Attached files
file | filename |
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EX-31.1 - RED TRAIL ENERGY, LLC | v193690_ex31-1.htm |
EX-10.1 - RED TRAIL ENERGY, LLC | v193690_ex10-1.htm |
EX-32.2 - RED TRAIL ENERGY, LLC | v193690_ex32-2.htm |
EX-31.2 - RED TRAIL ENERGY, LLC | v193690_ex31-2.htm |
EX-32.1 - RED TRAIL ENERGY, LLC | v193690_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the quarterly period ended June 30, 2010
¨
|
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 000-53039
RED
TRAIL ENERGY, LLC
(Name of
registrant as specified in its charter)
NORTH
DAKOTA
|
76-0742311
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
3682
Highway 8 South, P.O. Box 11, Richardton, North Dakota
|
58652
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(701)
974-3308
(Registrant’s
telephone number)
Indicate
by check mark whether the registrant (1) 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.
x Yes ¨ No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). ¨ Yes ¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
|
¨
|
Accelerated
filer
|
¨
|
|
Non-accelerated
filer
|
x
|
(Do not check if a smaller reporting company)
|
Smaller
reporting company
|
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨ Yes x No
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: As of August 13, 2010 there
were 40,193,973 Class A Membership Units.
INDEX
Page
|
||
PART
I — FINANCIAL INFORMATION
|
3
|
|
Item
1. – Condensed Financial Statements
|
3
|
|
Item
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
|
13
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
25
|
|
Item
4. Controls and Procedures
|
27
|
|
PART
II — OTHER INFORMATION
|
27
|
|
Item
1.
Legal
Proceedings
|
27
|
|
Item
1A. Risk Factors
|
28
|
|
Item
2.
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
28
|
|
Item
3.
Defaults
Upon Senior Securities
|
28
|
|
Item
4.
Removed
and Reserved
|
28
|
|
Item
5.
Other
Information
|
28
|
|
Item
6. Exhibits
|
29
|
|
SIGNATURES
|
|
29
|
2
PART
I — FINANCIAL INFORMATION
Item 1. –
Condensed Financial Statements
RED
TRAIL ENERGY, LLC
CONDENSED
BALANCE SHEETS
June 30, 2010
|
||||||||
(Unaudited)
|
December 31, 2009
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and equivalents
|
$ | 5,456,716 | $ | 13,214,091 | ||||
Restricted
cash
|
844,942 | 2,217,013 | ||||||
Accounts
receivable
|
2,672,952 | 2,635,775 | ||||||
Derivative
instruments, at fair value
|
― | 129,063 | ||||||
Inventory
|
5,931,783 | 6,993,031 | ||||||
Prepaid
expenses
|
169,398 | 195,639 | ||||||
Total
current assets
|
15,075,791 | 25,384,612 | ||||||
Property,
Plant and Equipment
|
||||||||
Land
|
351,280 | 351,280 | ||||||
Land
improvements
|
3,970,500 | 3,970,500 | ||||||
Buildings
|
5,312,995 | 5,312,995 | ||||||
Plant
and equipment
|
79,441,785 | 79,199,850 | ||||||
Construction
in progress
|
94,358 | ― | ||||||
89,170,918 | 88,834,625 | |||||||
Less
accumulated depreciation
|
20,322,359 | 17,419,043 | ||||||
Net
property, plant and equipment
|
68,848,559 | 71,415,582 | ||||||
Other
Assets
|
||||||||
Investment
in RPMG
|
605,000 | 605,000 | ||||||
Patronage
equity
|
309,990 | 192,207 | ||||||
Deposits
|
46,133 | 80,000 | ||||||
Total
other assets
|
961,123 | 877,207 | ||||||
Total
Assets
|
$ | 84,885,473 | $ | 97,677,401 | ||||
LIABILITIES
AND MEMBERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | 6,755,687 | $ | 7,605,302 | ||||
Accrued
expenses
|
3,130,600 | 2,634,534 | ||||||
Derivative
instruments, at fair value
|
90,225 | 806,490 | ||||||
Accrued
loss on firm purchase commitments
|
60,000 | ― | ||||||
Current
maturities of long-term debt
|
8,830,434 | 6,500,000 | ||||||
Current
portion of interest rate swaps, at fair value
|
888,343 | 785,591 | ||||||
Total
current liabilities
|
19,755,289 | 18,331,917 | ||||||
Other
Liabilities
|
||||||||
Contracts
payable
|
275,000 | 275,000 | ||||||
Long-Term
Debt
|
||||||||
Notes
payable
|
27,498,384 | 43,620,025 | ||||||
Long-term
portion of interest rate swaps, at fair value
|
1,270,532 | 1,575,095 | ||||||
Total
long-term debt
|
28,768,916 | 45,195,120 | ||||||
Commitments
and Contingencies
|
||||||||
Members'
Equity
|
36,086,268 | 33,875,364 | ||||||
Total
Liabilities and Members' Equity
|
$ | 84,885,473 | $ | 97,677,401 |
Notes to
Unaudited Condensed Financial Statements are an integral part of this
Statement.
3
RED
TRAIL ENERGY, LLC
CONDENSED
STATEMENTS OF OPERATIONS
Quarter Ended
June 30, 2010
(Unaudited)
|
Quarter Ended
June 30, 2009
(Unaudited)
|
Six Months Ended
June 30, 2010
(Unaudited)
|
Six Months Ended
June 30, 2009
(Unaudited)
|
|||||||||||||
Revenues
|
||||||||||||||||
Ethanol,
net of derivative fair value changes
|
$ | 18,822,186 | $ | 19,462,830 | $ | 42,606,351 | $ | 36,366,832 | ||||||||
Distillers
grains
|
3,695,872 | 4,170,001 | 8,798,598 | 8,161,612 | ||||||||||||
Total
Revenue
|
22,518,058 | 23,632,831 | 51,404,949 | 44,528,444 | ||||||||||||
Cost
of Goods Sold
|
||||||||||||||||
Cost
of goods sold, net of changes in fair value of derivative
instruments
|
20,528,249 | 21,659,717 | 44,154,801 | 40,051,075 | ||||||||||||
(Gain)/loss
on firm purchase commitments
|
(42,000 | ) | 421,000 | 60,000 | 695,000 | |||||||||||
Lower
of cost or market adjustment for inventory on hand
|
― | 476,000 | ― | 1,243,000 | ||||||||||||
Depreciation
|
1,452,675 | 1,470,664 | 2,903,117 | 2,940,883 | ||||||||||||
Total
Cost of Goods Sold
|
21,938,924 | 24,027,381 | 47,117,918 | 44,929,958 | ||||||||||||
Gross
Margin (Deficit)
|
579,134 | (394,550 | ) | 4,287,031 | (401,514 | ) | ||||||||||
General
and Administrative
|
586,172 | 701,337 | 1,226,327 | 1,482,347 | ||||||||||||
Operating
Income (Loss)
|
(7,038 | ) | (1,095,887 | ) | 3,060,704 | (1,883,861 | ) | |||||||||
Interest
Expense
|
773,439 | 566,216 | 1,862,357 | 1,871,437 | ||||||||||||
Other
income, net
|
6,890 | 402,450 | 1,012,557 | 444,671 | ||||||||||||
Net
Income (Loss)
|
$ | (773,587 | ) | $ | (1,259,653 | ) | $ | 2,210,904 | $ | (3,310,627 | ) | |||||
Wtd
Avg Units Outstanding - Basic
|
40,193,973 | 40,189,028 | 40,193,973 | 40,189,001 | ||||||||||||
Net
Income (Loss) Per Unit - Basic
|
$ | (0.02 | ) | $ | (0.03 | ) | $ | 0.06 | $ | (0.08 | ) | |||||
Wtd
Avg Units Outstanding - Diluted
|
40,193,973 | 40,189,028 | 40,193,973 | 40,189,001 | ||||||||||||
Net
Income (Loss) Per Unit - Diluted
|
$ | (0.02 | ) | $ | (0.03 | ) | $ | 0.06 | $ | (0.08 | ) |
Notes to
Unaudited Condensed Financial Statements are an integral part of this
Statement.
4
RED
TRAIL ENERGY, LLC
CONDENSED
STATEMENTS OF CASH FLOWS
Six months ended
June 30, 2010
(Unaudited)
|
Six months ended
June 30, 2009
(Unaudited)
|
|||||||
Cash
Flows from Operating Activities
|
||||||||
Net
income (loss)
|
$ | 2,210,904 | $ | (3,310,627 | ) | |||
Adjustment
to reconcile net income (loss) to net cash provided by
|
||||||||
operating
activities:
|
||||||||
Depreciation
|
2,903,316 | 2,969,586 | ||||||
Amortization
and write-off of debt financing costs
|
― | 567,385 | ||||||
Change
in fair value of derivative instruments
|
(588,305 | ) | 447,739 | |||||
Change
in fair value of interest rate swaps
|
506,846 | (682,827 | ) | |||||
Equity-based
compensation
|
― | 3,334 | ||||||
Equity-based
compensation non-cash write-off
|
― | (52,635 | ) | |||||
Noncash
patronage equity
|
(117,783 | ) | (75,911 | ) | ||||
Unrealized
gain (loss) on firm purchase commitments
|
60,000 | (731,800 | ) | |||||
Changes
in assets and liabilities
|
||||||||
Restricted
cash-margin account
|
1,373,174 | ― | ||||||
Accounts
receivable
|
(37,177 | ) | (2,359,302 | ) | ||||
Inventory
|
1,061,248 | (1,063,706 | ) | |||||
Prepaid
expenses
|
26,241 | 4,255,655 | ||||||
Other
assets
|
33,867 | ― | ||||||
Accounts
payable
|
(849,615 | ) | 1,742,108 | |||||
Accrued
expenses
|
496,066 | 393,262 | ||||||
Cash
settlements on interest rate swaps
|
(708,657 | ) | 333,301 | |||||
Net
cash provided by operating activities
|
6,370,125 | 2,435,562 | ||||||
Cash
Flows from Investing Activities
|
||||||||
Investment
in RPMG
|
― | (127,971 | ) | |||||
Refund
of sales tax on fixed assets
|
― | 753,386 | ||||||
Capital
expenditures
|
(336,293 | ) | (12,750 | ) | ||||
Net
cash provided by (used in) investing activities
|
(336,293 | ) | 612,665 | |||||
Cash
Flows from Financing Activities
|
||||||||
Debt
repayments
|
(13,791,207 | ) | (1,270,078 | ) | ||||
Restricted
cash - collateral
|
― | (750,000 | ) | |||||
Treasury
units issued
|
― | 5,000 | ||||||
Proceeds
from long-term debt
|
― | 3,559,874 | ||||||
Net
cash provided by (used in) financing activities
|
(13,791,207 | ) | 1,544,796 | |||||
Net
Increase (Decrease) in Cash and Equivalents
|
(7,757,375 | ) | 4,593,023 | |||||
Cash
and Equivalents - Beginning of Period
|
13,214,091 | 4,433,839 | ||||||
Cash
and Equivalents - End of Period
|
$ | 5,456,716 | $ | 9,026,862 | ||||
Supplemental
Disclosure of Cash Flow Information
|
||||||||
Interest
paid
|
$ | 2,235,525 | $ | 1,434,732 | ||||
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
||||||||
Write-off
of debt issuance costs
|
$ | ― | $ | 517,823 | ||||
Investment
in RPMG included in accounts payable
|
$ | ― | $ | 127,971 |
Notes to
Unaudited Condensed Financial Statements are an integral part of this
Statement.
5
RED
TRAIL ENERGY, LLC
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED JUNE 30, 2010 AND DECEMBER 31, 2009
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 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 six months
ended June 30, 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.
Fair Value of Financial
Instruments
The fair
value of the Company’s cash and equivalents, accounts receivable, accounts
payable, and derivative instruments approximate their carrying
value. The Company evaluated the fair value of its long-term
debt at June 30, 2010 and December 31, 2009 and the fair value approximated the
carrying value (see Note 4 for additional information).
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.
|
6
RED
TRAIL ENERGY, LLC
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED JUNE 30, 2010 AND DECEMBER 31, 2009
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.
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. There were
no member unit equivalents outstanding during the periods presented;
accordingly, the Company’s basic and diluted net income (loss) per unit are the
same.
2.
DERIVATIVE INSTRUMENTS
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:
|
June 30, 2010
|
December 31, 2009
|
||||||||||||||||||||||||||
Contract Type
|
# of
Contracts
|
Notional Amount
(Qty)
|
Fair Value
|
# of
Contracts
|
Notional Amount
(Qty)
|
Fair Value
|
||||||||||||||||||||||
Corn
futures
|
215 | 1,075,000 |
bushels
|
$ | (90,225 | ) | 82 | 410,000 |
bushels
|
$ | 129,063 | |||||||||||||||||
Ethanol
swap contracts
|
0 | 0 |
gallons
|
0 | 530 | 7,632,000 |
gallons
|
(806,490 | ) | |||||||||||||||||||
Total
fair value
|
$ | (90,225 | ) | $ | (677,427 | ) |
Amounts
are recorded separately on the balance sheet - negative numbers represent
liabilties
None of
the commodity contracts in place at June 30, 2010 were designated as effective
hedges for accounting purposes. As such, the change in fair value of
the commodity contracts in place at June 30, 2010 has been recorded in the
results of operations and classified as stated above.
Interest
Rate Contracts
The
Company had approximately $29.3 million and $30.8 million of notional amount
outstanding in swap agreements, as of June 30, 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 June 30, 2010 and December 31, 2009, the fair value of the
interest rate swaps totaled approximately $2.2 million and $2.4 million,
respectively, and is recorded as a liability on the balance
sheets. 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 $709,000 and $333,000 for the
six months ended June 30, 2010 and 2009, respectively. See Note 4 for
a description of these agreements.
7
RED
TRAIL ENERGY, LLC
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED JUNE 30, 2010 AND DECEMBER 31, 2009
The
following tables provide details regarding the Company’s derivative financial
instruments at June 30, 2010 and December 31, 2009:
Derivatives not designated as hedging instruments under ASC 815 | ||||||||
Balance Sheet - as of June 30, 2010
|
Asset
|
Liability
|
||||||
Corn
derivative instruments, at fair value
|
$ | ― | $ | 90,225 | ||||
Interest
rate swaps, at fair value
|
― | 2,158,875 | ||||||
Total
derivatives not designated as hedging instruments for accounting
purposes
|
$ | ― | $ | 2,249,100 |
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) in fair value
recognized in income
|
Amount of gain (loss)
recognized in income
during three months
ended June 30, 2010
|
Amount of gain (loss)
recognized in income
during three months
ended June 30, 2009
|
Amount of gain (loss)
recognized in income
during six months
ended June 30, 2010
|
Amount of gain (loss)
recognized in income
during six months
ended June 30, 2009
|
|||||||||||||
Corn
derivative instruments
|
Cost
of Goods Sold
|
$ | (296,759 | ) | $ | (235,925 | ) | $ | (155,927 | ) | $ | (733,776 | ) | |||||
Ethanol
derivative instruments
|
Revenue
|
513,127 | ― | 2,000,956 | ― | |||||||||||||
Interest
rate swaps
|
Interest
Expense
|
163,991 | (495,115 | ) | 201,811 | (349,525 | ) | |||||||||||
Total
|
$ | 380,359 | $ | (731,040 | ) | $ | 2,046,840 | $ | (1,083,301 | ) |
3.
INVENTORY
Inventory
is valued at lower of cost or market. Inventory values as of June 30,
2010 and December 31, 2009 were as follows:
As of
|
June 30, 2010
|
December 31, 2009
|
||||||
Raw
materials, including corn, chemicals and supplies
|
$ | 4,860,050 | $ | 4,921,532 | ||||
Work
in process
|
500,088 | 642,701 | ||||||
Finished
goods, including ethanol and distillers grains
|
571,645 | 1,428,798 | ||||||
Total
inventory
|
$ | 5,931,783 | $ | 6,993,031 |
Lower of
cost or market adjustments for the three and six months ended June 30, 2010 and
2009 were as follows:
For the three
months ended
June 30, 2010
|
For the three
months ended
June 30, 2009
|
For the six
Months ended
June 30, 2010
|
For the six
months ended
June 30, 2009
|
|||||||||||||
Loss
on firm purchase commitments
|
$ | (42,000 | ) | $ | 421,000 | $ | 60,000 | $ | 695,000 | |||||||
Lower
of cost or market adjustment for inventory on hand
|
- | 476,000 | - | 1,243,000 | ||||||||||||
Total
lower of cost or market adjustments
|
$ | (42,000 | ) | $ | 897,000 | $ | 60,000 | $ | 1,938,000 |
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
June 30, 2010, the average price of corn purchased under fixed price contracts,
that had not yet been delivered, was slightly below market
price. Based on this information, the Company accrued an estimated
loss of firm purchase commitments of $60,000 for the six months ended June 30,
2010. The Company also recorded a loss on firm purchase commitments
of approximately $695,000 for the six month period ended June 30,
2009. The loss is recorded in “Loss on firm purchase commitments” on
the statement 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.
8
RED
TRAIL ENERGY, LLC
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED JUNE 30, 2010 AND DECEMBER 31, 2009
The
Company recorded inventory valuation impairments of $0 and $476,000 for the six
months ended June 30, 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.
4.
BANK FINANCING
Long-term
debt consists of the following:
As of
|
June 30, 2010
|
December 31, 2009
|
||||||
Notes
payable under loan agreement to bank
|
$ | 30,780,269 | $ | 44,541,350 | ||||
Subordinated
notes payable
|
5,525,000 | 5,525,000 | ||||||
Capital
lease obligations (Note 6)
|
23,549 | 53,675 | ||||||
Total
Long-Term Debt
|
36,328,818 | 50,120,025 | ||||||
Less
amounts due within one year
|
8,830,434 | 6,500,000 | ||||||
Total
Long-Term Debt Less Amounts Due Within One Year
|
$ | 27,498,384 | $ | 43,620,025 | ||||
Market
value of interest rate swaps
|
2,158,875 | 2,360,686 | ||||||
Less
amounts due within one year
|
888,343 | 785,591 | ||||||
Total
Interest Rate Swaps Less Amounts Due Within One Year
|
$ | 1,270,532 | $ | 1,575,095 |
Scheduled maturities for the twelve months ended June 30
|
||||||||||||
Interest rate swaps
|
Long-term debt
|
Totals
|
||||||||||
2011+
|
$ | 888,343 | $ | 8,830,434 | $ | 9,718,777 | ||||||
2012
|
1,270,532 | 27,492,487 | 28,763,019 | |||||||||
2013
|
― | 2,953 | 2,953 | |||||||||
2014
|
― | 2,944 | 2,944 | |||||||||
2015
|
― | ― | ― | |||||||||
Thereafter
|
― | ― | ― | |||||||||
Total
|
$ | 2,158,875 | $ | 36,328,818 | $ | 38,487,693 |
+ -
Scheduled maturities for the twelve months ended June 30, 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 and we have not received such consent.
As of
June 30, 2010, the Company was in compliance with all of its debt
covenants.
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.
9
RED
TRAIL ENERGY, LLC
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED JUNE 30, 2010 AND DECEMBER 31, 2009
Interest Expense
|
For the six months
ended June 30, 2010
|
For the six months
ended June 30, 2009
|
||||||
Interest
expense on long-term debt
|
$ | 1,355,511 | $ | 1,320,276 | ||||
Amortization/write-off
of deferred financing costs
|
― | 567,386 | ||||||
Change
in fair value of interest rate swaps
|
(201,811 | ) | (349,526 | ) | ||||
Net
settlements on interest rate swaps
|
708,657 | 333,301 | ||||||
Total
interest expense
|
$ | 1,862,357 | $ | 1,871,437 |
5.
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 June 30, 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
June 30, 2010
|
Fair Value as of
June 30, 2010
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||||||
Assets
|
||||||||||||||||||||
Money
market funds
|
$ | 844,942 | $ | 844,942 | $ | 844,942 | $ | ― | $ | ― | ||||||||||
Derivative
instruments
|
― | ― | ― | ― | ― | |||||||||||||||
Total
|
$ | 844,942 | $ | 844,942 | $ | 844,942 | $ | ― | $ | ― | ||||||||||
Liabilities
|
||||||||||||||||||||
Interest
rate swaps
|
$ | 2,158,875 | $ | 2,158,875 | $ | ― | $ | 2,158,875 | $ | ― | ||||||||||
Derivative
instruments
|
90,225 | ― | 90,225 | ― | ― | |||||||||||||||
Total
|
$ | 2,249,100 | $ | 2,158,875 | $ | 90,225 | $ | 2,158,875 | $ | ― |
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 swaps reflect
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.
10
RED
TRAIL ENERGY, LLC
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED JUNE 30, 2010 AND DECEMBER 31, 2009
Financial
Instruments Not Measured at Fair Value
The
estimated fair value of the Company’s long-term debt, including the short-term
portion, at June 30, 2010, approximated the carrying value of approximately
$36.3 million. The Company 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 June 30, 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 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.
6.
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 $260,000 for the three and six months ended June 30,
2010, respectively and $134,000 and $236,000 for the three and six months ended
June 30, 2009, respectively. Equipment under capital leases consists
of office equipment and plant equipment.
Equipment
under capital leases is as follows at:
As of
|
June 30, 2010
|
December 31, 2009
|
||||||
Equipment
|
$ | 219,476 | $ | 219,476 | ||||
Accumulated
amortization
|
74,870 | 63,248 | ||||||
Net
equipment under capital lease
|
$ | 144,606 | $ | 156,228 |
At June
30, 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 June 30:
Operating
Leases
|
Capital
Leases
|
|||||||
2011
|
$ | 520,860 | $ | 15,945 | ||||
2012
|
464,875 | 3,354 | ||||||
2013
|
274,100 | 3,354 | ||||||
2014
|
31,200 | 3,075 | ||||||
2015
|
31,200 | ― | ||||||
Thereafter
|
― | ― | ||||||
Total
minimum lease commitments
|
$ | 1,322,235 | 25,728 | |||||
Less
amount representing interest
|
2,179 | |||||||
Present
value of minimum lease commitments included in the preceding current
liabilities
|
$ | 23,549 |
7.
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 was used to pay down the Company’s
Long-Term Revolving Note. The funds may be released upon resolution
of this issue.
11
RED
TRAIL ENERGY, LLC
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR
THE PERIODS ENDED JUNE 30, 2010 AND DECEMBER 31, 2009
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 June
30, 2010 the Company had various fixed price contracts for the purchase of
approximately 1,146,000 bushels of corn. Using the stated contract
price for the fixed price contracts, the Company had commitments of
approximately $4.0 million related to the 1,146,000 bushels under
contract.
8.
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:
June 30, 2010
|
December 31, 2009
|
|||||||
Balance
Sheet
|
||||||||
Accounts
receivable
|
$ | 2,111,792 | $ | 2,155,238 | ||||
Accounts
payable
|
1,039,228 | 1,164,218 | ||||||
Notes
payable
|
1,525,000 | 1,525,000 | ||||||
For the three months
ended June 30,
2010
|
For the three
months ended
June 30, 2009
|
For the six
months ended
June 30, 2010
|
For the six months
ended June 30,
2009
|
|||||||||||||
Statement
of Operations
|
||||||||||||||||
Revenues
|
$ | 18,584,502 | $ | 20,215,469 | $ | 41,548,875 | $ | 37,699,964 | ||||||||
Cost
of goods sold
|
754,815 | 656,496 | 1,619,652 | 1,353,808 | ||||||||||||
General
and administrative
|
64,716 | 176,968 | 114,614 | 283,683 | ||||||||||||
Inventory Purchases
|
$ | 1,005,698 | $ | 1,179,356 | $ | 2,331,243 | $ | 2,692,493 |
12
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 and six month periods ended June 30, 2010, compared to
the same period of the prior fiscal year. This discussion should be read in
conjunction with the consolidated financial statements and the Management’s
Discussion and Analysis section for the fiscal year ended December 31, 2009,
included in the Company’s Annual Report on Form 10-K.
Cautionary
Statements Regarding Forward-Looking Statements
This
report contains forward-looking statements that involve future events, our
future performance and our future operations and actions. In some
cases you can identify forward-looking statements by the use of words such as
“may,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,”
“could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative
of these terms or other similar expressions. These forward-looking
statements are only our predictions and involve numerous assumptions, risks and
uncertainties. Our actual results or actions may differ materially
from these forward-looking statements for many reasons, including the following
factors:
|
·
|
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;
|
|
·
|
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;
|
13
|
·
|
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
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.
|
Our
actual results or actions could and likely will differ materially from those
anticipated in the forward-looking statements for many reasons, including the
reasons described in this report. We are not under any duty to update
the forward-looking statements contained in this report. We cannot
guarantee future results, levels of activity, performance or
achievements. We caution you not to put undue reliance on any
forward-looking statements, which speak only as of the date of this
report. You should read this report and the documents that we
reference in this report and have filed as exhibits completely and with the
understanding that our actual future results may be materially different from
what we currently expect. We qualify all of our forward-looking
statements by these cautionary statements.
Available
Information
Information
about us is also available at our website at www.redtrailenergyllc.com,
which includes links to reports we have filed with the Securities and Exchange
Commission. The contents of our website are not incorporated by reference in
this Quarterly Report on Form 10-Q.
Overview
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”).
Our revenues are derived from the sale
and distribution of our ethanol and distillers grains primarily in the
continental United States. Our ethanol plant currently operates at
approximately 110 percent of its nameplate capacity. Corn is our
largest cost component and our profitability is highly dependent on the spread
between the price of corn and the price of ethanol.
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.
14
There
have been a number of recent developments in legislation that impacts the
ethanol industry. One such development concerns the federal Renewable
Fuels Standard (RFS). The ethanol industry is benefited by the RFS
which requires that a certain amount of renewable fuels must be used in the
United States each year. In February 2010, the EPA issued new
regulations governing the RFS. These new regulations have been called
RFS2. The most controversial part of RFS2 involves what is commonly
referred to as the lifecycle analysis of greenhouse gas
emissions. Specifically, the EPA adopted rules to determine which
renewable fuels provided sufficient reductions in greenhouse gases, compared to
conventional gasoline. Any fuels that fail to meet this standard
cannot be used by fuel blenders to satisfy their obligations under the RFS
program. The RFS2 as adopted by the EPA provides that corn-based
ethanol from modern ethanol production processes does meet the definition of a
renewable fuel under the RFS program.
In addition to RFS2 which included
greenhouse gas reduction requirements, in 2009, California passed a Low Carbon
Fuels Standard (LCFS). The California LCFS requires that renewable
fuels used in California must accomplish certain reductions in greenhouse gases
which is measured using a lifecycle analysis, similar to
RFS2. Management believes that this lifecycle analysis is based on
unsound scientific principles that unfairly harms corn based
ethanol. Management believes that these new regulations will preclude
corn based ethanol from being used in California. California
represents a significant ethanol demand market. If we are unable to
supply ethanol to California, it could significantly reduce demand for the
ethanol we produce. Several lawsuits have been filed by ethanol
industry groups challenging the California LCFS.
Ethanol production in the United States
is benefited by various tax incentives. The most significant of these
tax incentives is the federal Volumetric Ethanol Excise Tax Credit
(VEETC). VEETC provides a volumetric ethanol excise tax credit of 4.5
cents per gallon of ethanol blended with gasoline at a rate of
10%. VEETC is scheduled to expire on December 31, 2010. If
this tax credit is not renewed, it likely would have a negative impact on the
price of ethanol and demand for ethanol in the marketplace and may harm our
financial condition.
In addition to the tax incentives,
United States ethanol production is also benefited by a 54 cent per gallon
tariff imposed on ethanol imported into the United States. However,
the 54 cent per gallon tariff is set to expire at the end of the 2010 calendar
year. Elimination of the tariff that protects the United States
ethanol industry could lead to the importation of ethanol produced in other
countries, especially in areas of the United States that are easily accessible
by international shipping ports. Ethanol imported from other
countries may be a less expensive alternative to domestically produced ethanol
and may affect our ability to sell our ethanol profitably.
We expect to fund our operations during
the next 12 months using cash flow from our continuing operations and our
current credit facilities.
Results
of Operations for the Three Months Ended June 30, 2010 and 2009
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 June 30, 2010 and 2009,
respectively.
Three Months Ended
June 30, 2010
(Unaudited)
|
Three Months Ended
June 30, 2009
(Unaudited)
|
|||||||||||||||
Statements of Operations Data
|
Amount
|
% of Revenue
|
Amount
|
% of Revenue
|
||||||||||||
Revenues
|
$ | 22,518,058 | 100.0 | % | $ | 23,632,831 | 100.00 | % | ||||||||
Cost
of Goods Sold
|
21,938,924 | 97.43 | % | 24,027,381 | 101.67 | % | ||||||||||
Gross
Margin (Deficit)
|
579,134 | 2.57 | % | (394,550 | ) | (1.67 | )% | |||||||||
General
and Administrative Expenses
|
586,172 | 2.60 | % | 701,337 | 2.97 | % | ||||||||||
Operating
Loss
|
(7,038 | ) | (0.03 | )% | (1,095,887 | ) | (4.64 | )% | ||||||||
Interest
Expense
|
773,439 | 3.43 | % | 566,216 | 2.40 | % | ||||||||||
Other
Income
|
6,890 | 0.03 | % | 402,450 | 1.70 | % | ||||||||||
Net
Loss
|
$ | (773,587 | ) | (3.44 | )% | $ | (1,259,653 | ) | (5.33 | )% |
15
Revenues
The
following table shows the sources of our revenue for the three months ended June
30, 2010 and June 30, 2009.
Three Months Ended
June 30, 2010
|
Three Months Ended
June 30, 2009
|
|||||||||||||||
Revenue Source
|
Amount
|
% of Revenues
|
Amount
|
% of Revenues
|
||||||||||||
Ethanol
Sales
|
$ | 18,822,186 | 83.6 | % | $ | 19,462,830 | 82.4 | % | ||||||||
Dried
Distillers Grains Sales
|
3,139,859 | 13.9 | % | 2,934,077 | 12.4 | % | ||||||||||
Modified Distillers
Grains Sales
|
556,013 | 2.5 | % | 1,235,924 | 5.2 | % | ||||||||||
Total
Revenues
|
$ | 22,518,058 | 100.00 | % | $ | 23,632,831 | 100.00 | % |
The following table shows additional
data regarding production and price levels for our primary inputs and products
for the three months ended June 30, 2010 and June 30, 2009.
Three Months ended
June 30, 2010
|
Three Months ended
June 30, 2009
|
|||||||
Production:
|
||||||||
Ethanol
sold (gallons)
|
12,717,000 | 12,689,000 | ||||||
Dried
distillers grains sold (tons)
|
32,970 | 24,055 | ||||||
Modified
distillers grains sold (tons)
|
11,274 | 22,088 | ||||||
Revenues:
|
||||||||
Ethanol
price/gallon (net of hedging)
|
$ | 1.48 | $ | 1.53 | ||||
Distillers
grains avg price/ton
|
$ | 95.23 | $ | 121.97 | ||||
Modified
distillers grains avg price/ton
|
$ | 49.23 | $ | 55.88 | ||||
Primary
Input:
|
||||||||
Corn
ground (bushels)
|
4,660,800 | 4,423,712 | ||||||
Costs
of Primary Input:
|
||||||||
Corn
avg price/bushel (net of hedging)
|
$ | 3.41 | $ | 3.98 | ||||
Other
Costs (per gallon of ethanol sold):
|
||||||||
Chemical
and additive costs
|
$ | 0.079 | $ | 0.081 | ||||
Denaturant
cost
|
$ | 0.048 | $ | 0.034 | ||||
Electricity
cost
|
$ | 0.048 | $ | 0.038 | ||||
Direct
labor cost
|
$ | 0.039 | $ | 0.035 |
Ethanol
production and sales held relatively steady during the three month period ended
June 30, 2010 as compared to the same period in 2009. We sold
12,717,000 gallons of ethanol during the three month period ended June 30, 2010
compared to 12,689,000, for the same three month period ending in
2009. The average price we received for our ethanol at was $1.48 and
$1.53 for the three month period ending June 30, 2010 and 2009,
respectively.
We
experienced an increase in the amount of dried distillers grains sold in the
three month period ended June 30, 2010 as compared to the same period in
2009. We sold 32,970 tons of dried distillers grains during the three
month period ended June 30, 2010 compared to 24,055 tons of dried distillers
grains during the three month period ended June 30, 2009. The average
price per ton of dried distillers grains was $95.23 and $121.97 for the three
month period ending June 30, 2010 and 2009, respectively.
16
Our
modified distillers grains sales were down significantly for the three month
period ended June 30, 2010 as compared to the same period in 2009. We
sold 11,274 tons of modified distillers grains during the three month period
ended June 30, 2010 compared to 22,088 tons of modified distillers grains during
the three month period ended June 30, 2009. The average price per ton
of modified distillers grains was $49.23 and $55.88 for the three month period
ending June 30, 2010 and 2009, respectively. This shift from modified
distillers grains to dried distillers grains is being driven by additional
demand for dried distillers grains by the export market.
We are currently operating at
approximately 110 percent of nameplate capacity. In the event that we
decrease our production of ethanol, our production of distillers grains would
also decrease. Such a decrease in our volume of production of ethanol
and distillers grains would result in lower revenues. However, if we
decreased production, we would experience a corresponding decrease in the
quantity of corn and coal used by the plant, thereby lowering our costs of good
sold. Therefore, the effect of a decrease in our product volume would
be largely dependent on the market prices of the products we produce and the
inputs we use to produce our products at the time of such a production
decrease. We anticipate operating at less than full capacity only if
industry margins become unfavorable or we experience technical difficulties in
operating the plant.
For the three months ended June 30,
2010, we received approximately 84% of our revenue from the sale of ethanol and
approximately 16% of our revenue from the sale of distillers grains. Our revenue
from ethanol increased slightly during the three months ended June 30, 2010
compared to the same period in 2009, as a result of a slight increase in the
volume of ethanol sold and a decrease in our distillers grains
revenue. During the three months ended June 30, 2010, we experienced
a decrease in the price we received for our ethanol. Ethanol prices
peaked late in 2009 and trended weaker though the end of June
2010. Since that time, ethanol prices have recovered and are back to
January 2010 price levels. Management attributes this decreasing trend in
ethanol prices with increased production of ethanol and steady
demand. Increased gasoline and ethanol prices during the last
calendar quarter of 2009 and the first quarter of 2010 allowed the ethanol
industry to realize more favorable margins. Management believes that
the increased margins led some idled ethanol plants to again commence
production. Unless this increased supply is equally met with
increased demand for ethanol, management believes ethanol prices will be
pressured downward.
Management
believes that demand for ethanol is being affected by what is known as the blend
wall. The blend wall is a theoretical limit where more ethanol cannot
be blended into the national gasoline pool. Currently, ethanol is
blended with conventional gasoline for use in standard (non-flex fuel) vehicles
to create a blend which is 10% ethanol and 90% gasoline. Estimates
indicate that approximately 135 billion gallons of gasoline are sold in the
United States each year. Assuming that all gasoline in the United
States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand
for ethanol is 13.5 billion gallons per year. This theoretical limit
acts as a cap on ethanol demand which can negatively impact ethanol
prices. If ethanol production continues to expand without a
corresponding increase in ethanol demand, management anticipates further
decreases in ethanol prices.
The trend in the price of ethanol is
uncertain unless the EPA approves an increase in the amount of ethanol that can
be blended with gasoline for use in standard (non-flex fuel)
vehicles. The EPA is considering allowing a blend of 15% ethanol and
85% gasoline (called E15) for use in standard vehicles. The EPA has
delayed making a decision on E15 until sometime in 2010. If the EPA
allows a 15% ethanol blend, it may result in increased ethanol demand which
could positively impact ethanol prices. However, the EPA may restrict
the type of vehicles that can use E15 which may lead to gasoline retailers
refusing to carry E15. Automobile manufacturers and environmental
groups are lobbying against higher percentage ethanol blends.
During the three months ended June 30,
2010, distillers grains prices trended downward. Management
attributes this decreasing price trend to an excess supply of distillers grains
and to concerns about the quality of distillers grains. After the end
of the three month period ended June 30, 2010, distillers grains prices
increased in conjunction with corn prices. Management anticipates
that distillers grains prices will continue to track the price of corn which has
been extremely volatile due to uncertainty over the condition of the corn crop
and price volatility in the wheat and soybean markets.
17
Cost of Goods
Sold
Our cost of goods sold from the
production of ethanol and distillers grains is primarily made up of corn and
energy expenses. The price we paid for our main input, corn, was
lower during the first quarter of 2010 compared to the first quarter of
2009. Our overall cost of goods sold decreased as a percentage of our
revenues to 97.4% for the three months ended June 30, 2010 compared to 101.7%
for the same period in 2009. The decrease in our cost of goods sold was
primarily due to our lower corn costs.
Our cost of corn is also affected by
gains and losses on the corn derivative instruments we use to manage our
exposure to risk in the corn market. For the three months ended
June 30, 2010, we recognized a loss on our corn derivatives of approximately
$297,000 compared to a loss of approximately $236,000 for the three months ended
June 30, 2009.
Competition
for corn in our area has tightened basis levels. Although we believe
there is corn available nationally from a supply and demand standpoint, there is
uncertainty over the quantity and quality of local corn for the
plant. The cost of corn is the highest input to the plant and these
uncertainties could dramatically affect our expected input
costs. During the three month period ended June 30, 2010, corn prices
were relatively steady but increased after the end of the quarter. We
expect that corn prices will continue to be volatile for the rest of our fiscal
year, depending on weather conditions and other demand factors.
The per unit cost of our other costs of
goods sold were all somewhat higher compared to last year although we did
experience a decrease in our chemical and additive costs.
We purchase the coal needed to power
our ethanol plant from a supplier under a long-term contract. This
arrangement helps us to mitigate price volatility in the coal
market. Our coal costs remained steady during the first quarter of
2010 compared to the first quarter of 2009. Our coal contract is up
for renewal in December 2011.
General and
Administrative
General and administrative costs for
the three months ended June 30, 2010 were approximately $586,000 or 2.6% of our
revenues compared to approximately $701,000 or 3.0% of revenues for the same
period in 2009. The decrease is primarily related to a decrease in
legal fees.
Operating Income and
Loss
Our loss from operations for the three
months ended June 30, 2010 was approximately $7,000 compared to an operating
loss of approximately $1,096,000 for the same period in 2009. This
reduction in our operating losses is primarily due to an improvement in the
relationship between the selling price of our products and our input costs for
the current year.
Interest
Expense
Our interest expense for the three
months ended June 30, 2010 was approximately $773,000 compared to approximately
$566,000 for the three months ended June 30, 2009. This increase in
primarily due to fluctuations in the market value of our interest rate swaps and
principal outstanding. Net settlements on the fair value of our
interest rate swaps are recorded in interest expense on a monthly
basis.
Other
Income
Our other income for the three months
ended June 30, 2010 was 0.03% of our revenues compared to 1.7% of revenues for
the same period in 2009. Our other income for the three month period
ended June 30, 2010 consisted primarily of interest income, gain/loss on sale of
assets and grant income. During the three month period ended June 30,
2009 we also received other income from interest earned on a sales tax refund
received related to plant construction.
18
Results
of Operations for the Six Months Ended June 30, 2010 and 2009
The following table shows the results
of our operations and the approximate percentage of revenues, costs of sales,
operating expenses and other items to total revenues in our unaudited statements
of operations for the six months ended June 30, 2010 and 2009:
Six Months Ended
June 30, 2010
(Unaudited)
|
Six Months Ended
June 30, 2009
(Unaudited)
|
|||||||||||||||
Statement of Operations Data
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||
Revenues
|
$ | 51,404,949 | 100.0 | % | $ | 44,528,444 | 100.00 | % | ||||||||
Cost
of Goods Sold
|
47,117,918 | 91.66 | % | 44,929,958 | 100.90 | % | ||||||||||
Gross
Profit (Loss)
|
4,287,031 | 8.34 | % | (401,514 | ) | (0.90 | )% | |||||||||
General
and Administrative Expenses
|
1,226,327 | 2.39 | % | 1,482,347 | 3.33 | % | ||||||||||
Operating
Income (Loss)
|
3,060,704 | 5.95 | % | (1,883,861 | ) | (4.23 | )% | |||||||||
Interest
Expense
|
1,862,357 | 3.62 | % | 1,871,437 | 4.20 | % | ||||||||||
Other
Income
|
1,012,557 | 1.97 | % | 444,671 | 1.00 | % | ||||||||||
Net
Income (Loss)
|
$ | 2,210,904 | 4.30 | % | $ | (3,310,627 | ) | (7.43 | )% |
Revenues
Our revenues from operations come from
two primary sources: sales of ethanol and sales of distillers grains. The
following table shows the sources of our revenue for the six months ended June
30, 2010 and June 30, 2009.
Six Months Ended
June 30, 2010
|
Six Months Ended
June 30, 2009
|
|||||||||||||||
Revenue Source
|
Amount
|
% of Revenues
|
Amount
|
% of Revenues
|
||||||||||||
Ethanol
Sales
|
$ | 42,606,351 | 82.9 | % | $ | 36,366,832 | 81.7 | % | ||||||||
Dried
Distillers Grains Sales
|
7,075,730 | 13.8 | % | 5,150,927 | 11.6 | % | ||||||||||
Modified Distillers
Grains Sales
|
1,722,868 | 3.3 | % | 3,010,685 | 6.7 | % | ||||||||||
Total
Revenues
|
$ | 51,404,949 | 100.00 | % | $ | 44,528,444 | 100.00 | % |
The
following table shows additional data regarding production and price levels for
our primary inputs and products for the six months ended June 30, 2010 and
2009:
Six Months ended
June 30, 2010
|
Six Months ended
June 30, 2009
|
|||||||
Production:
|
||||||||
Ethanol
sold (thousands of gallons)
|
26,967 | 24,481 | ||||||
Dried
distillers grains sold (tons)
|
67,486 | 39,508 | ||||||
Modified
distillers grains sold (tons)
|
31,489 | 56,688 | ||||||
Revenues:
|
||||||||
Ethanol
average price/gallon (net of hedging)
|
$ | 1.58 | $ | 1.49 | ||||
Dried
distillers grains avg price/ton
|
$ | 102.16 | $ | 130.38 | ||||
Modified
distillers grains avg price/ton
|
$ | 54.56 | $ | 53.02 | ||||
Primary
Input:
|
||||||||
Corn
ground (bushels)
|
9,800,060 | 8,752,833 | ||||||
Costs
of Primary Input:
|
||||||||
Corn
avg price/bushel (net of hedging)
|
$ | 3.48 | $ | 3.98 | ||||
Other
Costs (per gallon of ethanol sold):
|
||||||||
Chemical
and additive costs
|
$ | 0.079 | $ | 0.084 | ||||
Denaturant
cost
|
$ | 0.046 | $ | 0.031 | ||||
Electricity
cost
|
$ | 0.046 | $ | 0.043 | ||||
Direct
Labor cost
|
$ | 0.036 | $ | 0.038 |
19
In the six month period ended June 30,
2010, ethanol sales comprised approximately 83% of our revenues and distillers
grains sales comprised approximately 17% of our revenues. For the six month
period ended June 30, 2009, ethanol sales comprised approximately 82% of our
revenues and distillers grains sales comprised approximately 18% of our revenue.
Our revenues were higher for our first half of fiscal year 2010 compared to the
same period of 2009 primarily as a result of our increase in ethanol production
and an increase in the sales price of our ethanol.
The average ethanol sales price we
received for the six month period ended June 30, 2010 was approximately 6%
higher than our average ethanol sales price for the comparable 2009 period.
Management anticipates that ethanol prices will continue to be subject to the
uncertainties surrounding several pieces of legislation as well as the prices of
oil and gasoline.
The price we received for our dried
distillers grains decreased by approximately 20% during the six month period
ended June 30, 2010 compared to the same period of 2009. Management attributes
this decrease in the price of our dried distillers grains to an increase in the
supply of dried distillers grains in our local market area. The price
of dried distillers grains changes in proportion to the price of corn, which has
decreased in the six month period ended June 30,
2010. Accordingly, we anticipate that the market price of
distillers grains will continue to be volatile as a result of changes in the
price of corn and competing animal feed substitutes such as soybean
meal.
Cost of Good
Sold
Our costs of goods sold as a
percentage of revenues were approximately 92% for the six month period ended
June 30, 2010 compared to approximately 101% for the same period of 2009. Our
cost of goods sold increased by approximately 3.8% in the six months ended June
30, 2010, compared to the six months ended June 30, 2009, and our revenue for
the same period increased by approximately 15%. This increase in the cost of
goods sold is primarily a result of an increase in the volume of corn processed
at our facility. The increase in our revenues is due primarily to an
increase in the volume of ethanol sold along with an increase in the price we
received for our ethanol.
General and Administrative
Expenses
Our general and administrative expenses
as a percentage of revenues were lower for the six month period ended June 30,
2010 than they were for the same period ended June 30, 2009. These percentages
were approximately 2.4% and approximately 3.3% for the six months ended June 30,
2010 and 2009, respectively. This decrease in general and administrative
expenses is primarily due to increased operating efficiencies and our concerted
effort to lower general and administrative expenses. We expect that going
forward our general and administrative expenses will remain relatively steady
unless the proposed reclassification and reorganization of the Company’s
membership units, as discussed previously is approved. If proposed
reclassification is approved, there should be significant general and
administrative expense savings.
Operating Income
(Loss)
Our income from operations for the six
months ended June 30, 2010 was approximately 5.9% of our revenues compared to
loss of approximately 4.2% of our revenues for the six months ended June 30,
2009. This increase in our profitability is primarily due to the increase in the
price we received for our ethanol for the six months ended June 30, 2010
compared to the six months ended June 30, 2009. During the same
period we experienced a $0.50 per bushel decrease in our cost of
corn. Both of these factors moved in our favor at the time we
increased production at our facility.
20
Interest
Expense
Our interest expense for the six months
ended June 30, 2010 was approximately $1,860,000 compared to approximately
$1,870,000 for the six months ended June 30, 2009. The outstanding
balance on our long-term debt obligations decreased by approximately $14,000,000
during the first six months of 2010. However, this reduction in
long-term debt was partially offset by the performance of our interest rate swap
transactions.
Other
Income
Other income for the six months ended
June 30, 2010, was approximately 2.0% of our revenue and totaled approximately
$1,013,000. Other income for the six months ended June 30, 2009 totaled
approximately $445,000 and was approximately 1.0% of our
revenues. The increase in other income is attributable to our receipt
of approximately $983,000 from a business interruption insurance claim related
to an unplanned outage at our plant during October 2009.
Changes
in Financial Condition for the Six Months Ended June 30, 2010
The following table highlights the
changes in our financial condition:
June 30, 2010
|
December 31, 2009
|
|||||||
Current
Assets
|
$ | 15,075,791 | $ | 25,384,612 | ||||
Current
Liabilities
|
$ | 19,755,289 | $ | 18,331,917 | ||||
Members' Equity
|
$ | 36,086,268 | $ | 33,875,364 |
We
experienced a decrease in our current assets at June 30, 2010 compared to our
fiscal year ended December 31, 2009. We had approximately $7,750,000
less cash on hand at June 30, 2010 compared to December 31, 2009, and
approximately $1,372,000 less in restricted cash. Our accounts
receivable remained steady over the same period and our inventory was
approximately $1,000,000 less at June 30, 2010 than December 31,
2010.
We
experienced a slight increase in our total current liabilities on June 30, 2010
compared to December 31, 2009 due primarily to an increase in current maturities
of long-term debt.
Our
long-term liabilities as of June 30, 2010 are approximately $16,400,000 less
than our long-term liabilities as of December 31, 2009, primarily as a result of
principal payments made on our long-term debt and the movement of some long-term
debt to current maturities of long-term debt. At June 30, 2010, we
had approximately $29,044,000 outstanding in the form of long-term loans,
compared to approximately $45,470,000 at December 31, 2009.
We
experienced an increase in members' equity at June 30, 2010 compared to our
fiscal year ended December 31, 2009. This primarily is a result of
our net income so far this fiscal year in the amount of approximately
$2,211,000.
Liquidity
and Capital Resources
Based on financial forecasts performed
by our management, we anticipate that we will have sufficient cash from our
current credit facilities and cash from our operations to continue to operate
the ethanol plant for the next 12 months. We do not anticipate
seeking additional equity or debt financing during our 2010 fiscal
year. However, should we experience unfavorable operating conditions
in the future, we may have to secure additional debt or equity sources for
working capital or other purposes.
Statements of Cash Flows
|
For the six months
ended June 30, 2010
|
For the six months
ended June 30, 2009
|
||||||
Cash
flows provided by operating activities
|
$ | 6,370,125 | $ | 2,435,562 | ||||
Cash
flows provided by (used in) investing activities
|
$ | (336,293 | ) | $ | 612,665 | |||
Cash
flows provided by (used in) financing activities
|
$ | (13,791,207 | ) | $ | 1,544,796 |
21
Operating
activities
We experienced a significant increase
in our net cash provided by operations for the six month period ended June 30,
2010 as compared to the same period in 2009. Cash provided by
operating activities was approximately $6,370,000 for the six months ended June
30, 2010 as compared to approximately $2,436,000 provided by operating
activities for the six months ended June 30, 2009. Our net income
from operations for the six months ended June 30, 2010 was approximately
$2,211,000 as compared to a net loss of approximately $3,311,000 for the same
period in 2009.
Investing
activities
We had minimal investing activities for
the periods ended June 30, 2010 and 2009, respectively.
Financing
activities
We had a
significant increase in cash used for financing activities for the six month
period ended June 30, 2010 as compared to the same period in
2009. Cash used for financing activities was approximately
$13,791,000 for the nine months ended June 30, 2010. All of this cash
was used to pay down our long-term debt. For the six month period
ended June 30, 2009, we had net borrowing activity of approximately $1,545,000
as we borrowed an additional $3,560,000 on our long-term debt instruments which
was offset by a regularly scheduled debt payment of approximately $1,270,000 and
the issuance of letters of credit in the amount of $750,000 to support grain
warehouse bonds and distilled spirits bonds.
Our
liquidity, results of operations and financial performance will be impacted by
many variables, including the market price for commodities such as, but not
limited to, corn, ethanol and other energy commodities, as well as the market
price for any co-products generated by the facility and the cost of labor and
other operating costs. Assuming future relative price levels for corn,
ethanol and distillers grains remain consistent we expect operations to generate
adequate cash flows to maintain operations. This expectation assumes that we
will be able to sell all the ethanol that is produced at the plant.
Capital
Expenditures
The Company currently has three capital
projects in progress that it anticipates will cost a total of approximately
$302,000. We anticipate completion of these projects to occur in the
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
Short-Term Debt
Sources
The Company does not currently have any
short-term credit facilities.
Long-Term Debt
Sources
Our primary debt instruments are with
First National Bank of Omaha (the “Bank”) and have a scheduled maturity date of
April 2012. These debt instruments include fixed and variable rate
notes. The following table summarizes our long-term debt instruments
with the Bank.
22
|
Outstanding Balance
(Millions)
|
Interest Rate
|
Range of Estimated
|
||||||||||||||||||||
Term Note
|
June 30,
2010
|
December 31,
2009
|
June 30,
2010
|
December 31,
2009
|
Quarterly Principal
Payment Amounts
|
Notes
|
|||||||||||||||||
Fixed
Rate Note
|
$ | 22.44 | $ | 23.60 | 6.00 | % | 6.00 | % |
$560,000
- $630,000
|
1,
2, 4
|
|||||||||||||
2007
Fixed Rate Note
|
8.34 | 8.80 | 6.00 | % | 6.00 | % |
$200,000
- $235,000
|
1,
2, 5
|
|
||||||||||||||
Variable
Rate Note
|
0 | 2.10 | 6.00 | % | 6.00 | % |
$1,600,000
|
1,
2, 3, 5
|
|||||||||||||||
Long-Term
Revolving Note
|
0 | 10.00 | 6.00 | % | 6.00 | % |
$550,000
- $610,000
|
1,
2, 6, 7, 8
|
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 June 30, 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 $4,100,000) 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 our
loan agreement with Bank. 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, we 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, we
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.
Subordinated
Debt
As part of our construction loan
agreement, we 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 June 30, 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. However, the
subordination agreement requires the Bank to provide consent to make principal
payments to the subordinated debt holders but we have 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 June 30, 2010 and December 31, 2009.
23
Letters of
Credit
We issued two letters of credit during
the second quarter of 2009 in conjunction with the issuance of certain grain
warehouse and distilled spirits bonds. The letters of credit were
issued in the amount of $500,000 and $250,000, respectively.
Restrictive
Covenants
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.
|
The debt instruments with Banks also
contain 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 June 30, 2010 we are in
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 $230,000 for the period July 2010 to December 2010 in
order to maintain compliance with this covenant at December 31,
2010.
Management
Reorganization Plan
On June 29, 2010, the Company’s board
of governors approved a management reorganization plan that became effective on
July 8, 2010. Pursuant to this management reorganization plan Gerald
Bachmeier was appointed to the position of Chief Executive Officer for the
Company.
In conjunction with the implementation
of the Company’s management reorganization plan, the Company and Mr. Bachmeier
entered into an employment agreement effective on July 8, 2010. The
term of Mr. Bachmeier’s employment agreement is five and one-half years and is
subject to customary termination provisions. Mr. Bachmeier’s base
salary on an annualized basis for the period from July 8, 2010 through December
31, 2010 is $135,000. The employment agreement also provides for a
year-end bonus based on the Company’s net income.
Mr. Bachmeier previously served as
interim Chief Executive Officer for the Company from June 15, 2009 through
December 31, 2009. Mr. Bachmeier serves on the Board of Directors for the
Renewable Fuels Association and the Minnesota Coalition for Ethanol and has
served on the Board of Directors for Renewable Products Marking
Group. Mr. Bachmeier has been involved in the ethanol industry for
the past 20 years.
24
Industry
Support
There has been no change in the
repayment status of our grant from the North Dakota State Industrial Commission
(totaling $275,000) during the second quarter of 2010.
North Dakota Ethanol
Incentive Program
Under this 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 $1,600,000 per
plant per year up to a lifetime maximum of $10,000,000 per plant. We
did not receive any funds from this program during the six months ended June 30,
2010 and 2009, respectively. We cannot predict whether we will
receive funds from this program during the remainder of
2010.
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 3 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 June 30, 2010.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements.
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 U.S. 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, ethanol and natural
gas. 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 of Generally Accepted
Accounting Principles (“GAAP”).
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. 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 $27,600,000 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
$10,000,000 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 June 30, 2010, would change the fair
value of our interest rate swaps by approximately $560,000.
25
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.
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 June 30, 2010 we had
approximately 1,146,000 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 approximately
$60,000 related to these contracts. We would expect a sustained $0.10
change in the price of corn to have an approximate $115,000 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 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.
Liability
Risk
We
participate in a captive reinsurance company (the “Captive”). The Captive
reinsures losses related to worker’s compensation, commercial property and
general liability. Premiums are accrued by a charge to income for the
period to which the premium relates and is remitted by our insurer to the
captive reinsurer. The Captive reinsures catastrophic losses in excess of
a predetermined amount. Our premiums are structured such that we have made
a prepaid collateral deposit estimated for losses related to the above
coverage. The Captive insurer has estimated and collected an amount in
excess of the estimated losses but less than the catastrophic loss limit insured
by the Captive. We cannot be assessed in excess of the amount in the collateral
fund.
26
Item
4. 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 June 30, 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 June 30,
2010, that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
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
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
$77,000,000. The Company has remaining payments under the
Design-Build Agreement of approximately $3,900,000. This payment has
been withheld pending satisfactory resolution of certain punch list items,
including an 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 and Fagen are currently engaged
in mediation to resolve the issues related to the plant’s coal
combustor.
27
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.
The California
Low Carbon Fuel Standard may decrease demand for corn based ethanol which could
negatively impact our profitability. Recently, California passed a
Low Carbon Fuels Standard (LCFS). The California LCFS requires that
renewable fuels used in California must accomplish certain reductions in
greenhouse gases which are measured using a lifecycle analysis. Management
believes that these new regulations could preclude corn based ethanol produced
in the Midwest from being used in California. California represents a
significant ethanol demand market. If we are unable to supply ethanol to
California, it could significantly reduce demand for the ethanol we
produce. Any decrease in ethanol demand could negatively impact ethanol
prices which could reduce our revenues and negatively impact our ability to
profitably operate the ethanol plant.
If the Federal
Volumetric Ethanol Excise Tax Credit (“VEETC”) expires on December 31,
2010, it could negatively impact our profitability. The ethanol
industry is benefited by VEETC which is a federal excise tax credit of 4.5 cents
per gallon of ethanol blended with gasoline at a rate of at least 10%.
This excise tax credit is set to expire on December 31, 2010. We
believe that VEETC positively impacts the price of ethanol. On
December 31, 2009, the portion of VEETC that benefits the biodiesel
industry was allowed to expire. This resulted in the biodiesel industry
ceasing to produce biodiesel because the price of biodiesel without the tax
credit was uncompetitive with the cost of petroleum based diesel. If the
portion of VEETC that benefits ethanol is allowed to expire, it could negatively
impact the price we receive for our ethanol and could negatively impact our
profitability.
If the secondary
tariff on imported ethanol is allowed to expire in January 2011, we could
see an increase in ethanol produced in foreign countries being marked in the
Untied States which could negatively impact our profitability. The
secondary tariff on imported ethanol is a 54 cent per gallon tariff on ethanol
imports from certain foreign countries. The secondary tariff on imported
ethanol is scheduled to expire in January 2011. If this tariff is
allowed to expire, an influx of imported ethanol on the domestic ethanol market
could have a significant negative impact on ethanol prices and our
profitability.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4 Removed and Reserved
Item
5. Other Information
None.
28
Item
6. Exhibits. The following exhibits are included
herein:
Exhibit No.
|
Description
|
|
10.1
|
Employment
Agreement between Red Trail Energy, LLC and Gerald Bachmeier dated July 8,
2010.
|
|
31.1
|
Certificate
Pursuant to 17 CFR 240.15d-14(a).
|
|
31.2
|
Certificate
Pursuant to 17 CFR 240.15d-14(a).
|
|
32.1
|
Certificate
Pursuant to 18 U.S.C. § 1350.
|
|
32.2
|
Certificate
Pursuant to 18 U.S.C. § 1350.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
RED
TRAIL ENERGY, LLC
|
|||
Date:
|
August
13, 2010
|
/s/ Gerald
Bachmeier
|
|
Gerald
Bachmeier
|
|||
Chief
Executive Officer
|
|||
Date:
|
August
13, 2010
|
/s/ Kent
Anderson
|
|
Kent
Anderson
|
|||
Chief
Financial
Officer
|
29