Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - Western Iowa Energy, L.L.C. | c04926exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Western Iowa Energy, L.L.C. | c04926exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - Western Iowa Energy, L.L.C. | c04926exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - Western Iowa Energy, L.L.C. | c04926exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended June 30, 2010.
OR
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the transition period from to .
COMMISSION FILE NUMBER 00051965
WESTERN IOWA ENERGY, LLC
(Exact name of registrant as specified in its charter)
Iowa (State or other jurisdiction of incorporation or organization) |
41-2143913 (I.R.S. Employer Identification No.) |
|
1220 S. Center Street, P.O. Box 399 Wall Lake, Iowa |
51466 |
|
(Address of principal executive offices) | (Zip Code) |
(712) 664-2173
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes | o No |
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of 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).
o Yes | o 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 o | Accelerated Filer o | Non-Accelerated Filer þ | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes | þ No |
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date:
As of August 9, 2010, there were 26,447 membership units outstanding.
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WESTERN IOWA ENERGY, LLC
BALANCE SHEETS
BALANCE SHEETS
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(UNAUDITED) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 81,736 | $ | 300 | ||||
Margin deposits |
133,356 | 58,445 | ||||||
Trade accounts receivable related party |
303,789 | 3,106,676 | ||||||
Other receivables |
| 387,883 | ||||||
Incentive receivables |
| 2,946,499 | ||||||
Derivative instruments |
34,889 | | ||||||
Inventory |
3,096,902 | 383,528 | ||||||
Prepaid expenses |
146,258 | 540,890 | ||||||
Total current assets |
3,796,930 | 7,424,221 | ||||||
PROPERTY, PLANT AND EQUIPMENT |
||||||||
Land and land improvements |
1,435,928 | 1,364,842 | ||||||
Office building and equipment |
645,542 | 645,542 | ||||||
Plant and process equipment |
33,897,821 | 33,854,309 | ||||||
Construction in progress |
| 8,136 | ||||||
Total, at cost |
35,979,291 | 35,872,829 | ||||||
Less accumulated depreciation |
8,782,841 | 7,669,210 | ||||||
Total property, plant and equipment |
27,196,450 | 28,203,619 | ||||||
OTHER ASSETS |
||||||||
Land options |
| 596 | ||||||
Other investments |
124,078 | 107,198 | ||||||
Loan origination fees, net of amortization |
60,306 | 69,355 | ||||||
Total other assets |
184,384 | 177,149 | ||||||
TOTAL ASSETS |
$ | 31,177,764 | $ | 35,804,989 | ||||
LIABILITIES AND MEMBERS EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Checks issued in excess of bank balance |
$ | | $ | 333,008 | ||||
Accounts payable: |
||||||||
Trade |
419,847 | 824,979 | ||||||
Related party |
15,096 | 88,277 | ||||||
Current portion of long-term debt |
834,722 | 2,459,722 | ||||||
Derivative instruments |
| 2,587 | ||||||
Accrued interest |
8,588 | 22,226 | ||||||
Accrued wages and benefits |
66,791 | 107,664 | ||||||
Accrued payroll taxes |
3,574 | 3,678 | ||||||
Accrued expenses related party |
4,687 | 103,537 | ||||||
Other current liabilities |
46,320 | 46,304 | ||||||
Total current liabilities |
1,399,625 | 3,991,982 | ||||||
LONG-TERM LIABILITIES |
||||||||
Long-term debt, less current portion above |
2,551,111 | 3,262,222 | ||||||
Total liabilities |
3,950,736 | 7,254,204 | ||||||
MEMBERS EQUITY |
||||||||
Contributed capital |
23,516,376 | 23,516,376 | ||||||
Retained earnings |
3,710,652 | 5,034,409 | ||||||
Total members equity |
27,227,028 | 28,550,785 | ||||||
TOTAL LIABILITIES AND MEMBERS EQUITY |
$ | 31,177,764 | $ | 35,804,989 | ||||
See accompanying notes.
3
Table of Contents
WESTERN IOWA ENERGY, LLC
STATEMENTS OF OPERATIONS (UNAUDITED)
STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended | Three Months Ended | Six Months Ended | Six Months Ended | |||||||||||||
June 30, 2010 | June 30, 2009 | June 30, 2010 | June 30, 2009 | |||||||||||||
REVENUES |
||||||||||||||||
Related parties |
$ | 2,995,789 | $ | 9,751,660 | $ | 6,534,830 | $ | 12,821,728 | ||||||||
Incentive funds |
| 1,148,325 | | 2,044,394 | ||||||||||||
Total revenues |
2,995,789 | 10,899,985 | 6,534,830 | 14,866,122 | ||||||||||||
COST OF SALES |
2,977,013 | 10,530,856 | 6,973,226 | 14,791,624 | ||||||||||||
Gross profit (loss) |
18,776 | 369,129 | (438,396 | ) | 74,498 | |||||||||||
OPERATING EXPENSES |
||||||||||||||||
Consulting and professional fees |
99,084 | 248,257 | 282,461 | 374,636 | ||||||||||||
Office and administrative expenses |
285,997 | 296,696 | 612,698 | 630,427 | ||||||||||||
Total operating expenses |
385,081 | 544,953 | 895,159 | 1,005,063 | ||||||||||||
OTHER INCOME (EXPENSE) |
||||||||||||||||
Interest income |
649 | 944 | 2,485 | 1,352 | ||||||||||||
Interest expense |
(27,299 | ) | (85,054 | ) | (58,939 | ) | (176,947 | ) | ||||||||
Grant income |
| | | 100,000 | ||||||||||||
Patronage dividends |
| | 66,252 | 116,734 | ||||||||||||
Total other income (expense) |
(26,650 | ) | (84,110 | ) | 9,798 | 41,139 | ||||||||||
NET LOSS |
$ | (392,955 | ) | $ | (259,934 | ) | $ | (1,323,757 | ) | $ | (889,426 | ) | ||||
BASIC AND DILUTED LOSS PER UNIT |
$ | (14.86 | ) | $ | (9.83 | ) | $ | (50.05 | ) | $ | (33.63 | ) | ||||
WEIGHTED AVERAGE UNITS OUTSTANDING,
BASIC AND DILUTED |
26,447 | 26,447 | 26,447 | 26,447 | ||||||||||||
See accompanying notes.
4
Table of Contents
WESTERN IOWA ENERGY, LLC
STATEMENTS OF CASH FLOWS (UNAUDITED)
STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended | Six Months Ended | |||||||
June 30, 2010 | June 30, 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (1,323,757 | ) | $ | (889,426 | ) | ||
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities |
||||||||
Depreciation and amortization |
1,122,680 | 1,116,062 | ||||||
Non cash portion of patronage dividends |
(16,880 | ) | (26,303 | ) | ||||
Non cash forgiveness of debt |
| (100,000 | ) | |||||
Effects of changes in operating assets and liabilities |
||||||||
Margin deposits |
(74,911 | ) | (501,939 | ) | ||||
Trade accounts receivable related party |
2,802,887 | (1,449,250 | ) | |||||
Other receivables |
387,883 | 17,087 | ||||||
Incentive receivables |
2,946,499 | (510,548 | ) | |||||
Inventory |
(2,713,374 | ) | (384,682 | ) | ||||
Derivative instruments |
(37,476 | ) | 271,506 | |||||
Prepaid expenses and other assets |
394,632 | (852,470 | ) | |||||
Accounts payable |
(478,313 | ) | 1,424,728 | |||||
Accrued interest |
(13,638 | ) | (1,775 | ) | ||||
Accrued wages and benefits |
(40,873 | ) | 24,137 | |||||
Accrued payroll taxes |
(104 | ) | 913 | |||||
Accrued expenses related party |
(98,850 | ) | (117,620 | ) | ||||
Other current liabilities |
16 | | ||||||
Net cash provided by (used in) operating activities |
2,856,421 | (1,979,580 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchase of property, plant and equipment, including
construction in progress |
(105,866 | ) | (38,365 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Net decrease in checks issued in excess of bank balance |
(333,008 | ) | | |||||
Proceeds from long-term debt |
2,925,000 | 7,927,000 | ||||||
Payments on long-term debt |
(5,261,111 | ) | (5,883,111 | ) | ||||
Net cash provided by (used in) financing activities |
(2,669,119 | ) | 2,043,889 | |||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
81,436 | 25,944 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
300 | 66,400 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 81,736 | $ | 92,344 | ||||
See accompanying notes.
5
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Western Iowa Energy, LLC located in Wall Lake, Iowa was organized on September 21, 2004 to own and
operate a 30 million gallon biodiesel plant for the production of fuel grade biodiesel. The
Companys fiscal year ends on December 31. Significant accounting policies followed by the Company
are presented below.
Use of Estimates in Preparing Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Basis of Accounting
The Company uses the accrual basis of accounting in accordance with accounting principles generally
accepted in the United States of America. This method recognizes revenues as earned and expenses
as incurred.
In the opinion of management, all adjustments have been made that are necessary to fairly present
the financial position, results of operations and cash flows of the Company.
These financial statements should be read in conjunction with the financial statements and notes
included in the Companys financial statements for the year ended December 31, 2009.
Revenue Recognition
Revenue from the production of biodiesel and related products is recorded upon transfer of the
risks and rewards of ownership which generally occurs upon delivery to customers.
Interest income is recognized as earned. Patronage dividends are recognized when received.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be cash equivalents.
The Company maintains its accounts primarily at one financial institution. At times throughout the
year, the Companys cash and equivalents balances may exceed amounts insured by the Federal Deposit
Insurance Corporation.
Accounts Receivable
Accounts receivable are presented at face value, net of the allowance for doubtful accounts. The
allowance for doubtful accounts is established through provisions charged against income and is
maintained at a level believed adequate by management to absorb estimated bad debts based on
historical experience and current economic conditions. Management has established an allowance for
doubtful accounts of $105,712 at June 30, 2010 and December 31, 2009.
6
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
The Companys policy is to charge simple interest on trade receivables past due balances; accrual
of interest is discontinued when management believes collection is doubtful. Receivables are
considered past due based upon payment terms set forth at the date of the related sale. The
Company has no receivables accruing interest at June 30, 2010 and December 31, 2009.
Derivative Instruments and Hedging Activities
Topic 815 of the Accounting Standards Codification (ASC), Derivatives and Hedging, requires a
company to evaluate its contracts to determine whether the contracts are derivatives. Certain
contracts that literally meet the definition of a derivative may be exempted from ASC 815 as normal
purchases or normal sales. Normal purchases and normal sales are contracts that provide for the
purchase or sale of something other than a financial instrument or derivative instrument that will
be delivered in quantities expected to be used or sold over a reasonable period in the normal
course of business. Contracts that meet the requirements of normal purchase or normal sales are
documented as such, and exempted from the accounting and reporting requirements of ASC 815. The
Company does enter into agreements to purchase soybean oil for anticipated production needs. These
contracts are considered normal purchase contracts and exempted from ASC 815.
Inventories
Inventory is stated at the lower of cost, determined on a first in, first out basis, or market
value.
Property, Plant, and Equipment
Property and equipment are stated at cost. Significant additions are capitalized, while
expenditures for maintenance, repairs and minor renewals are charged to operations when incurred.
Depreciation and amortization are computed using the straight-line method over the estimated useful
lives of the assets determined as follows:
Years | ||||
Land improvements |
20-40 | |||
Office building |
5-40 | |||
Office equipment |
5-20 | |||
Plant and process equipment |
10-40 |
Depreciation expense for the three months and six months ended June 30, 2010 was $551,424 and
$1,113,632, respectively. Depreciation expense for the three months and six months ended June 30,
2009 was $553,604 and $1,107,014, respectively.
The Company reviews its property and equipment for impairment whenever events indicate that the
carrying amount of the asset may not be recoverable. An impairment loss is recorded when the sum
of the future cash flows is less than the carrying amount of the asset. The amount of the loss is
determined by comparing the fair market values of the asset to the carrying amount of the asset.
7
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
Loan Origination Fees
Loan origination fees are stated at cost and are amortized on the straight-line method over the
life of the loan agreements. Amortization commenced as the Company borrowed funds on the loans.
Amortization for the three and six months ended June 30, 2010 and 2009 was $4,524 and $9,048,
respectively.
Other Investments
Other investments consist of investments in the capital stock and patron equities of the Companys
primary lenders. The investments are stated at cost and adjusted for non cash patronage equities
received.
Grant Income
Grant income consists of amounts received from unaffiliated organizations to assist in the
organization and development of the Company. Amounts are recorded as other income when there is no
obligation to repay the organization.
Income Taxes
The Company is organized as a limited liability company under state law and is treated as a
partnership for income tax purposes. Under this type of organization, the Companys earnings pass
through to the partners and are taxed at the partner level. Accordingly, no income tax provision
has been calculated. Differences between financial statement basis of assets and tax basis of
assets is related to capitalization and amortization of organization and start-up costs for tax
purposes, whereas these costs are expensed for financial statement purposes. Differences also
exist in the treatment of expenses capitalized for inventory for tax purposes, prepaid expenses,
and differences between depreciable lives and methods used for book and tax purposes.
Loss Per Unit
Losses per unit are calculated based on the period of time units have been issued and outstanding.
For purposes of calculating diluted earnings per capital unit, units subscribed for but not issued
are included in the computation of outstanding capital units based on the treasury stock method.
As of June 30, 2010 and 2009, there was not a difference between basic and diluted earnings per
unit as there were no units subscribed.
Cost of Sales
The primary components of cost of sales from the production of biodiesel products are raw materials
(soybean oil, animal fats, hydrochloric acid, methanol, and sodium methylate), energy (natural gas
and electricity), labor and depreciation on process equipment.
Fixed costs during the periods when the plant is idle are classified in cost of sales. Cost of
sales during these periods primarily consists of labor, depreciation on process equipment, and
other indirect costs.
8
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
Shipping and Handling Costs
Shipping and handling costs are expensed as incurred and are included in the cost of sales.
Environmental Liabilities
The Companys operations are subject to federal, state and local environmental laws and
regulations. These laws require the Company to investigate and remediate the effects of the
release or disposal of materials at its location. Accordingly, the Company has adopted policies,
practices and procedures in the areas of pollution control, occupational health, and the
production, handling, storage and use of hazardous materials to prevent material environmental or
other damage; and to limit the financial liability which could result from such events.
Environmental liabilities are recorded when the liability is probable and the costs can be
reasonably estimated.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument held by the Company:
Current assets and current liabilities The carrying value approximates fair value due to the
short maturity of these items.
Long-term debt The carrying amount of long-term obligations approximated fair value based on
estimated interest rates for comparable debt.
New Accounting Standards
In February 2010, FASB issued Accounting Standards Update (ASU) 2010-09 Subsequent Events (Topic
855) Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09 removes the
requirement for an SEC filer to disclose a date in both issued and revised financial statements.
Revised financial statements include financial statements revised as a result of either correction
of an error or retrospective application of GAAP. All of the amendments in ASU 2010-09 are
effective upon issuance of the final ASU, except for the use of the issued date for conduit debt
obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The
Company adopted ASU 2010-09 and it did not have a material impact on the Companys interim
financial statements.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820),
Improving Disclosures about Fair Value Measurements, amending ASC 820. ASU 2010-06 requires
entities to provide new disclosures and clarify existing disclosures relating to fair value
measurements. The new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in Level 3 fair value measurements, which are
effective for fiscal years beginning after December 15, 2010 and for interim periods within those
fiscal years. The adoption of ASU 2010-06, did not have a material impact on the Companys
financial position or results of operations.
9
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
NOTE 2 INCENTIVE PAYMENTS AND RECEIVABLE
Revenue from federal incentive programs is recorded when the Company has sold blended biodiesel and
satisfied the reporting requirements under the applicable program. When it is uncertain that the
Company will receive full allocation and payment due under the federal incentive program, it
derives an estimate of the incentive revenue for the relevant period based on various factors
including the most recently used payment factor applied to the program. The estimate is subject to
change as management becomes aware of increases or decreases in the amount of funding available
under the incentive programs or other factors that affect funding or allocation of funds under such
programs.
The Company receives federal incentive revenues from the Volumetric Ethanol Tax Credit (VEETC)
and Commodity Credit Corporation (CCC) Bioenergy Programs. The VEETC expired on December 31, 2009.
The amount of incentives receivable was $-0- and $2,946,499 as of June 30, 2010 and December 31,
2009.
NOTE 3 INVENTORY
Inventory consists of the following:
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Raw material |
$ | 539,405 | $ | 273,791 | ||||
Work in process |
1,387,430 | 49,398 | ||||||
Finished goods |
1,170,067 | 60,339 | ||||||
Total |
$ | 3,096,902 | $ | 383,528 | ||||
NOTE 4 DEBT AND FINANCING
Long-Term Debt
Long-term obligations of the Company are summarized as follows:
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Note payable to Farm Credit Services of America and
CoBank under term note agreement see details
below |
$ | 725,000 | $ | 2,350,000 | ||||
Note payable to Farm Credit Services of America and
CoBank under reducing revolving credit note see
details below |
1,975,000 | 2,630,000 | ||||||
Note payable to the Iowa Department of Economic
Development see details below |
192,500 | 207,500 | ||||||
Note payable to Glidden Rural Electric
Cooperative see details below |
493,333 | 534,444 | ||||||
Total |
3,385,833 | 5,721,944 | ||||||
Less current portion |
834,722 | 2,459,722 | ||||||
Long-term portion |
$ | 2,551,111 | $ | 3,262,222 | ||||
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WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
The estimated future maturities of long-term debt at June 30, 2010 are as follows:
2011 |
$ | 834,722 | ||
2012 |
112,222 | |||
2013 |
692,222 | |||
2014 |
1,582,222 | |||
2015 |
82,222 | |||
Thereafter |
82,223 | |||
Total |
$ | 3,385,833 | ||
The Company has available loan commitments from Farm Credit Services of America and CoBank. The
commitments consisted of a $10,000,000 term note, a $7,430,000 reducing revolving credit note and a
$570,000 letter of credit. In May 2010, the agreement was amended and the available commitment
under the reducing revolving credit note was reduced by $2,000,000. On August 5, 2010, the
agreement was amended to extend the $2,000,000 reduction in the commitment under the reducing
revolving credit note to October 31, 2010. As of June 30, 2010 and December 31, 2009, the balance
outstanding under the term note was $725,000 and $2,350,000, respectively. Principal payments of
$450,000 as amended, are required under the term loan and commenced December 20, 2006 and due each
quarter thereafter, with a final payment due no later than December 20, 2011. As of June 30, 2010
and December 31, 2009, the balance outstanding under the reducing revolving credit note was
$1,975,000 and $2,630,000, respectively. Advances under the reducing revolving credit note are
available through the life of the commitment. The commitment reduces by $900,000 semi-annually
beginning July 1, 2012 and continuing through January 1, 2016, with a final reduction at the
expiration of the commitment on July 1, 2016, at which time any outstanding balance shall be due
and payable in full. The notes require interest payments based on unpaid principal. The
agreements also include a provision for additional payments for the fiscal years ending 2006
through 2010 based on the free cash flows of the Company. The agreements provide for several
different interest rate options including variable and fixed options (3.25% and 3.50% variable on
the term note and revolving credit note, as of June 30, 2010 and December 31, 2009, respectively).
The variable interest rate options are based on Libor or the agents base rate and include
adjustments for performance which is based on the Companys debt to net worth ratio, measured
quarterly. The Company has issued a $570,000 irrevocable letter of credit through CoBank in favor
of Glidden Rural Electric Cooperative. In July 2010, the letter of credit was reduced to $490,000.
The notes are secured by essentially all of the Companys assets. At June 30, 2010, the Company
had $3,455,000 of available borrowings under the reducing revolving credit note.
The loan agreements with Farm Credit and CoBank contain various covenants pertaining to minimum
working capital and minimum net worth requirements. As of June 30, 2010 and December 31, 2009, the
Company believes it is in compliance with said covenants.
11
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
The Company was awarded $400,000 from the Iowa Department of Economic Development (IDED) consisting
of a $300,000 zero interest deferred loan and a $100,000 forgivable loan, the balance of which was
$192,500 and $207,500 at June 30, 2010 and December 31, 2009, respectively. The zero interest
deferred loan requires monthly installments of $2,500 beginning January 2008, with remaining unpaid
principal due at maturity, December, 2012. The Company was required to satisfy the terms of the
agreement to receive a permanent waiver of the forgivable loan. In April 2009, the Company
received notice from the IDED that the Company had satisfied the terms of the agreement and had
forgiven the forgivable loan. The forgiveness of the loan is reflected in other income in the
accompanying statement of operations for the three months ended March 31, 2009. The loan is
secured by a security agreement including essentially all of the Companys assets.
In July 2006, the Company entered into a rural development loan agreement under the Rural
Electrification Act of 1936 with Glidden Rural Electric Cooperative. The original loan amount was
$740,000 and requires monthly installments of $6,851, requiring no interest and commencing July 31,
2007. The loan is to be paid in full on or before the tenth anniversary date of the first advance
of funds. The Company has issued an irrevocable letter of credit through CoBank in favor of
Glidden Rural Electric Cooperative as security for the note.
NOTE 5 MEMBERS EQUITY
The Companys operating agreement provides that the net profits or losses of the Company will be
allocated to the members in proportion to the membership units held. Members will not have any
right to take part in the management or control of the Company. Each membership unit entitles the
member to one vote on any matter which the member is entitled to vote. Transfers of membership
units are prohibited except as provided in the operating agreement.
NOTE 6 CASH FLOW DISCLOSURES
Supplemental disclosure for interest paid:
Six Months | Six Months | |||||||
Ended | Ended | |||||||
June 30, 2010 | June 30, 2009 | |||||||
Cash paid for interest |
$ | 72,577 | $ | 178,722 | ||||
NOTE 7 RELATED PARTY TRANSACTIONS
The Companys general contractor (Renewable Energy Group, LLC) used to construct the plant is an
entity related to West Central Coop who was originally contracted to provide the management and
operational services for the Company. Renewable Energy Group, LLC was also issued member units in
July 2006 and December 2006 in exchange for a reduction in the construction payable. In July 2006,
West Central Coop and Renewable Energy Group, LLC joined forces and created Renewable Energy Group,
Inc. (REG, Inc.). On September 21, 2006, the Company consented to the assignment of the contract
to construct the facility and the management and operational services agreement to REG, Inc.
12
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WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
The Company incurred management and operational service fees, feed stock procurement fees and
marketing fees with REG, Inc. For the three and six months ended June 30, 2010, the
Company incurred service fees of $27,803 and $92,910, respectively. For the three and six months
ended June 30, 2009, the Company incurred service fees of $129,438 and $170,444, respectively. The
Company also purchases feed stock from West Central Coop and Bunge North America, Inc. an entity
related by common ownership in REG, Inc. For the six months ended June 30, 2010 and 2009, the
Company purchased feed stocks of $-0- and $37,438, respectively, from these related parties. The
amount payable to REG, Inc. as of June 30, 2010 and December 31, 2009 was $15,906 and $88,277,
respectively.
On April 3, 2009, the Company received from REG, Inc., a notice of termination of its management
and operational services agreement. The notification from REG, Inc. states that it shall
constitute such twelve month advance termination notice required by the terms of the agreement.
NOTE 8 LEASE COMMITMENTS
During July 2006, the Company entered into an operating lease agreement for rail equipment which
expires in 2011. The lease agreement has a monthly payment amount of $2,969. The following is a
schedule of future minimum lease payments under a non-cancelable lease at June 30, 2010:
2011 |
$ | 35,627 | ||
Lease expense for the three and six months ended June 30, 2010 and 2009 was $8,907 and $17,814,
respectively.
NOTE 9 RETIREMENT AND SAVINGS PLAN
The Company has a 401(k) retirement and savings plan, which is available to substantially all
employees. The participants may contribute up to 18% of their compensation. The Companys
matching contribution is discretionary for each plan year. The Company contributions for the six
months ended June 30, 2010 and 2009, was $10,261 and $9,538, respectively.
NOTE 10 FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows the guidance set forth in ASC Topic 820 for assets and liabilities recognized
at fair value on a recurring basis. This guidance provides a comprehensive framework for measuring
fair value and expands disclosures which are required about fair value measurements. Specifically,
the guidance sets forth a definition of fair value and establishes a hierarchy prioritizing the
inputs to valuation techniques, giving the highest priority to quoted prices in active markets for
identical assets and liabilities and the lowest priority to unobservable value inputs. The
adoption of this guidance had an immaterial impact on the companys financial statements. The
guidance defines levels within the hierarchy as follows:
| Level 1Unadjusted quoted prices for identical assets and liabilities in active
markets; |
| Level 2Quoted prices for similar assets and liabilities in active markets (other
than those included in Level 1) which are observable for the asset or liability, either
directly or indirectly; and |
Level 3Valuations derived from valuation techniques in which one or more significant inputs or
significant value drivers are unobservable.
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WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
The following tables set forth financial assets and liabilities measured at fair value in the
consolidated statement of financial position and the respective levels to which the fair value
measurements are classified within the fair value hierarchy as of June 30, 2010 and December 31,
2009:
June 30, 2010 | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Carrying | Active Markets for | Observable | Unobservable | |||||||||||||
Amount on | Identical Assets | Inputs | Inputs | |||||||||||||
Balance Sheet | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Financial assets: |
||||||||||||||||
Commodity derivatives |
$ | 34,889 | $ | 34,889 | $ | | $ | | ||||||||
December 31, 2009 | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Carrying | Active Markets for | Observable | Unobservable | |||||||||||||
Amount on | Identical Assets | Inputs | Inputs | |||||||||||||
Balance Sheet | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Financial liabilities: |
||||||||||||||||
Commodity derivatives |
$ | (2,587 | ) | $ | (2,587 | ) | $ | | $ | | ||||||
The Company enters into various commodity derivative instruments, including forward contracts,
futures, options and swaps. The fair value of the Companys derivatives are determined using
unadjusted quoted prices for identical instruments on the applicable exchange in which the Company
transacts. When quoted prices for identical instruments are not available, the Company uses forward
price curves derived from market price quotations. Market price quotations are obtained from
independent brokers, exchanges, direct communication with market participants and actual
transactions executed by the Company.
NOTE 11 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company adopted ASC Topic 815, Derivatives and Hedging, on January 1, 2009. This guidance was
intended to improve financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their effects on an
entitys financial position, financial performance, and cash flows.
Objectives and Strategies for Holding Derivative Instruments
In the ordinary course of business, the Company enters into contractual arrangements (derivatives)
as a means of managing exposure to changes in biodiesel prices and feedstock costs under
established procedures and controls. The Company has established a variety of approved derivative
instruments to be utilized in each risk management program, as well as varying levels of exposure
coverage and time horizons based on an assessment of risk factors related to each hedging program.
As part of its trading activity, the Company uses futures, option and swap contracts offered
through regulated commodity exchanges to reduce risk and is exposed to risk of loss in the market
value of biodiesel inventories and input costs.
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WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
Commodity Risk Management
Commodity price risk management programs serve to reduce exposure to price fluctuations on
purchases of feedstocks and biodiesel prices. The Company enters into over-the-counter and
exchange-traded derivative commodity instruments to hedge the commodity price risk associated with
feedstocks and commodity exposures. These agreements expire throughout 2010.
Accounting for Derivative Instruments and Hedging Activities
All derivatives are designated as non-hedge derivatives. Although the contracts may be effective
economic hedges of specified risks, they do not meet the hedge accounting criteria of ASC 815. At
June 30, 2010 and December 31, 2009, the Company had net derivative assets (liabilities) of $34,889
and $(2,587), respectively, related to these instruments, with the related mark-to-market effects
included in Cost of sales in the statements operations.
The following tables set forth the fair value of derivatives not designated as hedging instruments
as of June 30, 2010 and December 31, 2009, respectively:
Asset Derivatives | Liability Derivatives | |||||||||||||||
June 30, 2010 | December 31, 2009 | |||||||||||||||
Balance Sheet | Balance Sheet | |||||||||||||||
Location | Fair Value | Location | Fair Value | |||||||||||||
Commodity contracts |
||||||||||||||||
Heat oil swaps |
Current assets | $ | 34,889 | Current liabilities | $ | (2,587 | ) | |||||||||
During the three months and six months ended June 30, 2010 and 2009, net realized and unrealized
losses on derivative transactions were recognized in the statement of operations as follows:
Derivative (Gain) Loss | Derivative (Gain) Loss | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, 2010 | June 30, 2009 | |||||||||||||||
Statement of | Statement of | |||||||||||||||
Operations | Operations | |||||||||||||||
Location | (Gain) Loss | Location | (Gain) Loss | |||||||||||||
Commodity contracts |
||||||||||||||||
Heat oil swaps |
Cost of sales | $ | (208,414 | ) | Cost of sales | $ | 930,345 | |||||||||
Derivative (Gain) Loss | Derivative (Gain) Loss | |||||||||||||||
Six Months Ended | Six Months Ended | |||||||||||||||
June 30, 2010 | June 30, 2009 | |||||||||||||||
Statement of | Statement of | |||||||||||||||
Operations | Operations | |||||||||||||||
Location | (Gain) Loss | Location | (Gain) Loss | |||||||||||||
Commodity contracts |
||||||||||||||||
Heat oil swaps |
Cost of sales | $ | (188,387 | ) | Cost of sales | $ | 806,067 | |||||||||
15
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WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
NOTE 12 UNCERTAINTIES
The Company has produced biodiesel for sale to customers since June of 2006. During that time,
crude oil has ranged in price from the mid-$30 per barrel to a high of $147 per barrel on the
NYMEX. We also have experienced a wide swing in the price of soybean oil: between 25¢ per pound
and 70¢ per pound. Because the Company is able to process multiple feed stocks, they have been
able to process less expensive animal fats and vegetable oils into biodiesel that meets ASTM D 6751
standards. As a result, for the year ended December 31, 2009, the Companys net income was
$1,622,075 and incurred a loss of $1,323,757 for the six months ended June 30, 2010. In addition,
during 2009 and the six months ended June 30, 2010, the Company repaid approximately $6.0 million
of its long-term obligations.
During the Companys short history, it has dealt with the lack of a direct correlation between the
cost of its inputs and the selling price of the products that it produces. On the input side, it
has to work within the Agricultural market; and on the output side, it has to work within the
Energy market. Historically, there has been no consistent relationship between those two markets.
Because of the relationship of its business within differing markets, it is necessary that
management stay abreast of the varying market conditions to determine the economic relationship
that exists at any given time and under certain market conditions. Because of the subjectivity
involved with the determination and relationships of market conditions, the uncertainties are
exacerbated. The flexibility of the production facilities to process varying feed stocks adds to
the Companys ability to respond to the varying market conditions and to reduce some of the market
uncertainties. The expiration of the federal blenders tax credit on December 31, 2009, subject to
any action that Congress may take in 2010, may also materially impair the Companys ability to
profitably produce and sell biodiesel. As a result of these factors, the Company warm idled its
facility in April 2010 and has had reduced production since that time.
The Company has also received from REG, Inc. a notice of termination of the management and
operational services agreement (see Note 7). The agreement expired in June 2010, but REG has
continued to provide services. REG has proposed that the parties review and cooperate to negotiate
a new contract mutually beneficial to the Company and REG; however, there is no guarantee that a
new contract will be entered into between the parties. Additionally, on February 24, 2010 a vote
was held by unitholders to approve the proposed asset purchase agreement and merger with REG (see
Note 14). The Company failed to obtain the unitholder votes necessary to approve the transaction.
The accompanying financial statements have been prepared assuming the Company will continue as a
going concern. Due to certain items discussed above, our ability to continue to generate positive
cash flow is uncertain.
16
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WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
NOTE 13 GAIN CONTINGENCIES
The Companys primary customer and marketer (REG, Inc.) has agreed to an arbitration hearing with a
European customer. The Company and REG, Inc. allege breach of contract as the customer failed to
take delivery of the Companys product. The Companys portion of damages associated with
arbitration hearing is $1,054,488. At this time, no estimate can be made as to the time or the
amount, if any, of the ultimate recovery. As such no revenues have been recorded in the
accompanying statement of operations for the six months ended June 30, 2010 relating to
estimated damages recoverable. Revenues will be recorded at which time the actual damages are
determinable, which will likely occur upon receipt.
NOTE 14 ASSET PURCHASE AGREEMENT
On May 11, 2009, the Company entered into an asset purchase agreement and plan of merger with REG,
for the consolidation of the Companys commercial-scale biodiesel production facility with REG and
two other biodiesel producers. A new holding company (Newco), which was incorporated by REG,
would own and operate the Company and other acquired companies. The holding company was to be
owned by current REG investors and the current members of the Company as well as the members of the
two other consolidating companies.
On February 24, 2010 a vote was held by unitholders to approve the proposed transactions and merger
with REG. The Company failed to obtain the unitholder votes necessary to approve the transaction.
NOTE 15 SUBSEQUENT EVENTS
On August 5, 2010, the Companys agreement with Farm Credit Services of America was amended to
extend the $2,000,000 reduction in the commitment under the reducing revolving credit note to
October 31, 2010 (See Note 4).
Management evaluated subsequent events through the date the financial statements were issued.
17
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Item 2. Managements 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 period ended June
30, 2010, compared to the same period in fiscal year 2009. This discussion should be read in
conjunction with the financial statements and notes and the information contained in the Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
Cautionary Statements Regarding Forward Looking Statements
This report contains historical information, as well as forward-looking statements. These
forward-looking statements include any statements that involve known and unknown risks and relate
to future events and our expectations regarding future performance or conditions. Words such as
may, should, anticipate, believe, expect, will, plan, future, intend, could,
estimate, predict, hope, potential, continue, or the negative of these terms or other
similar expressions are intended to identify forward-looking statements, but are not the exclusive
means of identifying such statements. These forward-looking statements, and others we may make
from time to time, are subject to a number of risks and uncertainties. Many factors could cause
actual results to differ materially from those projected in forward-looking statements. While it
is impossible to identify all such factors, factors that could cause actual results to differ
materially from those estimated by us include, but are not limited to:
| Changes in federal, state, or local incentives for biodiesel production, including
without limitation the federal biodiesel blenders tax credit; |
| The availability and adequacy of our cash flow to meet our requirements; |
| Changes to the rules related to the Renewable Fuels Standard and the value of
renewable identification numbers (RINs); |
| Competition with other manufacturers in the biodiesel industry; |
| Results of our hedging strategies; |
| Changes in interest rates and the availability of credit to support capital
improvements, development, expansion, and operations; |
| Changes in the amounts available under our credit facilities with Farm Credit; |
| Our ability to keep up with the latest technology for the production of biodiesel; |
| Decrease in the demand for biodiesel; |
| Changes in plant production capacity or technical difficulties in operating the
plant; |
| Actual biodiesel and co-product production varying from expectations; |
| Availability and cost of products and raw materials, particularly soybean oil and
animal fats; |
| Changes in the price and market for biodiesel and its co-products; |
| Our ability to market and our reliance on third parties to market our products; |
| Fluctuations in petroleum prices; |
| Our ability to identify and enter into contractual arrangements with third parties
to procure feedstock for our plant and to market our products; |
| Competition from alternative fuels and alternative fuel additives; |
| Changes in our business strategy, capital improvement, or development plans; |
| Consequences of the domestic and global economic downturn and ongoing financial
crisis; |
| Our ability to generate free cash flow to invest in our business and service our
debt; |
| Changes in general economic conditions or the occurrence of certain events causing
an economic impact in the agriculture, oil, or transportation industries; |
| Changes in the environmental regulations or in our ability to comply with the
environmental regulations that apply to our plant operations; |
| Changes and advances in biodiesel production technology; |
| Our ability to export our biodiesel; |
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| Overcapacity within the biodiesel industry resulting in increased competition and
costs for feedstock and/or decreased prices for our biodiesel and co-products; |
| Our ability to successfully re-start operations following the warm-idling of our
plant; |
| The imposition of tariffs or other duties on biodiesel imported into Europe; |
| Our ability to comply with the financial covenants in our loan agreements; |
| Changes to our operations related to the rejection of the proposed consolidation
with REG, including without limitation our ability to retain and/or train a general
manager for the plant, our ability to procure feedstock for our plant, and our ability
to market and sell our finished products; |
| Our ability to hire qualified personnel to operate the plant if and when we re-start
operations following our warm-idling; and |
| Other factors described elsewhere in this report. |
We do not undertake any duty to update forward-looking statements after the date they are made
or to conform them to actual results or to changes in circumstances or expectations. Furthermore,
we cannot guarantee future results, events, 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.
Overview
Western Iowa Energy, LLC (WIE) is an Iowa limited liability company formed on September 21,
2004, for the purpose of developing, constructing, and operating a 30 million gallon per year
biodiesel manufacturing facility in Sac County, Iowa. References to we, us, and our refer to
Western Iowa Energy, LLC. Since May 2006, we have been engaged in the production of biodiesel and
its co-products, including glycerin, fatty acids and soapstock. We derive our revenues from the
sale and distribution of our biodiesel and co-products throughout the continental United States and
overseas.
In mid-April 2010 we warm-idled our plant due to limited sales and reduced sales forecasts
related to the failure of Congress to extend the blenders tax credit for biodiesel mixtures, which
expired on December 31, 2009. So long as our plant is warm-idled, we expect to generate only
limited revenues. The expiration of the blenders credit and our subsequent decision to warm-idle
our plant led to discussions with CoBank, as administrative agent of Farm Credit, regarding certain
changes to our credit facilities. In particular, on May 14, 2010, we agreed with Farm Credit to
reduce the amount available under our revolving credit loan and reduce the amount of minimum
working capital required pursuant to our loan covenants through July 31, 2010. We have since
extended the term of this agreement through October 31, 2010 and therefore expect the reduction in
the amount available under our revolving credit loan to last through that date at a minimum, unless
Farm Credit otherwise agrees to increase the available amount under the loan prior to that date.
For additional detail regarding our credit facilities, see Liquidity and Capital Resources
Indebtedness.
REG, Inc. (REG) manages and directs the general operations of our plant. The term of our
management and operational services agreement (MOSA) with REG, as extended, expired on June 11,
2010. However, since the term of the MOSA expired, we have continued our working relationship with
REG upon the same general terms without a written agreement. During the six months ended June 30,
2010 and June 30, 2009, we incurred management and operational service fees to REG of $92,910 and
$170,444, respectively. The amount payable to REG as of June 30, 2010 was $15,906. Without a
written agreement, either WIE or REG could terminate this relationship at any time. However, since
our biodiesel plant is warm-idled, as discussed above, and we are therefore not engaging in the
day-to-day production of biodiesel and its co-products, we do not require the same level of
management, feedstock procurement and product marketing services that would be required if we were
actively operating the plant.
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If demand for biodiesel increases and we begin operating the plant again, we will once again
require extensive management, feedstock procurement and product marketing services. Therefore, we
expect to either negotiate a new contract for these services with REG, identify alternative
providers of these services and negotiate
contracts with these providers, or begin providing these services on our own. Each of these
options carries significant risk for the Company. There can be no assurance that the Company will
be able to contract with a third party to provide management, sales, and marketing services on
terms favorable to the Company, or that the Company will be able to hire individuals to perform
these services. Any lack of a provider for these services would have a negative impact on our
revenues and could have a material adverse effect on the Company. Accordingly, our lack of a
long-term agreement to provide the Company with management, feedstock procurement and product
marketing services could adversely affect the Companys ability to generate revenues and the
Companys members could lose some or all of their investment.
Although the expiration of the federal blenders credit has resulted in decreased demand for
biodiesel, it is possible that the federal Renewable Fuels Standard (RFS) could help increase
demand, as it sets minimum usage requirements for biodiesel and other types of biomass-based
diesel. The Energy Policy Act of 2005 created the RFS, which initially required refiners to use
7.5 billion gallons of renewable fuels by 2012. The Energy Independence and Security Act of 2007
(EISA) expanded the existing RFS (often referred to as RFS2) to require the use of 9 billion
gallons of renewable fuel in 2008, increasing to 36 billion gallons of renewable fuel by 2022. In
February 2010, the EPA published final regulations to implement the RFS2 program. The new rules
set volume standards with respect to the amount of specific categories of renewable fuels. In
particular, the EPA combined the 2010 biomass-based diesel requirement of 650 million gallons with
the 2009 biomass-based diesel requirement of 500 million gallons to require the use of 1.15 billion
gallons of biomass-based diesel by the end of 2010. In 2011, at least 800 million gallons of
biomass-based diesel must be blended into the nations fuel pool; and in 2012, at least 1 billion
gallons of biomass-based diesel must be blended into the national fuel pool. In each year
thereafter, EPA must determine the level of biomass-based diesel required, which amount cannot be
less than 1 billion gallons. RFS2 is enforced through a system of registration, recordkeeping and
reporting requirements for obligated parties and renewable fuel producers through renewable
identification numbers (RINs). Obligated parties such as refiners and fuel importers must
acquire a certain number of biodiesel RINs in order to comply with RFS2. Some estimates have
pegged total U.S. biodiesel production from January 2009 through April 2010 at approximately 660
million gallons. Therefore, in order to meet the combined 2009-2010 RFS requirements, obligated
parties will be required to purchase an additional approximate 490 million gallons of biodiesel
from May through December 2010, which could lead to increased demand for biodiesel. However, there
can be no assurance that RFS2 will result in increased demand, that any increase in demand will
offset the loss of the federal blenders tax credit or, because U.S. biodiesel production capacity
exceeds the RFS2 requirements, that production of biodiesel will not continually exceed any demand
for biodiesel created by RFS2.
Results of Operations for the Three Months Ended June 30, 2010 and 2009
The following table shows the results of our operations for the three months ended June 30,
2010 and 2009, and the percentage of revenues, cost of sales, operating expenses, and other items
to total revenues in our statement of operations:
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, 2010 | June 30, 2009 | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Statement of Operations Data | Amount | % | Amount | % | ||||||||||||
Revenues |
$ | 2,995,789 | 100.00 | % | $ | 10,899,985 | 100.00 | % | ||||||||
Cost of Sales |
$ | 2,977,013 | 99.37 | % | $ | 10,530,856 | 96.61 | % | ||||||||
Gross Profit (Loss) |
$ | 18,776 | 0.63 | % | $ | 369,129 | 3.39 | % | ||||||||
Operating Expenses |
$ | 385,081 | 12.85 | % | $ | 544,953 | 5.00 | % | ||||||||
Other Income (Expense) |
$ | (26,650 | ) | (0.89 | %) | $ | (84,110 | ) | (0.77 | %) | ||||||
Net Income (Loss) |
$ | (392,955 | ) | (13.12 | %) | $ | (259,934 | ) | (2.38 | %) | ||||||
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Revenues
Our revenues from operations come primarily from our sales of biodiesel and, to a lesser
extent, our sales of crude glycerin and fatty acids. In the three months ended June 30, 2010, we
also derived revenues from custom processing and storage. The following table shows the sources of
our revenues for the three months ended June 30, 2010 and 2009:
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, 2010 | June 30, 2009 | |||||||||||||||
% of | % of | |||||||||||||||
Revenue Sources | Amount | Revenues | Amount | Revenues | ||||||||||||
Biodiesel Sales |
$ | 2,817,719 | 94.1 | % | $ | 10,419,976 | 95.6 | % | ||||||||
Glycerin Sales |
$ | 18,502 | 0.6 | % | $ | 251,206 | 2.3 | % | ||||||||
Fatty Acid Sales and Soapstock Sales |
$ | 87,270 | 2.9 | % | $ | 228,803 | 2.1 | % | ||||||||
Custom Processing and Storage |
$ | 72,298 | 2.4 | % | $ | | | % | ||||||||
Total Revenues |
$ | 2,995,789 | 100.00 | % | $ | 10,899,985 | 100.00 | % | ||||||||
Revenues from operations for the three months ended June 30, 2010 decreased by approximately
72.5% compared to revenues from operations for the three months ended June 30, 2009. This decrease
in revenues is due primarily to a decrease in our number of gallons of biodiesel sold. During the
three months ended June 30, 2010, we sold approximately 76.8% fewer gallons of biodiesel as
compared to the same period in 2009. This decrease in number of gallons sold is a direct result of
the expiration of the blenders tax credit for biodiesel mixtures. Unless and until this tax
credit is extended, it may be uneconomical for blenders of petroleum-based diesel to blend
biodiesel with petroleum-based diesel fuel due to the higher cost of biodiesel. Our decrease in
quantity of gallons sold was partially offset by an increase in biodiesel prices. The average
price per gallon we received for our biodiesel during the three months ended June 30, 2010
increased approximately 16.4% compared to the same period from the prior year.
Revenue from sales of glycerin decreased by approximately 92.6% for the three months ended
June 30, 2010 compared to the three months ended June 30, 2009. This decrease in revenue is the
net result of a decrease in quantity sold, offset slightly by an increase in glycerin prices. The
average sales price for our glycerin increased by approximately 7.3% during the three months ended
June 30, 2010 compared to the same period the prior year. However, our quantity of glycerin sold
decreased by approximately 93.1% during the three months ended June 30, 2010 compared to the same
period the prior year due to decreased production. Revenue from sales of fatty acids decreased
approximately 61.9% for the three months ended June 30, 2010 compared to the three months ended
June 30, 2009. The average sales price for our fatty acids increased by approximately 12.3% during
the three months ended June 30, 2010 compared to the same period the prior year. However, our
quantity of fatty acids sold decreased by approximately 66.0% during the three months ended June
30, 2010 compared to the same period the prior year due to decreased production.
For the three months ended June 30, 2010, we also derived revenues from custom processing and
storage. Our revenues from custom processing are attributable to experimental processing that we
conducted on behalf of another company. Our revenues from storage are attributable to storing
product sold by us until the time the purchaser took possession of the product. We do not expect
to derive substantial revenues from custom processing or storage in the future. During the three
months ended June 30, 2010, we did not receive any incentive funds from the federal government,
compared to the same period the prior year when we received $1,148,325 in incentive funds related
to the federal blenders tax credit. We do not expect to receive any incentive funds so long as
the federal blenders tax credit is not extended. The incentive funds we received during the three
months ended June 30, 2009 are included in our biodiesel sales revenue in the table above.
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During the three-month period ended June 30, 2010, we sold much of our existing biodiesel
inventory. During the first quarter of 2010, we rebuilt our in-house biodiesel inventories to
establish our typical working inventory of approximately one million gallons. Prior to the first
quarter of 2010 our inventory levels had been reduced to near zero in order for us to take
advantage of the blenders credit as much we could in 2009 prior to the expiration of the credit at
year-end. So long as the federal blenders credit is not extended, we do not anticipate
significantly rebuilding our in-house inventories again. During the three months ended June 30,
2010, we operated at an average of approximately 9.3% of our nameplate capacity.
Cost of Sales
While our absolute cost of sales for our products decreased during the three-month period
ended June 30, 2010 compared to the three-month period from the prior year, our cost of sales as a
percentage of our revenues increased from 96.61% of our revenues for the three months ended June
30, 2009, to 99.37% of our revenues for the three months ended June 30, 2010. This percentage
increase is primarily due to price increases for our feedstock, raw materials and energy compared
to the previous year, and due to the fact that we had lower production rates compared to the
previous year while fixed costs remained relatively consistent.
The primary components of cost of goods sold from the production of biodiesel are feedstock
(primarily soybean oil and animal fats) and other raw materials (methanol and other chemicals),
energy (natural gas and electricity), labor, and depreciation on process equipment. During the
three months ended June 30, 2010, approximately 75.3% of our total feedstock usage consisted of
choice white grease, which is consistent with the same period in 2009, when 75.5% of our total
feedstock usage was choice white grease. Animal fat prices remain less than soybean oil prices.
The average price we paid for feedstock for the three months ended June 30, 2010 was approximately
17.5% higher than our feedstock prices for the same period in 2009. Our average price paid for
methanol, another input into the biodiesel production process,
increased by approximately 49.4%
during the three months ended June 30, 2010 compared to the same period in the prior year.
Finally, our average price paid for natural gas increased by approximately 49.1% during the three
months ended June 30, 2010 compared to the same period in the prior year.
Operating Expense
Although our absolute operating expenses decreased during the three-month period ended June
30, 2010 compared to the three-month period from the prior year, our operating expenses as a
percentage of revenues were higher for the three-month period ended June 30, 2010 than they were
for the three-month period ended June 30, 2009. The decrease in our absolute operating expenses
was due to the fact that we had increased consulting and professional fees during the three-month
period ended June 30, 2009 in connection with our proposed consolidation with REG. In mid-April
2010 we warm-idled our plant due to limited sales and reduced sales forecasts related to the
failure of Congress to extend the blenders tax credit for biodiesel mixtures, which expired on
December 31, 2009. In connection with our plant warm-idling, we laid off 15 full-time employees to
reduce operating expenses, although we agreed to pay the health and dental insurance policy
premiums for these individuals through mid-August 2010. Effective August 13, 2010, we laid off
seven additional full-time employees. We will also temporarily pay a portion of the health and
dental insurance premiums of these employees. Following these most recent layoffs, we have six
full-time employees remaining. We do not expect to re-hire any employees until demand for
biodiesel improves and we re-start operations at our plant.
Other Income (Expenses)
Our other income and expenses increased from a net other expense of $84,110, or 0.77% of
revenues, for the three-month period ended June 30, 2009, to a net other expense of $26,650, or
0.89% of revenues, for the three-month period ended June 30, 2010. This change resulted primarily
from a decrease in interest expense related to our credit facilities.
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Results of Operations for the Six Months Ended June 30, 2010 and 2009
The following table shows the results of our operations for the six months ended June 30, 2010
and 2009, and the percentage of revenues, cost of sales, operating expenses, and other items to total
revenues in our statement of operations:
Six Months Ended | Six Months Ended | |||||||||||||||
June 30, 2010 | June 30, 2009 | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Statement of Operations Data | Amount | % | Amount | % | ||||||||||||
Revenues |
$ | 6,534,830 | 100.00 | % | $ | 14,866,122 | 100.00 | % | ||||||||
Cost of Sales |
$ | 6,973,226 | 106.71 | % | $ | 14,791,624 | 99.50 | % | ||||||||
Gross Profit (Loss) |
$ | (438,396 | ) | (6.71 | %) | $ | 74,498 | 0.50 | % | |||||||
Operating Expenses |
$ | 895,159 | 13.70 | % | $ | 1,005,063 | 6.76 | % | ||||||||
Other Income (Expense) |
$ | 9,798 | 0.15 | % | $ | 41,139 | 0.28 | % | ||||||||
Net Income (Loss) |
$ | (1,323,757 | ) | (20.26 | %) | $ | (889,426 | ) | (5.98 | %) | ||||||
Revenues
The following table shows the sources of our revenues for the six months ended June 30, 2010
and 2009:
Six Months Ended | Six Months Ended | |||||||||||||||
June 30, 2010 | June 30, 2009 | |||||||||||||||
% of | % of | |||||||||||||||
Revenue Sources | Amount | Revenues | Amount | Revenues | ||||||||||||
Biodiesel Sales |
$ | 5,858,041 | 89.6 | % | $ | 14,229,055 | 95.7 | % | ||||||||
Glycerin Sales |
$ | 153,840 | 2.4 | % | $ | 339,209 | 2.3 | % | ||||||||
Fatty Acid Sales and Soapstock Sales |
$ | 314,720 | 4.8 | % | $ | 297,858 | 2.0 | % | ||||||||
Custom Processing and Storage |
$ | 208,229 | 3.2 | % | $ | | | % | ||||||||
Total Revenues |
$ | 6,534,830 | 100.00 | % | $ | 14,866,122 | 100.00 | % | ||||||||
Revenues from operations for the six months ended June 30, 2010 decreased by approximately
56.0% compared to revenues from operations for the six months ended June 30, 2009. This decrease
in revenues is due primarily to decreased biodiesel and co-products sales. This decrease in
product sales is a consequence of the expiration of the blenders tax credit for biodiesel
mixtures. Additionally, during the six months ended June 30, 2010, we did not receive any
incentive funds from the federal government due to the expiration of the federal blenders tax
credit, compared to the same period the prior year when we received $2,044,394 in incentive funds.
The incentive funds we received during the six months ended June 30, 2009 are included in our
biodiesel sales revenue in the table above. During the six months ended June 30, 2010, we operated
at an average of approximately 19.6% of our nameplate capacity.
Cost of Sales
While our absolute cost of sales for our products decreased during the six-month period ended
June 30, 2010 compared to the six-month period from the prior year, our cost of sales as a
percentage of our revenues increased from 99.50% of our revenues for the six months ended June 30,
2009, to 106.71% of our revenues for the six months ended June 30, 2010. This percentage increase
is primarily due to price increases for our feedstock, raw
materials and energy compared to the previous year, and due to the fact that we had lower
production rates compared to the previous year while fixed costs remained relatively consistent.
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Operating Expense
Our operating expenses were lower for the six-month period ended June 30, 2010 than they were
for the six-month period ended June 30, 2009. This decrease was primarily due to the fact that we
had increased consulting and professional fees during the six-month period ended June 30, 2009 in
connection with our proposed consolidation with REG. However, our operating expenses as a
percentage of revenues were higher for the six-month period ended June 30, 2010 than they were for
the six-month period ended June 30, 2009 due to lower production levels, while fixed costs remained
relatively stable.
Other Income (Expenses)
Our other income and expenses decreased from a net other income of $41,139, or 0.28% of
revenues, for the six-month period ended June 30, 2009, to a net other income of $9,798, or 0.15%
of revenues, for the six-month period ended June 30, 2010. This change resulted primarily from a
decrease in patronage dividends from our lender and the non-reoccurring grant income we recognized
during the six-month period ended June 30, 2009 related to our forgivable loan from the Iowa
Department of Economic Development, offset partially by a decrease in interest expense related to
our credit facilities for the six-month period ended June 30, 2010 compared to the same period the
prior year.
Changes in Financial Condition for the Six Months Ended June 30, 2010
The following table highlights the changes in our financial condition for the six months ended
June 30, 2010:
June 30, 2010 | December 31, 2009 | |||||||
Current Assets |
$ | 3,796,930 | $ | 7,424,221 | ||||
Current Liabilities |
$ | 1,399,625 | $ | 3,991,982 | ||||
Long-Term Debt |
$ | 2,551,111 | $ | 3,262,222 | ||||
Members Equity |
$ | 27,227,028 | $ | 28,550,785 |
Current Assets. The decrease in current assets from $7,424,221 as of December 31,
2009, to $3,796,930 as of June 30, 2010, is primarily a result of a decrease in incentive
receivables, a decrease in trade account receivables and other receivables, and payments made on
our long-term debt, partially offset by an increase in inventory. Our receivables were relatively
high at December 31, 2009 due to our continued production through that date in order to take
advantage of the federal blenders tax credit as much as we could in 2009 prior to the expiration
of the credit at year-end. Since this tax credit expired, our production has been limited. For
similar reasons, our inventory was relatively low at December 31, 2009, but has since increased
again. During the six months ended June 30, 2010, we made payments on our term note totaling
$1,625,000 and reduced the amount outstanding under our revolving credit loan by $655,000.
Current Liabilities. Our current liabilities decreased from $3,991,982 as of
December 31, 2009, to $1,399,625 as of June 30, 2010. This decrease was due primarily to a
decrease in the current portion of our long-term debt related to our free cash flow payment and
regular quarterly payments on our term note, a decrease in checks issued in excess of our bank
balance, a decrease in accounts payable, and a decrease in accrued expenses.
Long-Term Debt. The decrease in our long-term debt, net of current maturities, at
June 30, 2010, as compared to December 31, 2009, was due to a decrease in the balance under our
term note and our reducing revolving credit note with Farm Credit Services. During the six-month
period ended June 30, 2010, we made payments totaling $1,625,000 to Farm Credit Services under our
term note and net payments totaling $655,000 under our revolving credit note.
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Members Equity. Members contributions at June 30, 2010 and December 31, 2009 are
$23,516,376. Retained earnings as of June 30, 2010 are $3,710,652 compared to $5,034,409 at
December 31, 2009 due to our net loss during the six months ended June 30, 2010.
Liquidity and Capital Resources
Cash Flows
The following table shows cash flows for the six months ended June 30, 2010 and 2009:
2010 | 2009 | |||||||
Net cash provided by (used in) operating activities |
$ | 2,856,421 | $ | (1,979,580 | ) | |||
Net cash used in investing activities |
$ | (105,866 | ) | $ | (38,365 | ) | ||
Net cash provided by (used in) financing activities |
$ | (2,669,119 | ) | $ | 2,043,889 | |||
Net increase in cash and equivalents |
$ | 81,436 | $ | 25,944 | ||||
Operating Cash Flows
For the six months ended June 30, 2010, cash provided by operating activities increased by
$4,836,001 compared to the six months ended June 30, 2009. This increase was primarily the result
of changes in our receivables, including trade account receivables, incentive receivables and other
receivables, our margin deposits and our prepaid expenses and other assets, netted against our
greater net loss for the six months ended June 30, 2010 compared to the same period the prior year
and changes in our inventory, derivative instruments and accounts payable. Most of the changes in
operating cash flows for the six months ended June 30, 2010 compared to the six months ended June
30, 2009 are directly attributable to our decreased production during the six months ended June 30,
2010.
In mid-April 2010 we warm-idled our plant due to limited sales and reduced sales forecasts
related to the failure of Congress to extend the blenders tax credit for biodiesel mixtures, which
expired on December 31, 2009. So long as our plant is warm-idled, we expect to generate only
limited revenues. Although our capital needs are currently being adequately met through our credit
facilities, any further reductions in the amount available for advancement under our revolving
credit loan beyond the current reduction may cause us to be unable to meet our capital needs. See
Liquidity and Capital Resources Indebtedness.
Investing Cash Flows
For the six months ended June 30, 2010, cash used in investing activities increased by $67,501
compared to the six months ended June 30, 2009. This increase in cash used resulted from an
increase in expenditures for property, plant, and equipment during the six months ended June 30,
2010, primarily related to our exercise of a real estate option to purchase an additional
approximate 35 acres adjacent to our plant site.
Financing Cash Flows
For the six months ended June 30, 2010, cash used in financing activities increased by
$4,713,008, compared to the six months ended June 30, 2009. This
increase is a result of a net decrease in checks issued in excess of
our bank balance, payments on our long-term debt exceeding proceeds
from our long-term debt for the six months ended June 30, 2010,
and proceeds from our long-term debt exceeding payments on our
long-term debt for the six months ended June 30, 2009.
Indebtedness
Short-Term Debt Sources
We obtained a $570,000 declining balance standby irrevocable letter of credit from Farm Credit
in favor of Glidden Rural Electric Cooperative (Glidden REC) as security for our loan with
Glidden REC (discussed below
under Long-Term Debt Sources). The letter of credit was set to expire on June 30, 2010, but
was extended in July 2010 at the lower amount of $490,000. The letter of credit will now expire on
June 30, 2011.
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Long-Term Debt Sources
On June 6, 2005, we closed on $18,000,000 of long-term debt financing with Farm Credit
pursuant to a Master Loan Agreement (MLA). CoBank, ACB is the administrative agent of Farm
Credit pursuant to an Administrative Agency Agreement dated June 6, 2005. Pursuant to supplements
to the MLA, the loan commitments from Farm Credit consist of a $10,000,000 term loan and an
$8,000,000 reduced revolving credit loan. However, the expiration of the blenders tax credit on
December 31, 2009 and our subsequent decision to warm-idle our plant led to discussions with
CoBank, as administrative agent of Farm Credit, regarding certain changes to our credit facilities.
In particular, on May 14, 2010, we agreed with Farm Credit to reduce the amount available under
our revolving credit loan from $8,000,000 to $6,000,000 (inclusive of our $490,000 irrevocable
letter of credit in favor of Glidden Rural Electric Cooperative, discussed above under Short-Term
Debt Sources) through July 31, 2010. On August 5, 2010, we finalized an extension of the term of
this agreement through October 31, 2010 and therefore expect the reduction in the amount available
under our revolving credit loan to last through that date at a minimum, unless Farm Credit
otherwise agrees to increase the available amount under the loan prior to that date. We have also
agreed to amend the covenant in our loan agreement with Farm Credit pertaining to minimum working
capital so that the reduction of the amount available for advancement under the revolving credit
loan does not cause us to fall out of compliance with the minimum working capital covenant in our
loan agreement with Farm Credit. Our prior minimum working capital requirement was $6,000,000 and
our amended minimum working capital requirement is $4,000,000. As of June 30, 2010, the balance
outstanding on our term loan was $725,000. At June 30, 2010, the balance outstanding under the
revolving credit loan was $1,975,000.
Our term loan requires quarterly payments of principal in the amount of $450,000, with a final
payment due no later than December 20, 2011. We are also required to make annual payments of 50%
of our free cash flow, as defined in our term loan agreement. Because the balance outstanding on
our term loan is $725,000 and our term loan requires principal payments in the amount of $450,000
each quarter, we expect to pay off the term loan in full within our next two fiscal quarters.
However, our term loan agreement provides that in the event our term loan is paid in full prior to
the end of fiscal year 2012, we must continue to make 50% free cash flow payments for each fiscal
year through fiscal year 2012 in the form of early reductions to the amount of our revolving credit
loan commitment.
Subject to our May 14, 2010 agreement with Farm Credit, as extended, advances under the
revolving credit loan are available throughout the life of the commitment, although the amount of
the commitment reduces by $900,000 semi-annually beginning upon the earlier of: (i) July 1, 2012,
or (ii) the first day of the month that is six months after the first day of the month following
the repayment of our term loan. Because we expect to pay off the term loan in full in December
2010, we anticipate that our revolving credit loan commitment will be reduced by $900,000 every six
months beginning July 1, 2011. As discussed above, the revolving credit loan commitment may also
be reduced in the amount of any free cash flow payment we would otherwise be required to make on
our term loan through 2012. Any outstanding balance on our revolving credit loan is due and
payable in full on July 1, 2016. At June 30, 2010, we had $3,455,000 of available borrowings under
the revolving credit loan.
The term loan and the revolving credit loan each bear interest at one of three rates, to be
determined by us in our discretion: (1) at a rate equal to the rate of interest established by the
agent as its agent base rate; (2) at a fixed rate per annum to be quoted by the agent in its sole
discretion; or (3) at a fixed rate per annum equal to LIBOR. Each of the rates is subject to
certain performance pricing adjustments. Additionally, our loan agreements with Farm Credit
contain various covenants pertaining to minimum working capital and minimum net worth requirements.
As of June 30, 2010, we are in compliance with these covenants. Our notes with Farm Credit are
secured by substantially all of our assets.
On July 13, 2006, we entered into a Rural Development Loan Agreement with the Glidden REC for
a $740,000 no-interest loan to fund operating expenses for the plant. Pursuant to the terms of the
agreement and an associated Promissory Note, the loan is to be repaid in monthly installments of
$6,851 beginning on July 31, 2007, and continuing on the last day of each month thereafter until
the principal sum has been paid in full or before the
final maturity date of the promissory note which shall be on the tenth anniversary of the
first advance of funds. The outstanding balance of the loan as of June 30, 2010 was $493,333.
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We have obtained subordinated debt financing of approximately $400,000 from the Iowa
Department of Economic Development (IDED). The subordinated debt financing included a $300,000
zero-interest deferred loan and a $100,000 forgivable loan. On April 30, 2009, IDED notified us
that we had satisfied all conditions of the forgivable loan and that IDED had forgiven the balance
outstanding under the forgivable loan. The zero-interest deferred loan requires monthly
installments of $2,500 beginning January 2008 with the remaining unpaid principal due in December
2012. The balance outstanding on the zero-interest deferred loan at June 30, 2010 is $192,500.
Subsequent Events
Effective May 14, 2010, we agreed with Farm Credit to reduce the amount available under our
revolving credit loan, inclusive of our irrevocable letter of credit in favor of Glidden Rural
Electric Cooperative, from $8,000,000 to $6,000,000 through July 31, 2010. We also agreed to amend
the covenant in our loan agreement with Farm Credit pertaining to minimum working capital so that
the reduction of the amount available for advancement under the revolving credit loan does not
cause us to fall out of compliance with the minimum working capital covenant in our loan agreement
with Farm Credit. Our prior minimum working capital requirement was $6,000,000 and our amended
minimum working capital requirement is $4,000,000. On August 5, 2010, we finalized an extension of
the term of this agreement through October 31, 2010 and therefore expect the reduction in the
amount available under our revolving credit loan to last through that date at a minimum, unless
Farm Credit otherwise agrees to increase the available amount under the loan prior to that date.
Critical Accounting Estimates
Management uses estimates and assumptions in preparing our financial statements in accordance
with generally accepted accounting principles. These estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. The following is a discussion of what we believe to be the most
critical of these policies and methods.
Inventories. Inventories are stated at the lower of cost or market value. Costs are
determined using the first-in, first-out method.
Long-Lived Assets. Depreciation and amortization of our property, plant, and equipment is
provided on the straight-line method by charges to operations at rates based upon the expected
useful lives of individual or groups of assets. Economic circumstances or other factors may cause
managements estimates of expected useful lives to differ from actual useful lives.
Long-lived assets, including property, plant and equipment, and investments are evaluated for
impairment on the basis of undiscounted cash flows whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written
down to our estimated fair market value based on the best information available. Considerable
management judgment is necessary to estimate discounted future cash flows and may differ from
actual cash flows.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 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 we conduct
all of our business in U.S. Dollars. We use derivative financial instruments as part of an overall
strategy to manage market risk. We consider market risk to be the potential loss arising from
adverse changes in market rates and prices. We do not enter into these contracts as hedges for
accounting purposes pursuant to the requirements of the FASB Accounting Standards
Codification (ASC) Topic 815, Derivatives and Hedging.
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Our risk management committee oversees our risk management practices and provides open
communication among management, REG, and the board of directors regarding market risk. The risk
management committee takes an active role in the risk management process and has developed policies
and procedures that require specific administrative and business functions to assist in the
identification, assessment, and control of various risks.
Interest Rate Risk
We are exposed to market risk from changes in interest rates. Exposure to interest rate risk
results primarily from our credit facilities with Farm Credit. Specifically, we have $2,700,000
outstanding in variable rate debt as of June 30, 2010. The specifics of our credit facilities are
discussed in detail in Item 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Liquidity and Capital Resources, Indebtedness.
Below is a sensitivity analysis we prepared regarding our income exposure to changes in
interest rates. The sensitivity analysis below shows the anticipated effect on our income from a
10% adverse change in interest rates for a one-year period.
Outstanding Variable | Interest Rate at | Interest Rate Following | Annual Adverse Change | |||||||||
Rate Debt at 6/30/10 | June 30, 2010 | 10% Adverse Change | to Income | |||||||||
$ |
725,000 | 3.25 | % | 3.58 | % | $ | 2,393 | |||||
$ |
1,975,000 | 3.25 | % | 3.58 | % | $ | 6,518 |
Commodity Price Risk
We are also exposed to market risk from commodity prices. Exposure to commodity price risk
results from our dependence on animal fats, soybean oil, and natural gas in the biodiesel
production process. We are also exposed to biodiesel and co-products price risks as our revenues
consist primarily of biodiesel sales and co-products sales. Currently, we seek to minimize the
risks from fluctuations in the price of soybean oil and biodiesel by using derivative instruments
such as cash, futures, and option contracts for soybean oil and home heating oil. There is
currently no futures market for biodiesel. Instead, we use home heating oil derivatives. Home
heating oil is high sulfur diesel, which is the closest commodity to biodiesel for which there is a
futures market. Currently, we are unable to manage our price risk for animal fats as there are no
futures contracts available for animal fats, and animal fats suppliers are, to date, unwilling to
enter into long-term contracts for animal fats.
In practice, as markets move, we actively manage our risk and adjust hedging strategies as
appropriate. The extent to which we enter into cash, futures, or option contracts varies
substantially from time to time based on a number of factors, including supply and demand factors
affecting the needs of customers or suppliers to purchase biodiesel or co-products or to sell us
raw materials on a fixed basis, our views as to future market trends, seasonal factors and the
costs of futures contracts.
Although we believe our hedge positions accomplish an economic hedge against our future
purchases, they are not designated as such for hedge accounting purposes, which would match the
gain or loss on our hedge positions to the specific commodity purchase being hedged. As the
current market price of our hedge positions changes, the gains and losses are immediately
recognized in our cost of goods sold. The immediate recognition of hedging gains and losses can
cause net income to be volatile from quarter to quarter due to the timing of the change in value of
the derivative instruments relative to the cost and use of the commodity being hedged. At June 30,
2010 and December 31, 2009, we recorded a net asset (liability) for derivative instruments of
$34,889 and $(2,587), respectively. During the six months ended June 30, 2010, we recognized a net
gain in earnings on derivative activities of $188,387, which is included in our cost of sales in
our statements of operations.
Several variables could affect the extent to which price fluctuations in the cost of soybean
oil and biodiesel impact our derivative instruments. However, it is likely that commodity cash
prices will have the greatest impact on the derivative instruments with delivery dates nearest the
current cash price. As we move forward, additional
protection may be necessary. As the prices of these hedged commodities move in reaction to market
trends and information, our statement of operations will be affected depending on the impact such
market movements have on the value of our derivative instruments. Depending on the market
movements, crop prospects, and weather, these price protection positions may cause immediate
adverse effects, but are expected to produce long-term growth for us.
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A sensitivity analysis has been prepared to estimate our exposure to soybean oil and biodiesel
price risk. The table presents the net fair value of our derivative instruments as of June 30,
2010 and June 30, 2009, and the potential loss in fair value resulting from a hypothetical 10%
adverse change in such prices. The fair value of the positions is a summation of the fair values
calculated by valuing each net position at quoted market prices as of the applicable date. The
results of this analysis, which may differ from actual results, are as follows:
Effect of | ||||||||
Hypothetical | ||||||||
Adverse Change - | ||||||||
Fair Value | Market Risk | |||||||
June 30, 2010 |
$ | 2,199,616 | $ | 219,962 | ||||
June 30, 2009 |
$ | 7,950,329 | $ | 795,033 |
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Our management, including our Principal Executive Officer, William J. Horan, and our Principal
Financial and Accounting Officer, Joe Neppl, have reviewed and evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the
Securities Exchange Act of 1934, as amended) as of June 30, 2010. Based on this review and
evaluation, these officers have concluded that our disclosure controls and procedures are effective
to ensure that information required to be disclosed in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the forms and rules of the Securities and Exchange Commission; and to ensure that the information
required to be disclosed by an issuer in the reports that it files or submits under the Exchange
Act is accumulated and communicated to our management, including our principal executive and
principal financial officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Controls
Our management, including our Principal Executive Officer, William J. Horan, and our Principal
Financial and Accounting Officer, Joe Neppl, have reviewed and evaluated any changes in our
internal control over financial reporting that occurred during the fiscal quarter ended June 30,
2010 and there has been no change that has materially affected or is reasonably likely to
materially affect our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time in the ordinary course of business, WIE may be named as a defendant in legal
proceedings related to various issues, including without limitation, workers compensation claims,
tort claims, or contractual disputes. Other than the arbitration matter described below, we are not
currently involved in any material legal proceedings, directly or indirectly, and we are not aware
of any claims pending or threatened against us or any of the directors that could result in the
commencement of legal proceedings.
In 2008, one of our customers defaulted on its contract with us for the purchase of biodiesel
due to revocation of the customers letter of credit after we shipped the biodiesel for exporting.
As a result, we sold the biodiesel to another customer for a lower price. We and other biodiesel
producers who sold biodiesel to this customer are now in continued arbitration to resolve this
dispute.
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Item 1A. Risk Factors.
Risk Factors are discussed in our annual report on Form 10-K. The risks described in our
annual report on Form 10-K are not the only risks facing us. The following Risk Factors are
provided to supplement and update the Risk Factors previously disclosed in our annual report on
Form 10-K. The Risk Factors set forth below should be read in conjunction with the considerations
set forth above in MANAGEMENTS DISCUSSION AND ANALYSIS and the risk factors set forth in our
annual report on Form 10-K.
The expiration of the biodiesel blenders federal tax credit could hinder our ability to
operate at a profit and reduce the value of our units. On December 31, 2009 the biodiesel
blenders tax credit for biodiesel mixtures expired. The blenders credit provided a tax credit of
$1.00 per gallon of biodiesel. Congress has so far failed to enact an extension of this incentive
for biodiesel production, which has led to decreased demand for biodiesel. The lack of the
blenders credit contributed to our limited sales and reduced sales forecasts, which led to our
decision to warm-idle our plant in mid-April 2010. Until the federal tax credit is extended, we
believe biodiesel markets will remain depressed and negatively impact our financial performance.
If our biodiesel plant is warm-idled for a sustained period of time, we might not be able to
meet our current liabilities and may experience losses. In mid-April 2010, we began warm-idling our
biodiesel plant due to limited sales and reduced sales forecasts. Management does not expect
market conditions to improve until Congress extends the blenders tax credit for biodiesel
mixtures, which expired on December 31, 2009. The blenders credit provided a tax credit to
biodiesel blenders of $1.00 per gallon of biodiesel blended. Without this credit, it may be
uneconomical for blenders of petroleum-based diesel to blend biodiesel with petroleum-based diesel
fuel due to the higher cost of biodiesel. Unless the federal tax credit is extended, we believe
that biodiesel will continue to suffer from decreased demand, resulting in depressed biodiesel
markets. So long as our plant is warm-idled, we expect to generate only limited revenues, and we
might not be able to pay our debts as they become due, including payments required under our loan
agreements with our lender. Failure to make the payments required under our loan agreements would
constitute an event of default, entitling our lender to exercise any number of remedies, including
foreclosure on its security interest in all of our assets. If the plant ceases to operate for
enough time, we might not be able to re-start operations at the plant and our members could lose
some or all of their investment.
If our biodiesel plant resumes production, we may have difficulty in finding customers to
purchase our biodiesel. We began warm-idling our biodiesel plant in mid-April 2010 due to limited
sales and reduced sales forecasts. If and when market conditions improve and we restart operations
at the plant, our former customers may no longer desire to purchase biodiesel from us. Since the
expiration of the tax credit, blenders of petroleum-based diesel have not blended as much biodiesel
with petroleum-based diesel fuel due to the higher cost of biodiesel. Even if the blenders credit
is extended, certain blenders may no longer have an interest in blending biodiesel with
petroleum-based diesel fuel. It is also possible that since the time we ceased producing
biodiesel, our former customers may have found other biodiesel producers from which to procure
biodiesel. This may have a material adverse effect on our ability to sell our biodiesel and our
members could lose some or all of their investment.
Further reductions in the amounts available under our credit facilities with Farm Credit may
cause us to be unable to meet our capital needs. The expiration of the blenders tax credit on
December 31, 2009 and our subsequent decision to warm-idle our plant led to discussions with
CoBank, as administrative agent of Farm Credit, regarding certain changes to our credit facilities.
In particular, we agreed with Farm Credit to reduce the amount available under our revolving
credit loan from $8,000,000 to $6,000,000 (inclusive of our $490,000 irrevocable letter of credit
in favor of Glidden Rural Electric Cooperative) and reduce the amount of minimum working capital
required pursuant to our loan covenants. On August 5, 2010, we finalized an extension of the term
of this agreement through October 31, 2010 and therefore expect the reduction in the amount
available under our revolving credit loan to last through that date at a minimum. If Farm Credit
further reduces the amounts available under our credit facilities or deems itself insecure and
demands immediate payment of the amounts owed to it pursuant to our credit facilities, we may be
unable to meet our capital needs. This may have a material adverse effect on our ability to
operate the plant and may cause our members to lose some or all of their investment.
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Application of the Renewable Fuels Standard for biodiesel may initially encourage excess
production while higher cost producers are first identified and then gleaned from the marketplace.
The Renewable Fuels Standard requires that obligated parties such as refiners and fuel importers
utilize 1.15 billion gallons of biodiesel
during 2009 and 2010 combined, and 800 million gallons during 2011. However, it is estimated
that total U.S. biodiesel production capacity exceeds 2 billion gallons. With the increase of
programmed demand, we expect that some idled capacity may come back into production, although
certain producers will be able to come back into production more quickly than others. Because the
idled capacity is diversely owned, and the owners are competitors, the re-entrance of these gallons
may not exactly equate with the quantity of gallons demanded. If more gallons come into production
than are required, then the supply of biodiesel may exceed demand while the marketplace promotes
the least-cost producers, and the higher-cost producers exit the marketplace. If we are not among
the least-cost producers, or if the marketplace experiences a prolonged period of overproduction,
we may not be able to sell our biodiesel and our members may lose all or part of their investments.
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.
In mid-April 2010 we warm-idled our plant due to limited sales and reduced sales forecasts
related to the failure of Congress to extend the blenders tax credit for biodiesel mixtures, which
expired on December 31, 2009. In connection with our plant warm-idling, we laid off 15 full-time
employees. Effective August 13, 2010, we laid off seven additional full-time employees. We will
temporarily pay a portion of the health and dental insurance premiums of these employees.
Following these most recent layoffs, we have six full-time employees remaining. We do not expect
to re-hire any employees until demand for biodiesel improves and we re-start operations at our
plant.
Item 6. Exhibits. The following exhibits are included herein:
Exhibit No. | Exhibit | |||
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. |
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SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WESTERN IOWA ENERGY, LLC |
||||
Date: August 13, 2010 | /s/ William J. Horan | |||
William J. Horan | ||||
Chairman, President and Director (Principal Executive Officer) |
||||
Date: August 13, 2010 | /s/ Joe Neppl | |||
Joe Neppl | ||||
Chief Financial Officer (Principal Financial and Accounting Officer) |
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