handle ethanol fuels,
and
|
|
o
|
growth
in the fleet of flexible fuel vehicles capable of using higher blends of
ethanol fuel;
|
|
·
|
Increased
competition in the ethanol and oil
industries;
|
|
·
|
Fluctuations
in U.S. oil consumption and petroleum
prices;
|
|
·
|
Changes in general economic
conditions or the occurrence of certain events causing an economic impact
in the agriculture, oil or automobile
industries;
|
|
·
|
Ongoing disputes with our
management consultant and design-build
contractor;
|
|
·
|
Our liability resulting from
litigation;
|
|
·
|
Our ability to retain key
employees and maintain labor
relations;
|
|
·
|
Changes and advances in ethanol
production technology; and
|
|
·
|
Competition from alternative
fuels and alternative fuel
additives.
|
16
Summary
Red Trail
Energy, LLC, a North Dakota limited liability company (the “Company,” “Red
Trail,” or “we,” “our,” or “us”), owns and operates a 50 million gallon
annual name-plate production ethanol plant near Richardton, North Dakota
(the
“Plant”).
Results of
Operations
The
following table shows the results of our operations and the percentages of
revenues, cost of goods sold, general and administrative expenses and other
items to total sales and revenues in our statements of operations for the three
months ended March 31, 2010 and 2009, respectively.
Three months ended
March 31, 2010
(Unaudited)
|
Three months ended
March 31, 2009
(Unaudited)
|
|||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
Revenues
|
||||||||||||||||
Ethanol,
net of changes in fair value of derivative instruments
|
$ | 23,784,165 | 82.34 | % | $ | 16,904,002 | 80.90 | % | ||||||||
Distillers
grains
|
5,102,726 | 17.66 | % | 3,991,611 | 19.10 | % | ||||||||||
Total
Revenue
|
28,886,891 | 100.00 | % | 20,895,613 | 100.00 | % | ||||||||||
Cost
of Goods Sold
|
||||||||||||||||
Cost
of goods sold, net of changes in fair value of derivative
instruments
|
23,606,550 | 81.72 | % | 18,391,358 | 88.02 | % | ||||||||||
Loss
on firm purchase commitments
|
102,000 | 0.35 | % | 274,000 | 1.31 | % | ||||||||||
Lower
of cost or market adjustment for inventory on hand
|
20,000 | 0.07 | % | 767,000 | 3.67 | % | ||||||||||
Depreciation
|
1,450,442 | 5.02 | % | 1,470,219 | 7.04 | % | ||||||||||
Total
Cost of Goods Sold
|
25,178,992 | 87.16 | % | 20,902,577 | 100.03 | % | ||||||||||
Gross
Margin (Deficit)
|
3,707,899 | 12.84 | % | (6,964 | ) | -0.03 | % | |||||||||
General
and Administrative
|
640,155 | 2.22 | % | 781,009 | 3.74 | % | ||||||||||
Operating
Income (Loss)
|
3,067,744 | 10.62 | % | (787,973 | ) | -3.77 | % | |||||||||
Interest
Expense
|
1,088,919 | 3.77 | % | 1,305,222 | 6.25 | % | ||||||||||
Other
Income, net
|
1,005,667 | 3.48 | % | 42,221 | 0.20 | % | ||||||||||
Net
Income (Loss)
|
$ | 2,984,492 | 10.33 | % | $ | (2,050,974 | ) | -9.82 | % |
Additional Data
|
Three Months ended
March 31, 2010
|
Three Months ended
March 31, 2009
|
||||||
Ethanol
sold (thousands of gallons)
|
14,249 | 11,792 | ||||||
Dried
distillers grains sold (tons)
|
34,516 | 15,453 | ||||||
Modified
distillers grains sold (tons)
|
20,215 | 34,600 | ||||||
Ethanol
avg price/gallon (incl hedging activity)
|
$ | 1.67 | $ | 1.43 | ||||
Dried
distillers grains avg price/ton
|
$ | 108.78 | $ | 138.28 | ||||
Modified
distillers grains avg price/ton
|
$ | 57.52 | $ | 51.20 | ||||
Corn
costs per bushel (incl hedging activity)
|
$ | 3.54 | $ | 3.98 |
Results
of Operations for the Three Months Ended March 31, 2010 as Compared to the Three
Months Ended March 31, 2009
Summary
Our main
revenue sources (ethanol and distillers grains) and our main cost component
(corn) are commodities that are subject to a high degree of price volatility but
also have at times, historically, maintained a high degree of
correlation. Because of this volatility, we may experience large
variances in our revenue and cost of goods sold from period to period and year
to year. While we do monitor increases and decreases in the price of
ethanol and corn and we also monitor our other costs of goods sold very closely,
we tend to focus our attention on the spread between ethanol and corn prices as
that has the biggest impact on our profitability. Margins decreased
during the first quarter of 2010, as compared to December 31, 2009 as ethanol
prices decreased in relation to corn prices. The main reason for the
decline in ethanol prices and margins appears to be a readily available supply
of ethanol as many plants that had been slowed down or shut down early in 2009
came back on line or increased production when margins improved during the last
six months of 2009.
17
Despite
the decline in margins from December 2009, our operations were profitable during
the first quarter of 2010 with a net income of approximately $3.0 million
compared to a net loss of approximately $2.1 million during the first quarter of
2009. Operationally we had a very strong quarter, producing
approximately 13.8 million gallons of ethanol. During the first
quarter of 2010, our earnings came from three main areas – operations, hedging
activity and an insurance settlement. Earnings from operations were
approximately $800,000 as margins were still positive in January and declined in
February and March. We realized a gain from our hedging activities of
approximately $1.2 million (including a loss on firm purchase commitments of
$102,000) and we also recognized income of approximately $983,000 from a
business interruption insurance claim related to downtime our plant experienced
during October 2009.
On April
8, 2010, the Company announced its intent to engage in a reclassification and
reorganization of the Company’s membership units. The proposed
transaction will provide for the reclassification of the Company’s membership
units into three separate and distinct classes.
If the
proposed reclassification is approved by the Company’s members, we expect that
each member of record holding 50,000 or more units will receive one Class A unit
for each common equity unit held by such unit holder prior to the
reclassification; each member of record holding 10,001 to 49,999 units will
receive one Class B unit for each common equity unit held by such unit holder
immediately prior to the reclassification; and each member of record holding
10,000 or fewer units will receive one Class C unit for each common equity unit
held by such unit holder immediately prior to the reclassification.
If the
Company’s members approve the proposed amendments to the Company’s operating
agreement and member control agreement and the reclassification is implemented,
the Company anticipates having fewer than 300 unit holders of record of its
common equity units and fewer than 500 unit holders of record of each of the
additional classes, which would enable the Company to voluntarily terminate the
registration of its units under the Securities and Exchange Act of
1934.
Revenues
Three
Months Ended March 31, 2010 and 2009
Revenues
increased approximately $8 million during the quarter ended March 31, 2010 as
compared to the quarter ended March 31, 2009. Ethanol revenue
increased approximately $6.9 million and distillers grains revenue increased
approximately $1.1 million. The increase was due, in part, to higher
prices received for ethanol and higher volumes sold of both ethanol and
distillers grains compared to the first quarter of 2009.
Ethanol
revenue
We
continued to operate the Plant at normal production rates (approximately 110% of
name plate capacity) during the first quarter of 2010. We sold
approximately 2.5 million more gallons of ethanol during the first quarter of
2010 compared to the first quarter of 2009 as we operated the Plant at a slower
rate during the first quarter of 2009 due to poor margin
conditions. The price we received during the first quarter of 2010,
including the effects of our hedging activity, was an average of $0.24 per
gallon higher than the price received during the first quarter of 2009 ($1.67
per gallon vs. $1.43 per gallon). Gains and losses related to our
ethanol hedging activities are recorded in revenue. We recorded gains
of approximately $1.5 million and $0 for the three months ended March 31, 2010
and 2009, respectively. Ethanol is a commodity that has maintained a
fairly high correlation to corn futures prices. While corn futures
prices trended lower during the first quarter of 2010, ethanol futures prices
decreased even further (approximately $0.40 per gallon) as the supply of ethanol
in the market place exceeded demand.
Distillers
grains revenue
Our first
quarter 2010 distillers grain sales volumes were roughly split 70-30 between
DDGS and DMWG compared to an approximate 40-60 split during the first quarter of
2009. The change in product mix came as we changed the pricing on our
DMWG product to more closely match that of DDGS. On a dry matter
basis (converting all distillers grains produced to a DDGS equivalent) our
overall production of distillers grains increased approximately 25% which is
line with the increase in our ethanol production. All of our DMWG
product is transported by truck but our DDGS product is transported by both
truck and rail. As other ethanol plants located in North Dakota that
had been idled for various reasons, resumed production we saw a shift in our
shipments of DDGS from truck to rail.
18
The
average price we received for our DDGS product during the first quarter of 2010
declined approximately 22% compared to the first quarter of 2009 ($109 per ton
vs. $138 per ton) but our DDGS revenue increased by approximately 70% as we sold
more than twice the volume of this product. DDGS prices generally
follow the price of corn which was somewhat lower in the first quarter of 2010
compared to 2009. The average price we receive for DDGS was also
impacted by the shift from truck transportation to rail transportation noted
above. We typically receive a premium of $5 - $10 per ton for product
shipped by truck vs. rail.
The
average price we received for our DMWG product in 2010 increased approximately
12% compared to the first quarter of 2009 ($58 per ton vs. $51) but our revenue
decreased approximately 35%. The decrease in revenue is primarily
related to lower production due to the change in product mix noted
above. We produced and sold approximately 14,400 fewer tons of DMWG
during the first quarter of 2010 compared to 2009. Prices for DMWG
also generally follow the price of corn – the increase in our average price
compared to last year is primarily due to the pricing change noted
above.
Revenues
– Prospective Information
Ethanol
revenue – because ethanol is a market driven commodity, ethanol prices are very
hard to predict. During the first quarter of 2010, ethanol prices
declined in relation to corn due to an oversupply of ethanol in the market
place. We anticipate that this oversupply situation will be somewhat
mitigated, and ethanol prices will improve relative to corn prices, as we move
into the summer driving season and demand increases for
gasoline. Blending economics are also still very positive so we
anticipate the demand from discretionary blending to continue. The
industry is also anticipating the United States Environmental Protection Agency
(“EPA”) to approve a higher allowable blend of ethanol (up to 15%) later this
summer which could also help bolster demand. At this time we are
uncertain as to the extent of infrastructure changes that may be required to
dispense gasoline blended with 15% ethanol, if any. Outside of these
factors, we anticipate the price of ethanol to generally follow the price of
corn. However, this is only a prediction on our part based on the
knowledge and resources we have available today.
There is
a great amount of uncertainty in the marketplace regarding the impact of
negative public perception of the ethanol industry, the possible repeal and/or
reduction of federal ethanol supports and the possible enactment, at the state
or federal level, of low carbon fuel standards that may negatively impact
ethanol. We could face additional negative impacts from low carbon
fuel standards since our Plant uses coal as its main fuel
source. Based on the low carbon fuel standard regulation proposed and
approved by the California Air Resources Board, we believe that ethanol produced
at our Plant would not be allowed to be sold in that state without a reduction
in our Plant’s carbon footprint. The regulation approved in
California is not mandated to go into effect until 2011. We cannot
predict whether other states, or the federal government, may try to enact
legislation similar to the regulation approved by the California Air Resources
Board. Please see “Item 1A – Risk Factors” in our Annual Report on
Form 10-K for the year ended December 31, 2009 for more information on risk
factors that may affect our ethanol revenues.
Distillers
grains revenue – distillers grains are also a market driven commodity which
makes the price very hard to predict. The price of distillers grains,
both DDGS and DMWG, tends to follow the price of corn. We generally
expect the average price we receive for our DDGS product to decrease during the
second and third quarters of each year (the summer months) compared to the first
and fourth quarters (fall and winter months) as cattle move into pastures and
the demand for this product decreases. The price we receive for our
DMWG product is more closely indexed to the price of corn due to the nature of
how it is marketed so we expect this price to fluctuate in conjunction with corn
prices.
Cost
of Sales
The price
we paid for our main input, corn, was lower during the first quarter of 2010
compared to the first quarter of 2009, which, along with the higher ethanol
prices noted above, led to an improvement in the margin between our revenue and
corn cost of approximately $0.31 per gallon. Our overall cost of
goods sold increased by approximately $4.3 million during the first quarter of
2010 compared to the first quarter of 2009. The increase was
primarily due to the increase in production noted above. The per unit
cost of many of the key components of our costs of goods sold (other than corn)
were mostly unchanged compared to last year although we did experience an
increase in our denaturant costs. Our gross profit margin increased
by approximately $3.7 million primarily due to improvement in the spread between
our ethanol and corn prices.
19
Three
Months Ended March 31, 2010 and 2009
|
·
|
Corn
costs - our corn costs per bushel were lower in the first quarter of 2010
compared to the first quarter of 2009 as market prices for corn were lower
and we processed corn that was delivered in much closer proximity to when
it was contracted (in essence we are not contracting for corn as far out
into the future as we had in the past). We also recognized a
larger hedging gain during the first quarter of 2010 as compared to the
first quarter of 2009 ($488,000 vs. $141,000). During the first
quarter of 2009, we processed through some corn that had been contracted
for during mid-2008 when corn prices were significantly
higher. Our average cost per bushel, net of hedging activities,
was approximately $3.54 and $3.98 for the three months ended March 31,
2010 and 2009, respectively.
|
|
·
|
Loss
on firm purchase commitments - the corn that we had under contract at
March 31, 2010, while very near market prices, was approximately $0.11 per
bushel higher than market, on average. This resulted in the
accrual of an estimated loss on firm purchase commitments of $102,000 as
of March 31, 2010. This compares to the accrual of an estimated
loss of $274,000 ($.20 per bushel) as of March 31,
2009.
|
|
·
|
Lower
of cost or market adjustments related to inventory on hand - we recorded
lower of cost or market adjustments related to inventory on hand of
$20,000 and $767,000 for the three months ended March 31, 2010 and 2009,
respectively.
|
|
·
|
Denaturant
costs – we used approximately 50,000 more gallons of denaturant during the
first quarter of 2010 compared to the first quarter of 2009 due to our
increased production. We also experienced a price increase of
approximately $0.74 per gallon during the same time frame ($2.07 per
gallon vs. $1.33 per gallon). The price increase is primarily
related to market prices for gasoline during
2010.
|
Cost
of Sales and Gross Margin – Prospective Information
Because
ethanol is a commodity, we cannot necessarily pass along increases in our cost
of goods sold to our customers. For that reason our gross margin is
very sensitive to changes in costs and we anticipate any increase in cost of
goods sold to have a negative impact on our gross margin. Major
components of costs of goods sold are discussed below.
Corn
cost
Because
corn is a market driven commodity, corn prices are very hard to
predict. Based on our corn procurement strategies we anticipate that
our corn costs will remain near market prices. We expect that our
corn prices will tend to be slightly higher than market prices in a declining
corn market and slightly under market prices in a rising corn market as we do
have to enter into fixed price contracts for at least a portion of our
production needs to ensure an adequate supply of corn to our Plant.
Energy
and chemical needs
While we
do have contracts in place for our main energy inputs in an effort to mitigate
future price increases for coal, water, electricity, natural gas and chemicals,
we have experienced an increase in our electric rates and our chemical supply
contract is subject to market pricing.
Coal
cost
We have a
contract in place for our coal needs in an effort to mitigate potential price
increases. Our current contract runs through December 31,
2011.
Chemical
and denaturant costs
We do not
anticipate any significant price increases for chemicals or denaturant during
the second quarter of 2010 but anticipate that we may see some price increases
in commodity prices such as oil, gasoline and natural gas which could have a
negative impact on our chemical costs.
General
and Administrative
Three
Months Ended March 31, 2010 and 2009
General
and administrative costs for the three months ended March 31, 2010 were
approximately $141,000 lower than the comparable period in 2009. The
decrease is primarily related to lower bank fees as we incurred $150,000 in fees
related to the Sixth Amendment to our loan agreement during the first quarter of
2009.
General
and Administrative - Prospective
For the
rest of 2010, we anticipate that our general and administrative costs may be
slightly higher than the comparable prior year period as we expect to incur
additional legal and accounting costs associated with mediation proceedings and
our deregistration process.
20
Interest
Expense
Our
interest expense is made up of the following components:
Interest Expense
|
For the three months
ended March 31,
2010
|
For the three months
ended March 31, 2009
|
||||||
Interest
expense on long-term debt
|
$ | 765,305 | $ | 572,161 | ||||
Amortization/write-off
of deferred financing costs
|
― | 567,386 | ||||||
Change
in fair value of interest rate swaps
|
(37,819 | ) | 145,590 | |||||
Net
settlements on interest rate swaps
|
361,433 | 20,085 | ||||||
Total
interest expense
|
$ | 1,088,919 | $ | 1,305,222 |
Three
Months Ended March 31, 2010 and 2009
|
·
|
Interest
expense on long-term debt - approximately $193,000 higher primarily due to
higher interest rates. Our weighted average interest rate for
the three months ended March 31, 2010 was approximately 1.25% higher than
the comparable period in 2009 while our debt balance was relatively
unchanged between the periods. The Sixth Amendment to our loan
agreements implemented a minimum interest rate of 6% which is the main
reason for the higher interest
rates.
|
|
·
|
Amortization/write-off
of deferred financing costs – Due to uncertainties with our loan
agreements during the first quarter of 2009, we wrote off the remaining
balance of our deferred financing costs which resulted in a charge of
approximately $517,000.
|
|
·
|
Net
settlements on interest rate swaps – the replacement rates on our interest
rate swaps were significantly lower during the first quarter of 2010 than
the comparable period in 2009 causing us to have to make up a larger
difference in rates through our net
settlements.
|
Interest
Expense - Prospective
We do not
feel we can accurately predict future interest rates although we expect that, at
some point, they will increase from the current historically low
levels. We currently have not received any indication that rates will
increase in the near future. At the end of March 2010, funds that had
been set aside in a money market account (approximately $4.1 million) related to
a dispute with our design builder were applied to our Long-Term Revolving Note
as a way to reduce our interest cost. The funds will still be made
available pending resolution of the dispute. During April 2010, we
paid down the remaining balance (approximately $5.9 million) of our Long-Term
Revolver as a better way to temporarily use our excess
cash. Depending on how long we are able to maintain the pay down of
this debt we would anticipate our interest costs to be lower as a result of our
lower debt balance, assuming interest rates remain at their current
levels.
We
anticipate that an increase in the interest rate used to calculate the value of
our interest rate swaps to have a positive impact on our net income while a
decrease in those rates would have a negative impact on our net
income. We also anticipate that the passage of time will decrease the
termination value of our interest rate swap.
Other
Income (Expense), Net
We
recognized other income of approximately $1 million and $42,000 during the three
months ended March 31, 2010 and 2009, respectively. During 2010, we
received approximately $983,000 from a business interruption insurance claim
related to an unplanned outage at our Plant during October 2009. Our
other income for the first quarter of 2009 was made up almost entirely of
interest income.
We do not
anticipate receiving any significant interest income during the rest of
2010. It is possible that we may receive funds from the North Dakota
Ethanol Incentive program during the balance of 2010 but we cannot accurately
predict the amount as we don’t know the amount of funds that will be available
to distribute nor whether the formula used will allow for a
payment.
21
Liquidity
and Capital Resources
Statement of Cash Flows
|
For the three months
ended March 31, 2010
|
For the three months
ended March 31, 2009
|
||||||
Cash
flows provided by operating activities
|
$ | 4,828,413 | $ | 1,315,199 | ||||
Cash
flows used in investing activities
|
(95,351 | ) | (4,503 | ) | ||||
Cash
flows provided by (used in) financing activities
|
(5,357,921 | ) | 1,250,993 |
Cash
Flows
During
the three months ended March 31, 2010, the increase in net income before
depreciation and amortization as compared to March 31, 2009 was a significant
contributor to cash flows from operating activities. The changes in
cash flows from operating activities generally follow the results of operations
as discussed in “Results of Operations for the Three Months Ended March 31, 2010
as Compared to the Three Months Ended March 31, 2009” and also are affected by
changes in working capital.
Three
Months Ended March 31, 2010 and 2009
Operating
activities
Cash
flows provided by operating activities increased by approximately $3.5 million
during the three months ended March 31, 2010 from the comparable period in
2009. A net positive change in net income of approximately $5.0
million was offset by a net decrease in non-cash items (primarily related to
changes in write-downs of debt financing costs and changes in fair value of
derivative instruments) of approximately $1.4 million and a net negative change
in working capital items between the periods of approximately $100,000 related
to normal working capital changes.
Investing
activities
We had
minimal investing activities for the periods ended March 31, 2010 and 2009,
respectively.
Financing
activities
Cash
flows used in financing activities increased by approximately $6.6 million
during the three months ended March 31, 2010 from the comparable period in
2009. The Company made principal payments of approximately $5.4
million during the first quarter of 2010. These payments consisted of
its regularly scheduled note payment of $1.3 million and the application of
approximately $4.1 million to the Long-Term Revolving Note that had been set
aside related to a dispute with its design builder. This activity
compares to a net borrowing of approximately $1.3 million during the first
quarter of 2009 as the Company borrowed $2.5 million on its Long-Term Revolving
Note which was offset by its regularly scheduled not payment of approximately
$1.2 million.
Capital
Expenditures
The
Company currently has two capital projects in progress that it anticipates will
cost a total of approximately $325,000. We anticipate completion of
these projects to occur in the late second or early third quarter of
2010. The Company is also evaluating certain other capital projects
related to reducing the carbon intensity of its fuel in anticipation of trying
to meet the requirements of the California low-carbon fuel
standard. The Company is in the early stages of reviewing potential
projects and does not currently have any accurate cost estimates. It
is possible that such projects will be undertaken during 2010. We
anticipate being able to fund our current on-going capital projects from our
operating cash flows.
Capital
Resources
We are
subject to a number of covenants and restrictions in connection with our credit
facilities, including:
•
|
Providing the Bank with current
and accurate financial
statements;
|
•
|
Maintaining certain financial
ratios including minimum net worth, working capital and fixed charge
coverage ratio;
|
•
|
Maintaining adequate
insurance;
|
•
|
Making, or allowing to be made,
any significant change in our business or tax structure;
and
|
•
|
Limiting our ability to make
distributions to members.
|
22
The
Construction Loan Agreement also contains a number of events of default
(including violation of our loan covenants)
which, if any of them were to occur, would give the Bank certain rights,
including but not limited to:
•
|
declaring all the debt owed to
the Bank immediately due and payable;
and
|
•
|
taking possession of all of our
assets, including any contract
rights.
|
The Bank
could then sell all of our assets or business and apply any proceeds to repay
their loans. We would continue to be liable to repay any loan amounts still
outstanding.
As of
March 31, 2010 the Company is in compliance with all of its loan
covenants.
As of May
10, 2010, we had available capital (cash plus borrowing capacity) of
approximately $10.5 million. Our available capital does not include
$750,000 set aside as cash collateral related to two letters of credit issued in
relation to our grain warehouse and distilled spirits bonds or approximately
$204,000 that is part of our hedging account. Based on our most recent
projections we anticipate that we will have enough available capital to operate
our business through 2010 and we will maintain compliance with our loan
covenants.
Our net
worth covenant is particularly sensitive to our earnings. We estimate
that we need to record earnings of greater than a net loss of approximately
$700,000 for the period April 2010 to December 2010 in order to maintain
compliance with this covenant at December 31, 2010.
Short-Term
Debt Sources
The
Company does not currently have any short term credit facilities.
Long-Term
Debt Sources
Term
Notes - Construction Loan
Outstanding Balance
(Millions)
|
Interest Rate
|
Range of Estimated
|
Estimated
Final
|
|||||||||||||||||||||
Term Note
|
March 31,
2010
|
December 31,
2009
|
March 31,
2010
|
December 31,
2009
|
Quarterly Principal
Payment Amounts
|
Payment
(millions)
|
Notes
|
|||||||||||||||||
Fixed
Rate Note
|
$ | 23.00 | $ | 23.60 | 6.00 | % | 6.00 | % |
$560,000
- $630,000
|
$ | 18.30 |
1,
2, 4
|
||||||||||||
Variable
Rate Note
|
1.60 | 2.10 | 6.00 | % | 6.00 | % |
$1,600,000
|
1.60 |
1,
2, 3, 5
|
|||||||||||||||
Long-Term
Revolving Note
|
5.88 | 10.00 | 6.00 | % | 6.00 | % |
$550,000
- $610,000
|
1.20 |
1,
2, 6, 7, 8
|
|||||||||||||||
2007
Fixed Rate Note
|
8.55 | 8.80 | 6.00 | % | 6.00 | % |
$200,000
- $235,000
|
6.80 |
1,
2, 5
|
Notes
1 - The
scheduled maturity date is April 2012
2 - Range
of estimated quarterly principal payments is based on principal balances and
interest rates as of March 31, 2010
3 -
|
Quarterly
payments of $634,700 are applied first to interest on the Long-Term
Revolving Note, next to accrued interest on the Variable Rate Note and
finally to principal on the Variable Rate Note. The Variable
Rate Note was paid off in April 2010 as the Excess Cash Flow payment was
applied to the Variable Rate Note.
|
4 -
Interest rate based on 5.0% over three-month LIBOR with a 6% minimum, reset
quarterly
5 -
Interest rate based on 5.0% over three-month LIBOR with a 6% minimum, reset
quarterly
6 -
Interest rate based on 5.0% over one-month LIBOR with a 6% minimum, reset
monthly
7 -
Principal payments would be made on the Long-Term Revolving Note once the
Variable Rate Note is paid in full. Any principal applied to the
Long-Term Revolving Note reduces the amount available under the
revolver.
8 - Funds
withheld from the plant's design builder (approx $4.1 million) which were
previously set aside in a money market account were applied to the Long-Term
Revolving Note in March 2010 pursuant to the terms of the 7th Amendment to the
Company's Loan Agreement. Accordingly, the payment amounts above take
into account the application of those funds which may ultimately be paid to the
design builder depending upon the terms of any resolution of the
dispute.
Please
see Note 5 to our Financial Statements in this Quarterly Report for a
comprehensive discussion of our Long-Term Debt Sources.
23
Contractual
Obligations and Commercial Commitments
We have
the following contractual obligations as of March 31, 2010:
Contractual Obligations
|
Total
|
Less than 1 Yr
|
1-3 Years
|
3-5 Years
|
More than 5 Yrs
|
|||||||||||||||
Long-term
debt obligations *+
|
$ | 50,538,373 | $ | 15,730,044 | $ | 34,795,679 | $ | 12,650 | $ | ― | ||||||||||
Capital
leases
|
41,352 | 30,731 | 6,708 | 3,913 | ― | |||||||||||||||
Operating
lease obligations
|
1,447,650 | 505,560 | 862,590 | 63,600 | 15,900 | |||||||||||||||
Corn
Purchases **
|
3,345,000 | 3,345,000 | ― | ― | ― | |||||||||||||||
Coal
purchases
|
2,545,875 | 1,424,700 | 1,121,175 | ― | ― | |||||||||||||||
Contractual
Obligation
|
176,000 | 176,000 | ||||||||||||||||||
Management
Agreement
|
300,300 | 171,600 | 128,700 | ― | ― | |||||||||||||||
Water
purchases
|
2,743,200 | 406,400 | 812,800 | 812,800 | 711,200 | |||||||||||||||
Total
|
$ | 61,137,750 | $ | 21,790,035 | $ | 37,727,652 | $ | 892,963 | $ | 727,100 |
* -
Long-term debt obligations shown in this table are based on remaining balances
as of March 31, 2010 and the scheduled payments and interest rates contained in
the Term Notes, as amended. Information in this table also assumes
permanent repayment of any amounts currently applied to our Long-Term Revolving
Note. We used the rates fixed in the interest rate swap agreements
(see “Interest Rate Swap
Agreements” in Note 5 to our unaudited condensed financial statements in
this Quarterly Report.) for the Fixed Rate Note and December 2007 Fixed Rate
Note, respectively which should account for possible net cash settlements on the
interest rate swaps.
+ -
Long-term debt obligations Less than 1 year include the full outstanding balance
of our subordinated debt which has a maturity date of March
2011. However, the subordination agreement requires the Bank to
provide us written consent to make any principal payments to the subordinated
debt holders and we have not received such consent.
** -
Amounts determined assuming prices, including freight costs, at which corn had
been contracted for cash corn contracts and current market prices as of March
31, 2010 for basis contracts that had not yet been fixed.
Grants
There has
been no change in the repayment status of our grant from the North Dakota State
Industrial Commission (totaling $275,000) during the first quarter of
2010.
North
Dakota Ethanol Incentive Program
Under the
program, each fiscal quarter, eligible ethanol plants may receive a production
incentive based on the average North Dakota price per bushel of corn received by
farmers during the quarter, as established by the North Dakota agricultural
statistics service, and the average North Dakota rack price per gallon of
ethanol during the quarter, as compiled by AXXIS Petroleum. The
amount is capped at $1.6 million per plant per year up to a lifetime maximum of
$10 million per plant. We did not receive any funds from this program
during the three months ended March 31, 2010 and 2009,
respectively. We cannot predict whether we will receive funds from
this program during the remainder of 2010. The incentive received is
calculated by using the sum arrived at for the corn price average and for the
ethanol price average as calculated below:
Corn
Price
|
·
|
For
every cent that the average quarterly price per bushel of corn exceeds
$1.80, the state shall add to the amounts payable under the program $.001
multiplied by the number of gallons of ethanol produced by the facility
during the quarter.
|
|
·
|
If
the average quarterly price per bushel of corn is exactly $1.80, the state
shall not add anything to the amount payable under the
program
|
|
·
|
For
every cent that the average price per bushel of corn is below $1.80, the
state shall subtract from the amounts payable under the program $.001
multiplied by the number of gallons produced by the facility during the
quarter.
|
Ethanol
Price
|
·
|
For
every cent that the average quarterly rack price per gallon of ethanol is
above $1.30, the state shall subtract from the amounts payable under the
program $.002 multiplied by the number of gallons of ethanol produced by
the facility during the
quarter.
|
24
|
·
|
If
the average quarterly price per gallon of ethanol is exactly $1.30, the
state shall not add anything to the amount payable under the
program.
|
|
·
|
For
every cent that the average quarterly rack price per gallon of ethanol is
below $1.30, the state shall add to the amounts payable under the program
$.002 multiplied by the number of gallons of ethanol produced by the
facility during the quarter.
|
If corn
prices are low compared to historical averages and ethanol prices are high
compared to historical averages, we will receive little or no funds from this
program.
Critical Accounting
Estimates
Our most
critical accounting policies, which are those that require significant judgment,
include policies related to the carrying amount of property, plant and
equipment; valuation of derivatives, inventory and purchase commitments of
inventory; and analysis of intangibles impairment. An in-depth
description of these can be found in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2009. For valuation allowances
related to firm purchase commitments of inventory, please refer to the
disclosures in Note 2 and Note 4 of the Notes to the unaudited condensed
financial statements in this Quarterly Report. Management has not
changed the method of calculating and using estimates and assumptions in
preparing our condensed financial statements in accordance with generally
accepted accounting principles. There have been no changes in the
policies for our accounting estimates for the quarter ended March 31,
2010.
Off-Balance Sheet
Arrangements
We have
not entered into any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We are
exposed to the impact of market fluctuations associated with interest rates and
commodity prices as discussed below. We have no exposure to foreign currency
risk as all of our business is conducted in United States dollars. We use
derivative financial instruments as part of an overall strategy to manage market
risk. We use cash, futures and option contracts to hedge changes to the
commodity prices of corn and we use ethanol swaps to hedge changes in the
commodity price of ethanol. We do not enter into these derivative
financial instruments for trading or speculative purposes, nor do we designate
these contracts as hedges for accounting purposes pursuant to the requirements
Generally Accepted Accounting Principals.
Interest
Rate Risk
We are
exposed to market risk from changes in interest rates. Exposure to interest rate
risk results primarily from holding a revolving promissory note and construction
term notes which bear variable interest rates. Approximately $13 million of our
outstanding long-term debt is not covered under an interest rate swap and is at
a variable rate as of March 31, 2010. We anticipate that a
hypothetical 1% change in interest rates, from those in effect on March 31,
2010, would change our interest expense by approximately $130,000 on an annual
basis. In order to achieve a fixed interest rate on the construction
loan and reduce our risk to fluctuating interest rates, we entered into an
interest rate swap contract that effectively fixed the interest rate at 8.08% on
approximately $27.6 million of the outstanding principal of the
construction loan. We entered into a second interest rate swap in
December 2007 and effectively fixed the interest rate at 7.695% on an additional
$10 million of our outstanding long-term debt. The interest rate
swaps are not designated as either a cash flow or fair value
hedge. Market value adjustments and net settlements are recorded in
interest expense. We anticipate that a hypothetical 1% change in
interest rates, from those in effect on March 31, 2010, would change the fair
value of our interest rate swaps by approximately $560,000.
Commodity
Price Risk
We expect
to be exposed to market risk from changes in commodity
prices. Exposure to commodity price risk results from our dependence
on corn in the ethanol production process and the sale of
ethanol.
25
We enter
in to fixed price contracts for corn purchases on a regular basis. It
is our intent that, as we enter in to these contracts, we will use various
hedging instruments (puts, calls and futures) to maintain a near even market
position. For example, if we have 1 million bushels of corn under
fixed price contracts we would generally expect to enter into a short hedge
position to offset our price risk relative to those bushels we have under fixed
price contracts. Because our ethanol marketing company (RPMG) is
selling substantially all of the gallons it markets on a spot basis we also
include the corn bushel equivalent of the ethanol we have produced that is
inventory but not yet priced as bushels that need to be hedged.
Although
we believe our hedge positions will accomplish an economic hedge against our
future purchases, they are not designated as hedges for accounting purposes,
which would match the gain or loss on our hedge positions to the specific
commodity purchase being hedged. We use 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
sales. The immediate recognition of hedging gains and losses under
fair value accounting can cause net income to be volatile from quarter to
quarter and year to year due to the timing of the change in value of derivative
instruments relative to the cost of the commodity being
hedged. However, it is likely that commodity cash prices will have
the greatest impact on the derivatives instruments with delivery dates nearest
the current cash price.
As of
March 31, 2010 we had approximately 926,000 bushels of corn under fixed price
contracts. These contracts were priced slightly above current market
prices so we accrued a loss on firm purchase commitments of $102,000 related to
these contracts. We would expect a sustained $0.10 change in the
price of corn to have an approximate $93,000 impact on our net
income.
It is the
current position of RPMG (our ethanol marketing company) that, under current
market conditions, selling ethanol in the spot market will yield the best price
for our ethanol. RPMG will, from time to time, contract a portion of
the gallons they market with fixed price contracts. We had no fixed
price contracts for the sale of physical ethanol outstanding at March 31, 2010
or March 31, 2009.
We
estimate that our expected corn usage will be between 18 million and 20
million bushels per year for the production of approximately 50 million to 54
million gallons of ethanol. As corn prices move in reaction to market
trends and information, our income statements will be affected depending on the
impact such market movements have on the value of our derivative
instruments.
To manage
our coal price risk, we entered into a coal purchase agreement with our supplier
to supply us with coal, fixing the price at which we purchase coal. If we are
unable to continue buying coal under this agreement, we may have to buy coal in
the open market.
ITEM 4T. CONTROLS AND
PROCEDURES
Evaluation of
Disclosure Controls and Procedures
We
conducted an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer of
the effectiveness of the design and operation of our disclosure controls and
procedures. The term “disclosure controls and procedures,” as defined
in Rules 13a-15(e) and 15d – 15(e) under the Securities Exchange Act of
1934 (“Exchange Act”), as amended, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
the company in the reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission’s (“SEC”) rules and
forms. Disclosure controls and procedures also include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate, to allow timely decisions
regarding required disclosure.
Our Chief
Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of our disclosure controls and procedures as of March 31, 2010,
have concluded that our disclosure controls and procedures are effective in
ensuring that material information required to be disclosed is included in the
reports that we file with the SEC.
Changes in Internal
Controls
There
have been no changes in our internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the
fiscal quarter ended March 31, 2010, that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
26
Inherent
Limitations on the Effectiveness of Controls
Management
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent or detect all errors and all
fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that objectives of the
control systems are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the
inherent limitations in a cost-effective control system, no evaluation of
internal controls over financial reporting can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, have been detected or will be
detected.
These
inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of a simple error or
mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part
on certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over
time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies and
procedures.
PART II — OTHER
INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
None.
ITEM 1A. RISK
FACTORS
In
addition to the other information set forth in this report, including the
important information under the heading “Disclosure Regarding Forward-Looking
Statements,” you should carefully consider the “Risk Factors” discussed in our
Annual Report on Form 10-K for the year ended December 31, 2009. “Risk
Factors” are conditions that may cause investment in our Company to be
speculative or risky. In light of developments during the first quarter of
fiscal 2010, we have decided to update our Risk Factors as set forth below.
Other than these updates, we are not currently aware of factors other than those
set forth in our Annual Report on Form 10-K that would have a foreseeable effect
on the level of risk associated with investment in our Company; however,
additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial might materially adversely affect our actual
business, financial condition and/or operating results.
We have withheld
$3.9 million from our design-builder, Fagen, related to the coal
combustor. We have withheld $3.9 million from our
design-builder, Fagen, due to punch list items which are not complete as of May
13, 2010 and problems with the coal combustor. The punch list are items that
must be complete under the terms of the Lump Sum Design-Build Agreement between
Fagen and us dated August 29, 2005 (the “Design-Build Contract”) in order
for us to sign off on final completion and authorize payment of the
$3.9 million. In addition to a number of other punch list items,
the Design-Build Contract specified that the coal combustor would operate on
lignite coal and meet the emissions requirements in our air quality permits;
however, numerous plant shutdowns during start up in early 2007 related to using
lignite coal forced the Company to switch to PRB coal. While running
on lignite coal and subsequently, while running on cleaner burning PRB coal, we
have not been able to maintain compliance with our air quality
permits. There is no assurance that any potentially agreed upon
solution would solve the problems or solve the problems for $3.9 million or
less. Any potential fixes could cost significantly more than $3.9
million. There is also no assurance that Fagen and its subcontractors
will agree on any solution or even agree that the problem is their
responsibility to correct. If Fagen disputes the withholding of the $3.9 million
and demands payment, we may be forced to pay the $3.9 million and there
would be no assurance that the punch list items would be completed or that the
coal combustor would be able to use lignite coal.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
None.
27
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER
INFORMATION
None.
ITEM 6. EXHIBITS
See
Exhibit Index following the signature page of this report.
28
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RED
TRAIL ENERGY, LLC
|
|||
Date:
May 13, 2010
|
By:
|
/s/ Calvin Diehl
|
|
Calvin
Diehl
|
|||
Chief
Executive Officer
|
|||
Date:
May 13, 2010
|
By:
|
/s/
Mark E. Klimpel
|
|
Mark
E. Klimpel
|
|||
Chief
Financial Officer
|
29
EXHIBIT INDEX
RED
TRAIL ENERGY, LLC
FORM 10-Q FOR THE QUARTER ENDED MARCH
31, 2010
31.1*
|
Certification
by Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Securities
Exchange Act of 1934).
|
|
31.2*
|
Certification
by Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Securities
Exchange Act of 1934).
|
|
32.1*
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.2*
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
* Filed herewith.
+ Confidential
treatment requested for portions of this exhibit.
30