Attached files
file | filename |
---|---|
EX-10.4 - EXHIBIT 10.4 - ONE EARTH ENERGY LLC | c08017exv10w4.htm |
EX-31.1 - EXHIBIT 31.1 - ONE EARTH ENERGY LLC | c08017exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - ONE EARTH ENERGY LLC | c08017exv32w1.htm |
EX-10.6 - EXHIBIT 10.6 - ONE EARTH ENERGY LLC | c08017exv10w6.htm |
EX-10.3 - EXHIBIT 10.3 - ONE EARTH ENERGY LLC | c08017exv10w3.htm |
EX-31.2 - EXHIBIT 31.2 - ONE EARTH ENERGY LLC | c08017exv31w2.htm |
EX-10.7 - EXHIBIT 10.7 - ONE EARTH ENERGY LLC | c08017exv10w7.htm |
EX-32.2 - EXHIBIT 32.2 - ONE EARTH ENERGY LLC | c08017exv32w2.htm |
EX-10.5 - EXHIBIT 10.5 - ONE EARTH ENERGY LLC | c08017exv10w5.htm |
EX-10.2 - EXHIBIT 10.2 - ONE EARTH ENERGY LLC | c08017exv10w2.htm |
EX-10.1 - EXHIBIT 10.1 - ONE EARTH ENERGY LLC | c08017exv10w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the fiscal year ended December 31, 2009
o | Transition report under Section 13 or 15(d) of the Exchange Act. |
For the transition period from to
Commission
file number 333-135729
ONE EARTH ENERGY, LLC
(Exact name of registrant as specified in its charter)
Illinois (State or other jurisdiction of |
20-3852246 (I.R.S. Employer Identification No.) |
|
incorporation or organization) | ||
202 N. Jordan Drive, Gibson City, IL | 60936 | |
(Address of principal executive offices) | (Zip Code) |
(217) 784-5321
(Issuers telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
None
(Issuers telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. o Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the 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. o Yes þ 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller Reporting Company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of June 30, 2010, the aggregate market value of the membership units held by non-affiliates
(computed by reference to the issuers offering price of such membership units in its initial
public offering, as no current market exists for such membership units) was $16,050,000. As of
November 8, 2010, there were 13,781 membership units outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
INDEX
Page | ||||||||
2 | ||||||||
2 | ||||||||
11 | ||||||||
17 | ||||||||
17 | ||||||||
17 | ||||||||
17 | ||||||||
17 | ||||||||
18 | ||||||||
19 | ||||||||
30 | ||||||||
F-1 | ||||||||
31 | ||||||||
31 | ||||||||
32 | ||||||||
32 | ||||||||
32 | ||||||||
35 | ||||||||
38 | ||||||||
39 | ||||||||
41 | ||||||||
42 | ||||||||
43 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 10.2 | ||||||||
Exhibit 10.3 | ||||||||
Exhibit 10.4 | ||||||||
Exhibit 10.5 | ||||||||
Exhibit 10.6 | ||||||||
Exhibit 10.7 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
Table of Contents
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains historical information, as well as forward-looking statements
that involve known and unknown risks and relate to future events, our future financial
performance, or our expected future operations and actions. In some cases, you can identify
forward-looking statements by terminology such as may, will, should, expect, plan,
anticipate, believe, estimate, future, intend, could, hope, predict, target,
potential, or continue or the negative of these terms or other similar expressions. These
forward-looking statements are only our predictions based upon current information and involve
numerous assumptions, risks and uncertainties. Our actual results or actions may differ
materially from these forward-looking statements for many reasons, including the reasons
described in this report. While it is impossible to identify all such factors, factors that could
cause actual results to differ materially from those estimated by us include:
| Changes in the availability and price of corn and natural gas; |
|
| Decreases in the market prices of ethanol and distillers grains; |
|
| Ethanol supply exceeding demand; and corresponding ethanol price reductions; |
|
| Changes in the environmental regulations that apply to our plant operations; |
|
| Changes in our business strategy, capital improvements or development plans; |
|
| Changes in plant production capacity or technical difficulties in operating the plant; |
|
| Changes in general economic conditions or the occurrence of certain events causing an
economic impact in the agriculture, oil or automobile industries; |
|
| Lack of transport, storage and blending infrastructure preventing ethanol from
reaching high demand markets; |
|
| Changes in federal and/or state laws (including the elimination of any federal and/or
state ethanol tax incentives); |
|
| Changes and advances in ethanol production technology; |
|
| Additional ethanol plants built in close proximity to our ethanol facility; |
|
| Competition from alternative fuel additives; |
|
| Changes in interest rates and lending conditions; |
|
| Our ability to generate free cash flow to invest in our business and service our debt; |
|
| Our ability to retain key employees and maintain labor relations; and |
|
| Volatile commodity and financial markets. |
The cautionary statements referred to in this section also should be considered in
connection with any subsequent written or oral forward-looking statements that may be issued by
us or persons acting on our behalf. We undertake no duty to update these forward-looking
statements, even though our situation may change in the future. 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.
1
Table of Contents
AVAILABLE INFORMATION
Our website address is www.oneearthenergy.com. Our annual report on Form 10-K, current reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act), are
available, free of charge, on our website under the link SEC Filings, as soon as reasonably
practicable after we electronically file such materials with, or furnish such materials to, the
Securities and Exchange Commission. The contents of our website are not incorporated by reference
in this annual report on Form 10-K.
PART I
ITEM 1. BUSINESS
Business Development
One Earth Energy, LLC is an Illinois limited liability company organized on November 28, 2005,
for the purpose of raising capital to develop, construct, own and operate a 100 million gallon per
year ethanol plant in east central Illinois near Gibson City, Illinois. References to we, us,
our, One Earth and the Company refer to One Earth Energy, LLC. Since June 24, 2009, we have
been engaged in the production of ethanol and distillers grains at the plant.
We are subject to industry-wide factors that affect our operating and financial performance.
These factors include, but are not limited to the available supply and cost of corn from which our
ethanol and distillers grains are processed; the cost of natural gas, which we use in the
production process; dependence on our distillers grains marketer to market and distribute our
products; the competitive nature of the ethanol industry; possible legislation at the federal,
state and/or local level; changes in federal ethanol tax incentives and the cost of complying with
extensive environmental laws that regulate our industry.
We expect our ethanol plant to produce approximately 2.8 gallons of ethanol for each bushel of
corn processed in the production cycle. We refer to the difference between the price per gallon of
ethanol and the price per bushel of corn (divided by 2.8) as the crush spread. Should the crush
spread decline, it is possible that our ethanol plant will generate operating results that do not
provide adequate cash flows for sustained periods of time. In such cases, production at the
ethanol plant may be reduced or stopped altogether in order to minimize variable costs at the
plant.
We attempt to manage the risk related to the volatility of corn and ethanol prices by
utilizing forward corn purchase and forward ethanol and distillers grain sale contracts. We
attempt to match quantities of ethanol and distillers grains sale contracts with an appropriate
quantity of corn purchase contracts over a given period of time when we can obtain an adequate
gross margin resulting from the crush spread inherent in the contracts we have executed. However,
the market for future ethanol sales contracts is not a mature market. Consequently, we generally
execute contracts for no more than three months into the future at any given time. As a result of
the relatively short period of time our contracts cover, we generally cannot predict the future
movements in the crush spread for more than three months; thus, we are unable to predict the
likelihood or amounts of future income or loss from our ethanol plant.
The crush spread realized in 2009 was subject to significant volatility. For example, for
calendar year 2009, the average Chicago Board of Trade (CBOT) near-month corn price was
approximately $3.74 per bushel, with highs reaching nearly $4.20 per bushel and retreating to
approximately $3.20 per bushel in the fall. Ethanol prices were generally in a range of
approximately $1.45 to $1.70 per gallon for most of the year. Ethanol prices increased during the
last three months of 2009 reaching as high as $2.15 per gallon. We believe this market volatility
with respect to the crush spread was attributable to a number of factors, including but not limited
to export demand, speculation, currency valuation, global economic conditions, ethanol demand and
current production concerns. In 2009, the CBOT crush spread ranged from approximately $0.19 to
$0.63 per gallon of ethanol.
2
Table of Contents
Principal Products and Markets
The principal products we are producing at the plant are fuel-grade ethanol and distillers
grains. Raw carbon dioxide gas is another co-product of the ethanol production process. We have no
current agreement to capture or market carbon dioxide gas, and are not exploring any options at
this time.
Ethanol
Our primary product is ethanol. Ethanol is ethyl alcohol, a fuel component made primarily from
corn and various other grains. According to the Renewable Fuels Association, approximately
85 percent of ethanol in the United States today is produced from corn, and approximately
90 percent of ethanol is produced from a corn and other input mix. The ethanol we produce is
manufactured from corn. Although the ethanol industry continues to explore production technologies
employing various feedstocks, such as biomass, corn-based production technologies remain the most
practical and provide the lowest operating risks. Corn produces large quantities of carbohydrates,
which convert into glucose more easily than most other kinds of biomass. The Renewable Fuels
Association estimated 2009 domestic ethanol production at approximately 10.6 billion gallons.
An ethanol plant is essentially a fermentation plant. Ground corn and water are mixed with
enzymes and yeast to produce a substance called beer, which contains about 10% alcohol and 90%
water. The beer is boiled to separate the water, resulting in ethyl alcohol, which is then
dehydrated to increase the alcohol content. This product is then mixed with a certified denaturant
to make the product unfit for human consumption and commercially saleable.
Ethanol can be used as: (i) an octane enhancer in fuels; (ii) an oxygenated fuel additive for
the purpose of reducing ozone and carbon monoxide emissions; and (iii) a non-petroleum-based
gasoline substitute. Approximately 95% of all ethanol is used in its primary form for blending with
unleaded gasoline and other fuel products. Used as a fuel oxygenate, ethanol provides a means to
control carbon monoxide emissions in large metropolitan areas. The principal purchasers of ethanol
are generally the wholesale gasoline marketer or blender. The principal markets for our ethanol are
petroleum terminals in the southeastern and northeastern United States.
Approximately 85% of our revenue was derived from the sale of ethanol during our fiscal year ended
December 31, 2009.
Distillers Grains
The principal co-product of the ethanol production process is distillers grains, a high
protein, high-energy animal feed supplement primarily marketed to the dairy, beef, poultry and
swine industries. Distillers grains contain by-pass protein that is superior to other protein
supplements such as cottonseed meal and soybean meal. By-pass proteins are more digestible to the
animal, thus generating greater lactation in milk cows and greater weight gain in beef cattle. Dry
mill ethanol processing creates three forms of distiller grains: Distillers Wet Grains with
Solubles (DWS), Distillers Modified Wet Grains with Solubles (DMWS) and Distillers Dried Grains
with Solubles (DDGS). DWS is processed corn mash that contains approximately 70% moisture. DWS
has a shelf life of approximately three days and can be sold only to farms within the immediate
vicinity of an ethanol plant. DMWS is DWS that has been dried to approximately 50% moisture. DMWS
have a slightly longer shelf life of approximately ten days and are often sold to nearby markets.
DDGS is DWS that has been dried to 10% to 12% moisture. DDGS has an almost indefinite shelf life
and may be sold and shipped to any market regardless of its vicinity to an ethanol plant.
Approximately 15% of our revenue was derived from the sale of distillers grains during our
fiscal year ended December 31, 2009.
Ethanol and Distillers Grains Markets
As described below in Distribution of Principal Products, we market our ethanol in-house or
through a non-exclusive marketing agreement, and distillers grains through a third party. Whether
or not distillers grains produced by our ethanol plant are sold in local markets will depend on
decisions made in cooperation with our marketer. Local ethanol markets will be limited and must be
evaluated on a case-by-case basis. Although local
markets will be the easiest to service, they may be oversold, which often depress ethanol prices in
those markets.
3
Table of Contents
Our regional market is within a 450-mile radius of our plant and is serviced by rail. We are
connected to a short-line railroad that is connected to a Class I railroad, so that we may reach
regional and national markets with our products. Because ethanol use results in less air pollution
than regular gasoline, regional markets typically include large cities that are subject to
anti-smog measures such as either carbon monoxide or ozone non-attainment areas (e.g., Atlanta,
Birmingham, Baton Rouge and Washington D.C.).
While we believe that the nationally mandated usage of renewable fuels is currently driving
demand, we believe that an increase in voluntary usage will be necessary for the industry to
continue its growth trend. In addition, a higher renewable fuels standard (RFS) may be necessary to
encourage use by blenders. We expect that voluntary usage by blenders will occur only if the price
of ethanol makes increased blending economical. In addition, we believe that heightened consumer
awareness and consumer demand for ethanol-blended gasoline may play an important role in growing
overall ethanol demand and voluntary usage by blenders. If blenders do not voluntarily increase the
amount of ethanol blended into gasoline and consumer awareness does not increase, it is possible
that additional ethanol supply will outpace demand and further depress ethanol prices. The EPA
recently approved the use of E15 in car models 2007 and later, however, these blends may still need
to increase in order to avoid a decrease in ethanol prices.
Distribution of Principal Products
Our ethanol plant is located near Gibson City, Illinois in Ford County. We selected the site
because of its location which is close to an abundant supply of corn and accessible to road and
rail transportation. Our site is in close proximity to a short-line rail and a major highway that
is connected to Chicago, Illinois.
Ethanol Distribution
We have entered into a non-exclusive marketing agreement with Lansing Ethanol Services, LLC,
(Lansing) whereby Lansing will, from time to time, purchase ethanol from One Earth for a
merchandising fee. The term of the agreement is from June 5, 2009 until December 1, 2012. It will
automatically renew for additional periods of one year after the last day of the initial term, and
after each renewal term, unless either party sends a written notice of termination to the other.
Distillers Grains Distribution
We have entered into a marketing agreement with United Bio Energy Ingredients, LLC (UBEI).
Under the terms of the agreement, UBEI will purchase all of our distillers grains production during
the term of the contract. The initial term of the agreement is for 36 months, commencing on the
date that our ethanol plant began operations to produce ethanol. The agreement will automatically
renew for successive one year terms thereafter unless either party gives written notice of its
election not to renew. Pursuant to the agreement, UBEI will provide comprehensive marketing
services to us. UBEI will pay us for all distillers grains removed by them from our plant as
follows: for dried distillers grains, a price equal to ninety-seven percent (97%) of the F.O.B.
facility price charged by UBEI to its customers; for wet distillers grains, a price equal to
ninety-six percent (96%) of the F.O.B. Facility Price charged by UBEI to its customers; for
modified wet distillers grains, a price equal to ninety-five percent (95%) of the F.O.B. Facility
Price charged by UBEI to its customers. Such percentages are subject to a minimum and maximum price
per ton as set forth in the agreement.
4
Table of Contents
Federal Ethanol Supports and Governmental Regulation
Federal Ethanol Supports
The overall effect of the renewable fuel standard (RFS) program contained in the Energy
Independence and Security Act signed into law on December 19, 2007 (the 2007 Act) is uncertain.
The mandated minimum level of use of renewable fuels in the RFS under the 2007 Act increased to
approximately 11 billion gallons per year in 2009 (from 5.4 billion gallons under the RFS enacted
in 2005), and is scheduled to increase to 36 billion gallons per year in 2022. However, the 2007
Act also requires the increased use of advanced biofuels, which are
alternative biofuels produced without using corn starch such as cellulosic ethanol and
biomass-based diesel, with 21 billion gallons of the mandated 36 billion gallons of renewable fuel
required to come from advanced biofuels by 2022, which essentially caps the annual corn based
ethanol volume at 15 billion gallons. Required RFS volumes for both general and advanced renewable
fuels in years to follow 2022 will be determined by a governmental administrator, in coordination
with the U.S. Department of Energy and U.S. Department of Agriculture. The scheduled RFS for 2010
is approximately 12 billion gallons.
Undiffer- | ||||||||||||||||||||||||
Biomass- | entiated | |||||||||||||||||||||||
Renewable | Advanced | Cellulosic | based | Advanced | Total | |||||||||||||||||||
Year | Biofuel | Biofuel | Biofuel | Diesel | Biofuel | RFS | ||||||||||||||||||
2008 |
9.00 | 9.00 | ||||||||||||||||||||||
2009 |
10.50 | 0.60 | 0.50 | 0.10 | 11.10 | |||||||||||||||||||
2010 |
12.00 | 0.95 | 0.10 | 0.65 | 0.20 | 12.95 | ||||||||||||||||||
2011 |
12.60 | 1.35 | 0.25 | 0.80 | 0.30 | 13.95 | ||||||||||||||||||
2012 |
13.20 | 2.00 | 0.50 | 1.00 | 0.50 | 15.20 | ||||||||||||||||||
2013 |
13.80 | 2.75 | 1.00 | 1.75 | 16.55 | |||||||||||||||||||
2014 |
14.40 | 3.75 | 1.75 | 2.00 | 18.15 | |||||||||||||||||||
2015 |
15.00 | 5.50 | 3.00 | 2.50 | 20.50 | |||||||||||||||||||
2016 |
15.00 | 7.25 | 4.25 | 3.00 | 22.25 | |||||||||||||||||||
2017 |
15.00 | 9.00 | 5.50 | 3.50 | 24.00 | |||||||||||||||||||
2018 |
15.00 | 11.00 | 7.00 | 4.00 | 26.00 | |||||||||||||||||||
2019 |
15.00 | 13.00 | 8.50 | 4.50 | 28.00 | |||||||||||||||||||
2020 |
15.00 | 15.00 | 10.50 | 4.50 | 30.00 | |||||||||||||||||||
2021 |
15.00 | 18.00 | 13.50 | 4.50 | 33.00 | |||||||||||||||||||
2022 |
15.00 | 21.00 | 16.00 | 5.00 | 36.00 |
Source: Renewable Fuels Association
Waivers of the RFS minimum levels of renewable fuels included in gasoline could have a
material adverse effect on our results of operations. Under the RFS, as originally passed as part
of the Energy Policy Act of 2005, the U.S. Environmental Protection Agency, or EPA, in consultation
with the Secretary of Agriculture and the Secretary of Energy, may waive the renewable fuels
mandate with respect to one or more states if the Administrator of the EPA determines upon the
petition of one or more states that implementing the requirements would severely harm the economy
or the environment of a state, a region or the nation, or that there is inadequate supply to meet
the requirement.
On June 18, 2008, the United States Congress overrode a presidential veto to approve the Food,
Conservation and Energy Act of 2008 (the 2008 Farm Bill) and to ensure that all parts of the 2008
Farm Bill were enacted into law. Passage of the 2008 Farm Bill reauthorized the 2002 farm bill and
added new provisions regarding energy, conservation, rural development, crop insurance as well as
other subjects. The energy title continues the energy programs contained in the 2002 farm bill but
refocuses certain provisions on the development of cellulosic ethanol technology. The legislation
provides assistance for the production, storage and transport of cellulosic feedstocks and provides
support for ethanol production from such feedstocks in the form of grants, loans and loan
guarantees. The 2008 Farm Bill also modifies the ethanol fuels tax credit from 51 cents per gallon
to 45 cents per gallon in 2009. The 2008 Farm Bill also extends the 54 cent per gallon tariff on
imported ethanol for two years, to January 2011. The 2008 Farm Bill is distinct from the Energy
Independence and Security Act of 2007, which contains the renewable fuels standards described
above.
The Energy Independence and Security Act of 2007 and the 2008 Farm Bill offer a very strong
incentive to develop commercial scale cellulosic ethanol. The RFS requires that 16 billion gallons
per year of cellulosic bio-fuels be consumed in the United States by 2022. Additionally, state and
federal grants have been awarded to several companies who are seeking to develop commercial-scale
cellulosic ethanol plants. We expect this will encourage
innovation that may lead to commercially viable cellulosic ethanol plants in the near future. If an
efficient method of producing ethanol from cellulose-based biomass is developed, we may not be able
to compete effectively.
5
Table of Contents
There is currently some debate in the U.S. Senate about whether to allow the 54 cent per
gallon tariff on imported ethanol to expire. If the 54 cent per gallon tariff is repealed, the
demand for domestically produced ethanol may be offset by the supply of ethanol imported from
Brazil or other foreign countries.
The ethanol industry is benefited by VEETC which is a federal excise tax credit of 4.5 cents
per gallon of ethanol blended with gasoline at a rate of at least 10%. This excise tax credit is
set to expire on December 31, 2010. We believe that VEETC positively impacts the price of
ethanol. On December 31, 2009, the biodiesel blenders credit that benefits the biodiesel industry
was allowed to expire. This resulted in the biodiesel industry ceasing to produce biodiesel
because the price of biodiesel without the tax credit was uncompetitive with the cost of petroleum
based diesel. If VEETC is allowed to expire, it could negatively impact the price we receive for
our ethanol and could negatively impact our profitability.
Effect of Governmental Regulation
The ethanol industry and our business depend upon continuation of the federal ethanol supports
discussed above. These incentives have supported a market for ethanol that might disappear without
the incentives. Alternatively, the incentives may be continued at lower levels than at which they
currently exist. The elimination or reduction of such federal ethanol supports would make it more
costly for us to sell our ethanol and would likely reduce our net income and negatively impact our
future financial performance.
In addition, California recently passed a Low Carbon Fuels Standard (LCFS). The California
LCFS requires that renewable fuels used in California must accomplish certain reductions in
greenhouse gases which are measured using a lifecycle analysis. Management believes that these new
regulations could preclude corn based ethanol produced in the Midwest from being used in
California. California represents a significant ethanol demand market.
We are subject to various federal, state and local environmental laws and regulations,
including those relating to the discharge of materials into the air, water and ground, the
generation, storage, handling, use, transportation and disposal of hazardous materials, and the
health and safety of employees. In addition, some of these laws and regulations require our plant
to operate under permits that are subject to renewal or modification.
The governments regulation of the environment changes constantly. We are subject to extensive
air, water and other environmental regulations and we are required to maintain a number of
environmental permits to operate the plant. It is possible that more stringent federal or state
environmental rules or regulations could be adopted, which could increase our operating costs and
expenses. It also is possible that federal or state environmental rules or regulations could be
adopted that could have an adverse effect on the use of ethanol. For example, changes in the
environmental regulations regarding the required oxygen content of automobile emissions could have
an adverse effect on the ethanol industry. Furthermore, plant operations are governed by the
Occupational Safety and Health Administration (OSHA). OSHA regulations may change such that the
costs of the operation of the plant may increase. Any of these regulatory factors may result in
higher costs or other materially adverse conditions effecting our operations, cash flows and
financial performance.
Competition
We are in direct competition with numerous ethanol producers, many of whom have greater
resources than we do. Following the significant growth in the ethanol industry during 2005 and
2006, the industry has grown at a much slower pace. Management attributes the rapid growth during
2005 and 2006 with a very favorable spread between the price of ethanol and the cost of the raw
materials to produce ethanol during that time period. Management believes that current ethanol
supply capacity exceeds ethanol demand. This has resulted in some ethanol producers reducing
production of ethanol or ceasing operations altogether. As of September 30, 2010, the Renewable
Fuels Association estimates that approximately 7% of the ethanol production capacity in the United
States is currently idled. This is down from earlier in 2009 when the idled capacity may have been
as high as 20%. As a result of this overcapacity, the ethanol industry has become increasingly
competitive. Since ethanol is a
commodity product, competition in the industry is predominantly based on price. Larger ethanol
producers may be able to realize economies of scale that we are unable to realize. This could put
us at a competitive disadvantage to other ethanol producers. Management anticipates that without an
increase in the amount of ethanol that can be blended into gasoline for use in conventional
automobiles, ethanol demand may not significantly increase which may result in ethanol supply
capacity exceeding ethanol demand for the foreseeable future.
6
Table of Contents
Recently the United States Environmental Protection Agency has been researching increasing the
amount of ethanol that can be blended for use in conventional automobiles from 10% to 15% and
recently approved ethanol blends up to 15% for use in conventional automobiles made in 2007 or
later. Management anticipates this will increase demand for ethanol and will likely positively
impact ethanol prices. However, this will also likely result in companies building new ethanol
plants or expanding their current ethanol plants. This could lead to further overcapacity in the
ethanol industry. The partial waiver on E15 is welcome news for ethanol producers, but it is
unlikely to have a significant effect on the market in the near term, according to Cole Gustafson,
an economist at the North Dakota State University Extension Service. Technical requirements,
including health-safety testing, equipment testing and liability safeguards, must be in place
before E15 can be sold in all states. Another hindrance to E15s demand growth is the small size of
the 2007-and-newer vehicle market, which could increase ethanols market by only 1.4 billion to 1.6
billion gallons.
Many of the current ethanol production incentives are designed to encourage the production of
renewable fuels using raw materials other than corn. One type of ethanol production feedstock that
is being explored is cellulose. Cellulose is the main component of plant cell walls and is the most
common organic compound on earth. Cellulose is found in wood chips, corn stalks, rice, straw,
amongst other common plants. Cellulosic ethanol is ethanol produced from cellulose. Currently,
cellulosic ethanol production technology is not sufficiently advanced to produce cellulosic ethanol
on a commercial scale, however, due to these new government incentives, we anticipate that
commercially viable cellulosic ethanol technology will be developed in the near future. Several
companies and researchers have commenced pilot projects to study the feasibility of commercially
producing cellulosic ethanol. If this technology can be profitably employed on a commercial scale,
it could potentially lead to ethanol that is less expensive to produce than corn based ethanol,
especially if corn prices remain high. Cellulosic ethanol may also capture more government
subsidies and assistance than corn based ethanol. This could decrease demand for our product or
result in competitive disadvantages for our ethanol production process.
At the end of 2008, VeraSun Energy filed for Chapter 11 Bankruptcy following significant
losses it experienced on raw material derivative positions it had in place. VeraSuns ethanol
plants were auctioned during the Chapter 11 Bankruptcy process and a significant number of these
plants were purchased by Valero Energy Corporation which is a major gasoline refining company. The
purchase by Valero Energy represents the first major oil company that has taken a stake in ethanol
production infrastructure. Further, now Valero Energy controls its own supply of ethanol that can
be used to blend at its gasoline refineries. Should other oil companies become involved in the
ethanol industry, it may be increasingly difficult for us to compete. While we believe that we are
a low cost producer of ethanol, increased competition in the ethanol industry may make it more
difficult to operate the ethanol plant profitably.
According to the Renewable Fuels Association, as of September 30, 2010, the most recent data
available, the ethanol industry has grown to 214 production facilities in the United States. There
are eight plants currently under construction or expansion. The Renewable Fuels Association
currently estimates that the United States ethanol industry has capacity to produce more than
13 billion gallons of ethanol per year. The new ethanol plants under construction along with the
plant expansions under construction could push United States production of fuel ethanol in the near
future to more than 14.5 billion gallons per year. The largest ethanol producers include Archer
Daniels Midland, Green Plains Renewable Energy, Hawkeye Renewable, POET, and Valero Renewable
Fuels, each of which is capable of producing more ethanol than we produce.
Ethanol production is also expanding internationally. Ethanol produced or processed in certain
countries in Central America and the Caribbean region is eligible for tariff reduction or
elimination on importation to the United States under a program known as the Caribbean Basin
Initiative. Some ethanol producers, including Cargill, have started taking advantage of this
situation by building dehydration plants in participating Caribbean Basin countries, which convert
ethanol into fuel-grade ethanol for shipment to the United States. Ethanol imported from Caribbean
Basin countries may be a less expensive alternative to domestically produced ethanol and may affect
our ability to
sell our ethanol profitably. Further, despite the fact that there is a significant amount of
ethanol produced in the United States, ethanol produced abroad and shipped by sea may be a more
favorable alternative to supply coastal cities that are located on international shipping ports.
7
Table of Contents
Our ethanol plant also competes with producers of other gasoline additives having similar
octane and oxygenate values as ethanol. Alternative fuels, gasoline oxygenates and alternative
ethanol production methods are also continually under development. The major oil companies have
significantly greater resources than we have to market other additives, to develop alternative
products, and to influence legislation and public perception of ethanol. These companies also have
sufficient resources to begin production of ethanol should they choose to do so.
A number of automotive, industrial and power generation manufacturers are developing
alternative clean power systems using fuel cells, plug-in hybrids or clean burning gaseous fuels.
Like ethanol, the emerging fuel cell industry offers a technological option to address worldwide
energy costs, the long-term availability of petroleum reserves and environmental concerns. Fuel
cells have emerged as a potential alternative to certain existing power sources because of their
higher efficiency, reduced noise and lower emissions. Fuel cell industry participants are currently
targeting the transportation, stationary power and portable power markets in order to decrease fuel
costs, lessen dependence on crude oil and reduce harmful emissions. If the fuel cell industry
continues to expand and gain broad acceptance and becomes readily available to consumers for motor
vehicle use, we may not be able to compete effectively. This additional competition could reduce
the demand for ethanol, which would negatively impact our profitability.
Demand for ethanol may increase as a result of increased consumption of E85 fuel. E85 fuel is
a blend of 85% ethanol and 15% gasoline. According to United States Department of Energy estimates,
there are currently nearly 8 million flexible fuel vehicles capable of operating on E85 in the
United States. Further, the United States Department of Energy reports that there are currently
more than 1,900 retail gasoline stations supplying E85. The number of retail E85 suppliers
increases significantly each year, however, this remains a relatively small percentage of the total
number of U.S. retail gasoline stations, which is approximately 170,000. In order for E85 fuel to
increase demand for ethanol, it must be available for consumers to purchase it. As public awareness
of ethanol and E85 increases along with E85s increased availability, management anticipates some
growth in demand for ethanol associated with increased E85 consumption.
Many in the ethanol industry believe that while in the future higher percentage blends of
ethanol such as E85 for use in flexible fuel vehicles will positively impact demand for ethanol, in
the near term increasing the amount of ethanol that can be blended for use in conventional
automobiles will have a greater effect on ethanol demand. A proposal was made and recently approved
by the EPA to increase the amount of ethanol that can legally be blended in gasoline from 10% to
15% for use in conventional automobiles made in 2007 or later. Management believes that this could
increase annual ethanol demand.
Distillers Grains Competition
Ethanol plants in the Midwest produce the majority of distillers grains and primarily compete
with other ethanol producers in the production and sales of distillers grains. According to the
Renewable Fuels Associations Ethanol Industry Outlook 2009, ethanol plants produced 20 million
metric tons of distillers grains in 2007/2008 and estimates 25 million metric tons were produced in
2008/2009. The amount of distillers grains produced is expected to increase significantly as the
number of ethanol plants increase.
The primary consumers of distillers grains are dairy and beef cattle, according to the
Renewable Fuels Associations Ethanol Industry Outlook 2009. In recent years, an increasing amount
of distillers grains have been used in the swine and poultry markets. Numerous feeding trials show
advantages in milk production, growth, rumen health, and palatability over other dairy cattle
feeds. With the advancement of research into the feeding rations of poultry and swine, we expect
these markets to expand and create additional demand for distillers grains; however, no assurance
can be given that these markets will in fact expand, or if they do, that we will benefit from it.
The market for distillers grains is generally confined to locations where freight costs allow it to
be competitively priced against other feed ingredients. Distillers grains compete with three other
feed formulations: corn gluten feed, dry brewers grain and mill feeds. The primary value of these
products as animal feed is their protein content. Dry brewers grain and distillers grains have
about the same protein content, and corn gluten feed and mill feeds have
slightly lower protein contents.
8
Table of Contents
Sources and Availability of Raw Materials
Corn Feedstock Supply
The major raw material required for our ethanol plant to produce ethanol and distillers grain
is corn. To produce 100 million gallons of ethanol per year, our ethanol plant needs approximately
36 million bushels of corn per year, or approximately 100,000 bushels per day, as the feedstock for
its dry milling process. We primarily purchase the corn supply for our plant from local markets,
but may be required to purchase some of the corn we need from other markets and transport it to our
plant via truck or rail in the future. Traditionally, corn grown in the area of the plant site has
been exported for feeding or processing and/or overseas export sales.
We have entered into a Grain Handling Agreement with Alliance Grain Co. (Alliance). The
purpose of the agreement is to set out the terms upon which Alliance has agreed to serve as our
exclusive third-party agent to procure corn to be used as feedstock at our ethanol production
facility. Pursuant to the agreement, Alliance provides one grain originator to work at the facility
to negotiate and execute contracts on our behalf and arrange the shipping and delivery of the corn
required for ethanol production. In return for providing these services, Alliance receives an
agency fee per bushel delivered. The initial term of the agreement is for two years from the first
grind date, to automatically renew for one additional year unless properly terminated by either of
the parties. The parties also each have the right to terminate the agreement in certain
circumstances, including, but not limited to, default of either party by, bankruptcy or
receivership of, the other party, or mutual agreement to terminate the agreement.
We are significantly dependent on the availability and price of corn. The price at which we
purchase corn will depend on prevailing market prices. There is no assurance that a shortage will
not develop, particularly if there are other ethanol plants competing for corn or an extended
drought or other production problem. We anticipate that corn prices will continue to be extremely
volatile.
On October 8, 2010, the United States Department of Agriculture (USDA) released its Crop
Production report. Corn production for 2009 was a record setting year at 13.1 billion bushels.
The USDA estimates the 2010 corn production at 12.7 billion bushels, down slightly from 2009. Corn
prices reached historical highs in June 2008, but have come down sharply since that time as
stronger than expected corn yields materialized and the global financial crisis brought down the
price of most commodities generally. We expect continued volatility in the price of corn, which
could significantly impact our cost of goods sold.
The price and availability of corn are subject to significant fluctuations depending upon a
number of factors affecting grain commodity prices in general, including crop conditions, weather,
governmental programs and foreign purchases. Because the market price of ethanol is not directly
related to grain prices, ethanol producers are generally not able to compensate for increases in
the cost of grain feedstock through adjustments in prices charged for their ethanol. We therefore
anticipate that our plants profitability will be negatively impacted during periods of high grain
prices.
Utilities
We engaged U.S. Energy Services, Inc. to assist us in negotiating our utilities contracts and
provide us with on-going energy management services. U.S. Energy manages the procurement and
delivery of energy to their clients locations. U.S. Energy Services manages energy costs through
obtaining, organizing and tracking cost information. Their major services include supply
management, price risk management and plant site development.
Natural Gas. Natural gas is also an important input commodity to our manufacturing
process. Our natural gas usage for our fiscal year ended December 31, 2009 was 1,483,285 MMBTU,
constituting approximately 7% of our total costs of goods sold. We are using natural gas to produce
process steam and to dry our distillers grain products to a moisture content at which they can be
stored for long periods of time, and can be transported greater distances, so that we can market
the product to overseas markets.
9
Table of Contents
We entered into an agreement with Ameren Energy Generating Company (Ameren) on December 9,
2008, whereby we would receive an undivided 10% interest in a lateral natural gas pipeline owned by
Ameren
which is connected to the interstate natural gas pipeline system owned and operated by Natural Gas
Pipeline of America. The term of the assignment is for 10 years. Upon expiration of the agreement
on January 31, 2019, the property will revert back to Ameren. However, prior to the expiration of
the initial seven years of the term, Ameren will notify us regarding our willingness to renew the
agreement after the final expiration. We will be allowed to install an additional pipeline
contiguous to Amerens existing pipeline, subject to certain easements and final approval by
Ameren.
Electricity. We require a significant amount of electrical power to operate the plant.
On January 18, 2008, we entered into an agreement with AmerenCIPS for the construction of a
substation and ancillary equipment necessary to provide electric distribution service. The entire
cost of the construction was $1,394,000, of which $1,150,000 was required at the signing of the
agreement. The remaining balance is to be paid in 36 equal payments of no less than $6,800, which
will be included in the monthly invoice from AmerenCIPS as delivery service. The remaining balance
is secured by an irrevocable standby letter of credit, which may be reduced annually by the actual
or calculated delivery service revenues.
Water. We require a significant supply of water. Engineering specifications show our
plants water requirements to be approximately 878 gallons per minute, or 1.3 million gallons per
day, depending on the quality of water. We obtain water from the Mahomet Aquifer through our two
wells located approximately 13 miles east of the plant.
Much of the water used in our ethanol plant is recycled back into the process. There are,
however, certain areas of production where fresh water is needed. Those areas include boiler makeup
water and cooling tower water. Boiler makeup water is treated on-site to minimize all elements that
will harm the boiler and recycled water cannot be used for this process. Cooling tower water is
deemed non-contact water because it does not come in contact with the mash, and, therefore, can be
regenerated back into the cooling tower process. The makeup water requirements for the cooling
tower are primarily a result of evaporation. Much of the water can be recycled back into the
process, which minimizes the discharge water. Many new plants today are zero or near zero effluent
discharge facilities. Due to the boron level in our discharge water, we are required by the EPA to
dilute the discharge with water pumped from wells located on the plant site.
Employees
We currently have 48 full-time employees. We consider our relationship with our employees to
be good.
Research and Development
We do not conduct any research and development activities associated with the development of
new technologies for use in producing ethanol and distillers grains.
Patents, Trademarks, Licenses, Franchises and Concessions
We do not currently hold any patents, trademarks, franchises or concessions. We were granted a
license by ICM, Inc. (ICM) to use certain ethanol production technology necessary to operate our
ethanol plant. The cost of the license granted by ICM was included in the amount we paid to Fagen,
Inc. (Fagen) to design and build our ethanol plant.
Working Capital
We primarily use our working capital for purchases of raw materials necessary to operate the
ethanol plant. Our primary source of working capital has been cash flows from our operations along
with our two revolving lines of credit with our primary lender First National Bank of Omaha. At
December 31, 2009, we had $10,000,000 available on the seasonal line of credit. Subsequent to year
end, we paid off the long-term revolving line of credit of $9,750,000. We currently have $8,750,000
available to draw on the long-term revolving line of credit.
10
Table of Contents
Costs and Effects of Compliance with Environmental Laws
We are subject to extensive air, water and other environmental regulations and we require a
number of environmental permits to operate the plant. Fagen and RTP Environmental Engineering
Associates, Inc. advise us on general environmental compliance.
We are subject to oversight activities by the US EPA. There is always a risk that the US EPA
would enforce certain rules and regulations differently than Illinois environmental
administrators. Illinois and US EPA rules are also subject to change, and any such changes could
result in greater regulatory burdens on our future plant operations. We could also be subject to
environmental or nuisance claims from adjacent property owners or residents in the area arising
from possible foul smells or other air or water discharges from the plant. Such claims may result
in an adverse result in court if we are deemed to engage in a nuisance that substantially impairs
the fair use and enjoyment of real estate.
ITEM 1A. RISK FACTORS
You should carefully read and consider the risks and uncertainties below and the other
information contained in this report. Any of the events discussed in the risk factors below may
occur. If one or more of these events do occur, our results of operations, financial condition or
cash flows could me materially adversely affected.
Risks Relating to Our Business
We have a significant amount of debt, and our existing debt financing agreements contain, and
our future debt financing agreements may contain, restrictive covenants that limit distributions
and impose restrictions on the operation of our business. The use of debt financing makes it more
difficult for us to operate because we must make principal and interest payments on the
indebtedness and abide by covenants contained in our debt financing agreements. The level of our
debt may have important implications on our operations, including, among other things: (a) limiting
our ability to obtain additional debt or equity financing; (b) placing us at a competitive
disadvantage because we may be more leveraged than some of our competitors; (c) subjecting all or
substantially all of our assets to liens, which means that there may be no assets left for unit
holders in the event of a liquidation; and (d) limiting our ability to make business and
operational decisions regarding our business, including, among other things, limiting our ability
to pay dividends to our unit holders, make capital improvements, sell or purchase assets or engage
in transactions we deem to be appropriate and in our best interest.
Increases in the price of corn or natural gas would reduce our profitability. Our primary
source of revenue is from the sale of ethanol and distillers grains. Our results of operations and
financial condition are significantly affected by the cost and supply of corn and natural gas.
Changes in the price and supply of corn and natural gas are subject to and determined by market
forces over which we have no control including weather and general economic factors.
Ethanol production requires substantial amounts of corn. Generally, higher corn prices will
produce lower profit margins and, therefore, negatively affect our financial performance. While
corn prices have decreased significantly from highs experienced during the middle of 2008, corn
prices could significantly increase in a short period of time. If a period of high corn prices were
to be sustained for some time, such pricing may reduce our ability to operate profitably because of
the higher cost of operating our plant. We may not be able to offset any increase in the price of
corn by increasing the price of our products. If we cannot offset increases in the price of corn,
our financial performance may be negatively affected.
The prices for and availability of natural gas are subject to volatile market conditions.
These market conditions often are affected by factors beyond our control such as higher prices as a
result of colder than average weather conditions or natural disasters, overall economic conditions
and foreign and domestic governmental regulations and relations. Significant disruptions in the
supply of natural gas could impair our ability to manufacture ethanol and more significantly,
distillers grains for our customers. Furthermore, increases in natural gas prices or changes in our
natural gas costs relative to natural gas costs paid by competitors may adversely affect our
results of operations and financial condition. If we were to experience relatively higher corn and
natural gas costs compared to the selling prices of our products for an extended period of time,
our financial performance may be negatively affected.
11
Table of Contents
Declines in the price of ethanol or distillers grain would significantly reduce our revenues.
The sales prices of ethanol and distillers grains can be volatile as a result of a number of
factors such as overall supply and demand, the price of gasoline and corn, levels of government
support, and the availability and price of competing products. We are dependent on a favorable
spread between the price we receive for our ethanol and distillers grains and the price we pay for
corn and natural gas. Any lowering of ethanol and distillers grains prices, especially if it is
associated with increases in corn and natural gas prices, may affect our ability to operate
profitably. We anticipate the price of ethanol and distillers grains to continue to be volatile in
our 2010 fiscal year as a result of the net effect of changes in the price of gasoline and corn and
increased ethanol supply offset by increased ethanol demand. Declines in the prices we receive for
our ethanol and distillers grains will lead to decreased revenues and may result in our inability
to operate the ethanol plant profitably for an extended period of time which could negatively
affect our financial performance.
Our inability to secure credit facilities we may require in the future may negatively impact
our liquidity. Due to current conditions in the credit markets, it has been difficult for
businesses to secure financing. If we require financing in the future and we are unable to secure
such financing, or we are unable to secure the financing we require on reasonable terms, it may
have a negative impact on our liquidity.
The ethanol industry is an industry that is changing rapidly which can result in unexpected
developments that could negatively impact our operations and the value of our units. The ethanol
industry has grown significantly in the last decade. According to the Renewable Fuels Association,
the ethanol industry has grown from approximately 1.5 billion gallons of production per year in
1999 to more than 10 billion gallons in 2009. This rapid growth has resulted in significant shifts
in supply and demand of ethanol over a very short period of time. As a result, past performance by
the ethanol plant or the ethanol industry generally might not be indicative of future performance.
We may experience a rapid shift in the economic conditions in the ethanol industry which may make
it difficult to operate the ethanol plant profitably. If changes occur in the ethanol industry that
make it difficult for us to operate the ethanol plant profitably, it could negatively affect our
financial performance.
We engage in transactions which involve risks that could harm our business. Exposure to
commodity price risk results from our dependence on corn and natural gas in the ethanol production
process. We seek to minimize the risks from fluctuations in the prices of corn, natural gas and
ethanol by establishing a crush margin, which is the difference between the ethanol net price and
the corn price per gallon of ethanol. We attempt to contract the sale of ethanol and the purchase
of corn simultaneously that will generate the targeted crush margin. Corn and ethanol prices may
not trend in the same direction, which may make it difficult for us to achieve the crush margin
required to generate profits.
Price movements in corn, natural gas and ethanol contracts are highly volatile and are
influenced by many factors that are beyond our control. There are several variables that could
affect the extent to which our strategy is impacted by price fluctuations in the cost of corn or
natural gas. However, it is likely that commodity cash prices will have the greatest impact on our
strategy.
Our business is not diversified. Our success depends largely on our ability to profitably
operate our ethanol plant. We do not have any other lines of business or other sources of revenue
if we are unable to operate our ethanol plant and manufacture ethanol and distillers grains. If
economic or political factors adversely affect the market for ethanol or distillers grains, we have
no other line of business to fall back on. Our business could also be significantly harmed if the
ethanol plant could not operate at full capacity for any extended period of time.
We depend on our management and key employees, and the loss of these relationships could
negatively impact our ability to operate profitably. We are highly dependent on our management
team to operate our ethanol plant. We may not be able to replace these individuals should they
decide to cease their employment with us, or if they become unavailable for any other reason. While
we seek to compensate our management and key employees in a manner that will encourage them to
continue their employment with us, they may choose to seek other employment. Any loss of these
officers and key employees may prevent us from operating the ethanol plant profitably and could
decrease the value of our units.
12
Table of Contents
We depend on a key supplier, Alliance Grain, whose failure to perform could force us to
abandon business, hinder our ability to operate profitably or decrease the value of our units. We
are highly dependent upon Alliance Grain to procure our corn for production. Should Alliance Grain
fail to perform in any manner significant to our operations, we may encounter unforeseen costs or
difficulties in the operation of our plant which could affect our profitability negatively.
Changes and advances in ethanol production technology could require us to incur costs to
update our plant or could otherwise hinder our ability to compete in the ethanol industry or
operate profitably. Advances and changes in the technology of ethanol production are expected to
occur. Such advances and changes may make the ethanol production technology installed in our plant
less desirable or obsolete. These advances could also allow our competitors to produce ethanol at a
lower cost than we are able to. If we are unable to adopt or incorporate technological advances,
our ethanol production methods and processes could be less efficient than our competitors, which
could cause our plant to become uncompetitive or completely obsolete. If our competitors develop,
obtain or license technology that is superior to ours or that makes our technology obsolete, we may
be required to incur significant costs to enhance or acquire new technology so that our ethanol
production remains competitive. Alternatively, we may be required to seek third-party licenses,
which could also result in significant expenditures. These third-party licenses may not be
available or, once obtained, they may not continue to be available on commercially reasonable
terms. These costs could negatively impact our financial performance by increasing our operating
costs and reducing our net income.
Your investment may decline in value due to decisions made by our board of directors, and you
will not have the ability to remove or replace our directors. Under our operating agreement, all
directors are appointed; a majority of directors are appointed by REX and under certain
circumstances other members, however, most members do not have the right to appoint a director and
no directors are elected. The appointed directors serve at the option of the members with such
appointment rights, and our other members have no right to remove or replace any directors. As a
result, your only recourse to replace a director would be through an amendment to our partnership
agreement, which could be difficult to accomplish. Only members that own at least thirty percent
(30%) of our membership voting interests may propose an amendment to our operating agreement, and
such proposed amendments must also be approved by REX and the affirmative vote of the majority of
the membership voting interests present at a meeting where a quorum is in attendance. Therefore,
if the board of directors were to make a decision that would decrease the value of your units, you
would have very little ability to change this outcome.
Risks Related to Ethanol Industry
Demand for ethanol may not continue to grow unless ethanol can be blended into gasoline in
higher percentage blends for conventional automobiles. Currently, ethanol is blended with
conventional gasoline for use in standard (non-flex fuel) vehicles to create a blend which is 10%
ethanol and 90% conventional gasoline. Estimates indicate that approximately 135 billion gallons of
gasoline are sold in the United States each year. Assuming that all gasoline in the United States
is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is
13.5 billion gallons. This is commonly referred to as the blending wall, which represents a
theoretical limit where more ethanol cannot be blended into the national gasoline pool. Many in the
ethanol industry believe that the ethanol industry will reach this blending wall in 2010. In order
to expand demand for ethanol, higher percentage blends of ethanol must be utilized in conventional
automobiles. Such higher percentage blends of ethanol have recently become a contentious issue.
Automobile manufacturers and environmental groups have fought against higher percentage ethanol
blends. Currently, state and federal regulations prohibit the use of higher percentage ethanol
blends in conventional automobiles and vehicle manufacturers have stated that using higher
percentage ethanol blends in conventional vehicles would void the manufacturers warranty.
Recently, the EPA was expected to make a ruling on using higher percentage blends of ethanol such
as E15; however, the EPA deferred making a decision on this issue. Without an increase in the
allowable percentage blends of ethanol, demand for ethanol may not continue to increase which could
decrease the selling price of ethanol and could result in our inability to operate the ethanol
plant profitably which could negatively impact our financial performance.
13
Table of Contents
Technology advances in the commercialization of cellulosic ethanol may decrease demand for
corn based ethanol which may negatively affect our profitability. The current trend in ethanol
production research is to develop an efficient method of producing ethanol from cellulose-based
biomass, such as agricultural waste, forest
residue, municipal solid waste, and energy crops. This trend is driven by the fact that
cellulose-based biomass is generally cheaper than corn, and producing ethanol from cellulose-based
biomass would create opportunities to produce ethanol in areas which are unable to grow corn. The
Energy Independence and Security Act of 2007 and the 2008 Farm Bill offer a very strong incentive
to develop commercial scale cellulosic ethanol. The RFS requires that 16 billion gallons per year
of advanced bio-fuels be consumed in the United States by 2022. Additionally, state and federal
grants have been awarded to several companies who are seeking to develop commercial-scale
cellulosic ethanol plants. We expect this will encourage innovation that may lead to commercially
viable cellulosic ethanol plants in the near future. If an efficient method of producing ethanol
from cellulose-based biomass is developed, we may not be able to compete effectively. If we are
unable to produce ethanol as cost-effectively as cellulose-based producers, our ability to generate
revenue and our financial condition will be negatively impacted.
New plants under construction or decreases in the demand for ethanol may result in excess
production capacity in our industry. The supply of domestically produced ethanol is at an all-time
high. According to the Renewable Fuels Association, as of September 30, 2010, there are 214 ethanol
plants in the United States with capacity to produce more than 13 billion gallons of ethanol per
year. In addition, there are eight ethanol plants under construction or expansion underway which
together are estimated to increase ethanol production capacity by more than 1.4 billion gallons per
year. Excess ethanol production capacity may have an adverse impact on our results of operations,
cash flows and general financial condition. According to the Renewable Fuels Association,
approximately 7% of the ethanol production capacity in the United States was idled as of September
30, 2010, the most recent available data. During the early part of 2009 when the ethanol industry
was experiencing unfavorable operating conditions, as much as 20% of the ethanol production in the
United States may have been idled. Further, demand for ethanol may not increase past approximately
13 billion gallons of ethanol due to the blending wall unless higher percentage blends of ethanol
are approved by the EPA. If the demand for ethanol does not grow at the same pace as increases in
supply, we expect the selling price of ethanol to decline. If excess capacity in the ethanol
industry continues to occur, the market price of ethanol may decline to a level that is inadequate
to generate sufficient cash flow to cover our costs. This could negatively affect our
profitability.
Decreasing gasoline prices may negatively impact the selling price of ethanol which could
reduce our ability to operate profitably. The price of ethanol tends to change in relation to the
price of gasoline. Recently, as a result of a number of factors including the current world
economy, the price of gasoline has decreased. In correlation to the decrease in the price of
gasoline, the price of ethanol has also decreased. Decreases in the price of ethanol reduce our
revenue. Our profitability depends on a favorable spread between our corn and natural gas costs and
the price we receive for our ethanol. If ethanol prices fall during times when corn and/or natural
gas prices are high, we may not be able to operate our ethanol plant profitably.
Growth in the ethanol industry is dependent on growth in the fuel blending infrastructure to
accommodate ethanol, which may be slow and could result in decreased demand for ethanol. The
ethanol industry depends on the fuel blending industry to blend the ethanol that is produced with
gasoline so it may be sold to the end consumer. In many parts of the country, the blending
infrastructure cannot accommodate ethanol so no ethanol is used in those markets. Substantial
investments are required to expand this blending infrastructure and the fuel blending industry may
choose not to expand the blending infrastructure to accommodate ethanol. Should the ability to
blend ethanol not expand at the same rate as increases in ethanol supply, it may decrease the
demand for ethanol which may lead to a decrease in the selling price of ethanol which could impact
our ability to operate profitably.
We operate in an intensely competitive industry and compete with larger, better financed
entities which could impact our ability to operate profitably. There is significant competition
among ethanol producers. There are numerous producer-owned and privately-owned ethanol plants
planned and operating throughout the Midwest and elsewhere in the United States. We also face
competition from outside of the United States. The passage of the Energy Policy Act of 2005
included a renewable fuels mandate. The RFS was increased in December 2007 to 36 billion gallons by
2022. Further, some states have passed renewable fuel mandates. All of these increases in ethanol
demand have encouraged companies to enter the ethanol industry. The largest ethanol producers
include Archer Daniels Midland, Green Plains Renewable Energy, Hawkeye Renewable, POET, and Valero
Renewable Fuels, all of which are each capable of producing significantly more ethanol than we
produce. Further, many believe that there will be consolidation occurring in the ethanol industry
in the near future which will likely lead to a few companies who control a significant portion of
the ethanol production market. We may not be able to compete with
these larger entities. These larger ethanol producers may be able to affect the ethanol market in
ways that are not beneficial to us which could affect our financial performance.
14
Table of Contents
Competition from the advancement of alternative fuels may lessen the demand for ethanol.
Alternative fuels, gasoline oxygenates and ethanol production methods are continually under
development. A number of automotive, industrial and power generation manufacturers are developing
alternative clean power systems using fuel cells, plug-in hybrids or clean burning gaseous fuels.
Like ethanol, these emerging technologies offer an option to address worldwide energy costs, the
long-term availability of petroleum reserves and environmental concerns. Fuel cells have emerged as
a potential alternative to certain existing power sources because of their higher efficiency,
reduced noise and lower emissions. Fuel cell industry participants are currently targeting the
transportation, stationary power and portable power markets in order to decrease fuel costs, lessen
dependence on crude oil and reduce harmful emissions. If these alternative technologies continue to
expand and gain broad acceptance and become readily available to consumers for motor vehicle use,
we may not be able to compete effectively. This additional competition could reduce the demand for
ethanol, resulting in lower ethanol prices that might adversely affect our results of operations
and financial condition.
Consumer resistance to the use of ethanol based on the belief that ethanol is expensive, adds
to air pollution, harms engines and/or takes more energy to produce than it contributes may affect
the demand for ethanol. Certain individuals believe that use of ethanol will have a negative
impact on gasoline prices at the pump. Many also believe that ethanol adds to air pollution and
harms car and truck engines. Still other consumers believe that the process of producing ethanol
actually uses more fossil energy, such as oil and natural gas, than the amount of energy that is
produced. These consumer beliefs could potentially be wide-spread and may be increasing as a result
of recent efforts to increase the allowable percentage of ethanol that may be blended for use in
conventional automobiles. If consumers choose not to buy ethanol based on these beliefs, it would
affect the demand for the ethanol we produce which could negatively affect our profitability and
financial condition.
The downturn in the U.S. economy has had a negative impact on the ethanol industry. The U.S.
stock markets crumbled during the winter of 2009 upon the collapse of multiple major financial
institutions, the federal governments takeover of two major mortgage companies, Freddie Mac and
Fannie Mae, and the Presidents enactment of a $700 billion bailout plan pursuant to which the
federal government directly invested in troubled financial institutions. Financial institutions
across the country have lost billions of dollars due to the extension of credit for the purchase
and refinance of over-valued real property. The U.S. economy is in the midst of a recession, with
increasing unemployment rates and decreasing retail sales. These factors have caused significant
economic stress and upheaval in the financial and credit markets in the United States, as well as
abroad. Credit markets have tightened and lending requirements have become more stringent. Oil
prices and demand for fuel has fluctuated greatly and generally trended downward during our 2009
fiscal year. We believe that these factors have contributed to a decrease in the prices at which
we are able to sell our ethanol which may persist throughout all or parts of fiscal year 2010.
Risks Related to Regulation and Governmental Action
Government incentives for ethanol production, including federal tax incentives, may be
eliminated in the future, which could hinder our ability to operate at a profit. The ethanol
industry is assisted by various federal ethanol production and tax incentives, including the RFS
set forth in the Energy Policy Act of 2005. The RFS helps support a market for ethanol that might
disappear without this incentive; as such, waiver of RFS minimum levels of renewable fuels required
in gasoline could negatively impact our results of operations.
In addition, the elimination or reduction of tax incentives to the ethanol industry, such as
the VEETC available to gasoline refiners and blenders, could also reduce the market demand for
ethanol, which could reduce prices and our revenues by making it more costly or difficult for us to
produce and sell ethanol. If the federal tax incentives are eliminated or sharply curtailed, we
believe that decreased demand for ethanol will result, which could negatively impact our ability to
operate profitably.
Also, elimination of the tariffs that protect the United States ethanol industry could lead to
the importation of ethanol produced in other countries, especially in areas of the United States
that are easily accessible by international shipping ports. While the 2008 Farm Bill extended the
tariff on imported ethanol through 2011, this
tariff could be repealed earlier which could lead to increased ethanol supplies and decreased
ethanol prices.
15
Table of Contents
If the Federal Volumetric Ethanol Excise Tax Credit (VEETC) expires on December 31, 2010, it
could negatively impact our profitability. The ethanol industry is benefited by VEETC which is a
federal excise tax credit of 4.5 cents per gallon of ethanol blended with gasoline at a rate of at
least 10%. This excise tax credit is set to expire on December 31, 2010. We believe that VEETC
positively impacts the price of ethanol. On December 31, 2009, the biodiesel blenders credit that
benefits the biodiesel industry was allowed to expire. This resulted in the biodiesel industry
ceasing to produce biodiesel because the price of biodiesel without the tax credit was
uncompetitive with the cost of petroleum based diesel. If VEETC is allowed to expire, it could
negatively impact the price we receive for our ethanol and could negatively impact our
profitability.
Changes in environmental regulations or violations of these regulations could be expensive and
reduce our profitability. We are subject to extensive air, water and other environmental laws and
regulations. In addition, some of these laws require our plant to operate under a number of
environmental permits. These laws, regulations and permits can often require expensive pollution
control equipment or operational changes to limit actual or potential impacts to the environment. A
violation of these laws and regulations or permit conditions can result in substantial fines,
damages, criminal sanctions, permit revocations and/or plant shutdowns. In the future, we may be
subject to legal actions brought by environmental advocacy groups and other parties for actual or
alleged violations of environmental laws or our permits. Additionally, any changes in environmental
laws and regulations, both at the federal and state level, could require us to spend considerable
resources in order to comply with future environmental regulations. The expense of compliance could
be significant enough to reduce our profitability and negatively affect our financial condition.
Carbon dioxide may be regulated in the future by the EPA as an air pollutant requiring us to
obtain additional permits and install additional environmental mitigation equipment, which could
adversely affect our financial performance. In 2007, the Supreme Court decided a case in which it
ruled that carbon dioxide is an air pollutant under the Clean Air Act for the purposes of motor
vehicle emissions. The Supreme Court directed the EPA to regulate carbon dioxide from vehicle
emissions as a pollutant under the Clean Air Act. Similar lawsuits have been filed seeking to
require the EPA to regulate carbon dioxide emissions from stationary sources such as our ethanol
plant under the Clean Air Act. Our plant produces a significant amount of carbon dioxide that we
currently vent into the atmosphere. While there are currently no regulations applicable to us
concerning carbon dioxide, if the EPA or the State of Illinois were to regulate carbon dioxide
emissions by plants such as ours, we may have to apply for additional permits or we may be required
to install carbon dioxide mitigation equipment or take other as yet unknown steps to comply with
these potential regulations. Compliance with any future regulation of carbon dioxide, if it occurs,
could be costly and may prevent us from operating the ethanol plant profitably and negatively
affect our financial condition.
The California Low Carbon Fuel Standard may decrease demand for corn based ethanol which could
negatively impact our profitability. Recently, California passed a Low Carbon Fuels Standard
(LCFS). The California LCFS requires that renewable fuels used in California must accomplish
certain reductions in greenhouse gases which are measured using a lifecycle analysis. Management
believes that these new regulations could preclude corn based ethanol produced in the Midwest from
being used in California. California represents a significant ethanol demand market. If we are
unable to supply ethanol to California, it could significantly reduce demand for the ethanol we
produce. Any decrease in ethanol demand could negatively impact ethanol prices which could reduce
our revenues and negatively impact our ability to profitably operate the ethanol plant.
Risks Related to Conflicts of Interest
We are a majority-owned subsidiary of REX American Resources Corporation (REX) and REX may
have relationships that present conflicts of interest with us. We are highly dependent upon REX,
and under our Operating Agreement, REX has the right to appoint a majority of our directors and has
other special rights that other members do not have under our Operating Agreement. REX also has
interests in several other ethanol plants with which we compete. REX may have relationships with
other individuals, companies or organizations with which we will do business or compete. REX and
its other subsidiaries may also become involved in other transactions, some of which may compete
with our business.
16
Table of Contents
Our directors may have relationships with individuals, companies or organizations with which
we do business which may result in conflicts of interest. There may be business relationships
between our directors and other individuals, companies or organizations with which we do business
that may pose potential conflicts of interest with us. These relationships may result in conflicts
of interest with respect to transactions between us and the other individuals, companies or
organizations if our directors and officers put their interests in other companies or their own
personal relationships ahead of what is best for our company. All of our directors are currently
appointed; a majority of which are appointed by REX, however, in certain situations directors may
be appointed by other companies affiliated with us. Our members do not have the right to elect
directors.
ITEM 2. PROPERTIES
Our plant site is made up of three adjacent parcels which together total approximately 183
acres in east central Illinois near Gibson City, Illinois. The address of our plant is 202 N.
Jordan Dr, Gibson City, IL 60936. In June 2009, the plant was substantially completed and plant
operations commenced. The plant consists of the following buildings:
| A grains area, fermentation area, distillation evaporation area; |
||
| A dryer/energy center area; |
||
| A tank farm; |
||
| An auxiliary area; |
||
| An administration building and; |
||
| A storage/maintenance building. |
Our plant is in excellent condition and is capable of functioning at 100% of its production
capacity.
All of our tangible and intangible property, real and personal, serves as the collateral for
the debt financing with First National Bank of Omaha, which is described below under Item 7
Managements Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matter to a vote of our unit holders through the solicitation of proxies
or otherwise during the fiscal year ended December 31, 2009.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
As of December 31, 2009 we had 13,781 membership units outstanding and 328 unit holders of
record. There is no public trading market for our units.
As a limited liability company, we are required to restrict the transfers of our membership
units in order to preserve our partnership tax status. Our membership units may not be traded on
any established securities market or readily traded on a secondary market (or the substantial
equivalent thereof). All transfers are subject to a determination that the transfer will not cause
One Earth Energy to be deemed a publicly traded partnership.
17
Table of Contents
We have not declared or paid any distributions on our units. Except for restrictions imposed
in our loan agreement our board of directors has complete discretion over the timing and amount of
distributions to our unit holders. Provided that we are not in default on loan covenants, and with
the prior approval of our lender, which may not be unreasonably withheld, our loan agreement allows
us to make cash distributions at such times and in such amounts as will permit our unit holders to
satisfy their income tax liability in a timely fashion. Our expectations with respect to our
ability to make future distributions are discussed in greater detail in Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial and operating data as of the dates and for the
periods indicated. The selected balance sheet data and the selected statement of operations data
and other financial data have been derived from our audited financial statements. You should read
the following table in conjunction with Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations and the financial statements and the accompanying notes
included elsewhere in this Form 10-K. Among other things, those financial statements include more
detailed information regarding the basis of presentation for the following financial data.
Five Year Financial Summary
(Amounts In Thousands, Except Per Unit Amounts)
From | ||||||||||||||||||||
Inception, | Transition | |||||||||||||||||||
(November | Period, Two | |||||||||||||||||||
Year Ended | Year Ended | Year Ended | 28, 2005) to | Months Ended | ||||||||||||||||
December 31, | December 31, | October 31, | October 31, | December 31, | ||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2007 | ||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||
Revenues |
$ | 98,190 | $ | | $ | | $ | | $ | | ||||||||||
Cost of goods sold |
84,057 | | | | | |||||||||||||||
Gross profit |
14,133 | | | | | |||||||||||||||
Selling, general and administrative
expenses |
903 | 336 | 684 | 592 | 87 | |||||||||||||||
Operating income (loss) |
13,230 | (336 | ) | (684 | ) | (592 | ) | (87 | ) | |||||||||||
Losses on derivative financial instruments |
219 | 4,704 | | | 859 | |||||||||||||||
Interest expense |
1,886 | | 119 | | | |||||||||||||||
Net income (loss) |
$ | 11,230 | $ | (4,827 | ) | $ | (694 | ) | $ | (540 | ) | (608 | ) | |||||||
Net income (loss) per unit |
$ | 802.14 | $ | (344.79 | ) | $ | (694.00 | ) | $ | (540.00 | ) | $ | (43.43 | ) | ||||||
Balance Sheet Data: |
||||||||||||||||||||
Current assets |
$ | 26,701 | $ | 70 | $ | 37,634 | $ | 640 | $ | 30,312 | ||||||||||
Property and equipment, net |
148,709 | 128,639 | 26,863 | 43 | 36,032 | |||||||||||||||
Total assets |
177,284 | 130,109 | 65,671 | 965 | 67,548 | |||||||||||||||
Current liabilities |
13,780 | 12,112 | 1,937 | 82 | 4,171 | |||||||||||||||
Long-term debt |
89,910 | 54,957 | | | | |||||||||||||||
Derivative financial instruments |
3,818 | 4,494 | | | | |||||||||||||||
Members equity |
$ | 69,776 | $ | 58,546 | $ | 63,734 | $ | 884 | $ | 63,378 |
We were formed on November 28, 2005, thus there is no financial information prior to this
date. See Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations, for information regarding our exit from the development stage into production and
operations.
18
Table of Contents
Quarterly Financial Data
(Unaudited)
(Amounts In Thousands, Except Per Unit Amounts)
(Unaudited)
(Amounts In Thousands, Except Per Unit Amounts)
Quarter Ended | Quarter Ended | Quarter Ended | Quarter Ended | |||||||||||||
March 31, 2009 | June 30, 2009 | September 30, 2009 | December 31, 2009 | |||||||||||||
Revenues |
$ | | $ | | $ | 45,607 | $ | 52,583 | ||||||||
Cost of goods sold |
134 | 472 | 40,775 | 42,676 | ||||||||||||
Gross profit (loss) |
(134 | ) | (472 | ) | 4,832 | 9,907 | ||||||||||
Selling, general and
administrative expenses |
107 | 335 | 195 | 266 | ||||||||||||
Operating income (loss) |
(241 | ) | (807 | ) | 4,637 | 9,641 | ||||||||||
(Losses) gains on
derivative financial
instruments |
(153 | ) | 1,214 | (1,278 | ) | (2 | ) | |||||||||
Interest expense |
| 150 | 921 | 815 | ||||||||||||
Net (loss) income |
$ | (354 | ) | $ | 285 | $ | 2,456 | $ | 8,843 | |||||||
Net (loss) income per unit |
$ | (25.29 | ) | $ | 20.36 | $ | 175.43 | $ | 631.64 |
Quarterly Financial Data
(Unaudited)
(Amounts In Thousands, Except Per Unit Amounts)
(Unaudited)
(Amounts In Thousands, Except Per Unit Amounts)
Quarter Ended | Quarter Ended | Quarter Ended | Quarter Ended | |||||||||||||
March 31, 2008 | June 30, 2008 | September 30, 2008 | December 31, 2008 | |||||||||||||
Revenues |
$ | | $ | | $ | | $ | | ||||||||
Cost of goods sold |
| | | | ||||||||||||
Gross profit (loss) |
| | | | ||||||||||||
Selling, general and
administrative expenses |
231 | 18 | 12 | 75 | ||||||||||||
Operating loss |
(231 | ) | (18 | ) | (12 | ) | (75 | ) | ||||||||
(Losses) gains on
derivative financial
instruments |
(1,210 | ) | 1,426 | (816 | ) | (4,104 | ) | |||||||||
Net (loss) income |
$ | (1,255 | ) | $ | 1,425 | $ | (827 | ) | $ | (4,170 | ) | |||||
Net (loss) income per unit |
$ | (89.64 | ) | $ | 101.79 | $ | (59.07 | ) | $ | (297.86 | ) |
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements that involve future events, our future
performance and our expected future operations and actions. In some cases you can identify
forward-looking statements by the use of words such as may, will, should, anticipate,
believe, expect, plan, future, intend, could, estimate, predict, hope,
potential, continue, or the negative of these terms or other similar expressions. These
forward-looking statements are only our predictions and involve numerous assumptions, risks and
uncertainties. Our actual results or actions may differ materially from these forward-looking
statements for many reasons, including the reasons described in this report. We are not under any
duty to update the forward-looking statements contained in this report. We cannot guarantee future
results, levels of activity, performance or achievements. We caution you not to put undue reliance
on any forward-looking statements, which speak only as of the date of this report. You should read
this report and the documents that we reference in this report and have filed as exhibits,
completely and with the understanding that our actual future results may be materially different
from what we currently expect. We qualify all of our forward-looking statements by these cautionary
statements.
19
Table of Contents
Overview
One Earth Energy, LLC was formed on November 28, 2005. We were formed for the purpose of
raising capital to develop, construct, own and operate a 100 million gallon per year ethanol plant
in east central Illinois near Gibson City, Illinois. We emerged from the development stage and
began producing ethanol and distillers grains at the plant in June 2009. Prior to this, our
efforts were focused primarily on raising capital and constructing our ethanol plant.
Results of Operations
Comparison of Fiscal Years Ended December 31, 2009 and 2008
Revenues
During our fiscal year ended December 31, 2009, we transitioned from a development stage
company to an operational company. Accordingly, we do not yet have comparable income, production
and sales data for the year ended December 31, 2009 from our previous fiscal year.
Our revenues are derived from the sale of our ethanol and distillers grains. For the fiscal
year ended December 31, 2009, we received approximately 85% of our revenue from the sale of fuel
ethanol and approximately 15% of our revenue from the sale of distillers grains. During the early
part of our 2009 fiscal year, the ethanol industry was enduring unfavorable operating conditions.
Thus, we postponed our grind date until margins improved. Increased gasoline and ethanol prices
towards the end of the second quarter of 2009 allowed the ethanol industry to realize more
favorable margins. For the fiscal year ended December 31, 2009, the average selling price per
gallon of ethanol was $1.65 and our sales were based upon approximately 50.6 million gallons of
ethanol. For the fiscal year ended December 31, 2009, the average selling price per ton of
distillers grains was $103.34 and our sales were based upon approximately 143,000 tons of
distillers grains.
Management anticipates that ethanol prices will continue to change in relation to changes in
corn and energy prices. These prices have been somewhat volatile due to the uncertainty that we are
experiencing in the overall economy which has been affecting commodities prices for the last year.
Further, difficult weather conditions during the harvest in the fall of 2009 resulted in increased
corn prices. Management believes that there is currently a surplus of ethanol production capacity
in the United States. We believe this has resulted in several ethanol producers decreasing ethanol
and distillers grains production or halting operations altogether. The amount of this idled ethanol
production capacity has changed throughout our 2009 fiscal year as a result of changes in the
spread between corn prices and ethanol prices. Ethanol producers decreasing or ceasing production
has an effect on the supply of ethanol in the market which can positively impact the price of
ethanol. Much of this idled ethanol capacity could come back online within a reasonably short
period of time which could negatively impact ethanol prices. We anticipate that the ethanol
industry must continue to grow demand for ethanol in order to support current ethanol prices and
retain profitability in the ethanol industry.
A debate continues with respect to changes in the allowable percentage of ethanol blended with
gasoline for use in standard (non-flex fuel) vehicles. Currently, ethanol is blended with
conventional gasoline for use in standard vehicles to create a blend which is 10% ethanol and 90%
gasoline. Estimates indicate that approximately 135 billion gallons of gasoline are sold in the
United States each year. However, gasoline demand may be shrinking in the United States as a result
of the global economic slowdown. Assuming that all gasoline in the United States is blended at a
rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 13.5 billion gallons per
year. This is commonly referred to as the blending wall, which represents a theoretical limit
where more ethanol cannot be blended into the national gasoline pool. This is a theoretical limit
because it is believed that it would not be possible to blend ethanol into every gallon of gasoline
that is used in the United States and it discounts the possibility of additional ethanol used in
higher percentage blends such as E85 used in flex fuel vehicles. Many in the ethanol industry
believe that we will reach this blending wall in 2009 or 2010. The RFS mandate requires that
36 billion gallons of renewable fuels be used each year by 2022 which equates to approximately 27%
renewable fuels used per gallon of gasoline sold. In order to meet the RFS mandate and expand
demand for ethanol,
management believes higher percentage blends of ethanol must be utilized in conventional
automobiles. Such higher percentage blends of ethanol have continued to be a contentious issue.
Automobile manufacturers and environmental groups are lobbying against higher percentage ethanol
blends. State and federal regulations prohibit the use of higher percentage ethanol blends in
conventional automobiles and vehicle manufacturers have indicated that using higher percentage
blends of ethanol in conventional automobiles would void the manufacturers warranty. Without
increases in the allowable percentage blends of ethanol, demand for ethanol may not continue to
increase. Our financial condition may be negatively affected by decreases in the selling price of
ethanol resulting from ethanol supply exceeding demand.
20
Table of Contents
Management believes that the market prices for distillers grains change in relation to the
prices of other animal feeds, such as corn and soybean meal. As a result of the current economic
situation and its effect on commodities prices, there was a significant decrease in the market
prices of corn and soybean meal starting in 2008. This resulted in a significant decrease in
distillers grains prices. We believe that the negative effect of lower corn and soybean meal prices
had on market distillers grains prices was somewhat offset by decreased distillers grains
production by the ethanol industry during our 2009 fiscal year. Management believes that several
ethanol producers decreased ethanol and distillers grains production or ceased production
altogether during 2009 as a result of unfavorable operating conditions. Management believes this
resulted in decreased distillers grains production which we believe had a positive impact on the
market price of distillers grains.
We expect that revenues in future periods will be based upon production of approximately 100
million to 110 million gallons of ethanol per year. This expectation assumes that we will continue
to operate at or near nameplate capacity, which is dependent upon the crush spread realized and
other market conditions.
Cost of Goods Sold
Our cost of goods sold as a percentage of revenues was 85.6% for the fiscal year ended
December 31, 2009. Our two primary costs of producing ethanol and distillers grains are corn costs
and natural gas costs. Corn prices reached historical highs in June 2008, but have decreased since
that time as stronger than expected corn yields materialized and the global financial crisis
brought down the prices of most commodities generally. The cost of corn is the highest input to the
plant and these uncertainties could dramatically affect our expected input cost. We expect
continued volatility in the price of corn, which could significantly impact our cost of goods sold.
Natural gas prices have declined following a peak in mid-2008. Management expects short-term
natural gas prices to remain lower than historical levels.
Selling, General and Administrative Expense
Our selling, general and administrative expenses were $0.9 million for the fiscal year ended
December 31, 2009 compared to $0.3 million for the fiscal year ended December 31, 2008. We
experienced a significant increase in our operating expenses for the fiscal year ended December 31,
2009 compared to the same period of 2008 primarily due to an increase in our employees as a result
of our plant becoming fully operational. Operating expenses include salaries and benefits of
administrative employees, taxes, professional fees and other general costs. We expect these
expenses, on an annualized basis, to be comparable to the fiscal year ended December 31, 2009 in
future periods.
Operating Income
As a result of the foregoing, our income from operations for the fiscal year ended December
31, 2009 was approximately $13.2 million compared to a loss of $0.3 million for the fiscal year
ended December 31, 2008.
Interest and Other Income
Interest and other income was $105,000 for the fiscal year ended December 31, 2009 and was
consistent with the 2008 results. We do not expect interest and other income to be significant in
subsequent periods.
Interest Expense
Interest expense was $1.9 million for the fiscal year ended December 31, 2009. We reported no
interest expense for the fiscal year ended December 31, 2008. The increase was primarily
attributable to the higher amounts of average debt outstanding we had upon the completion of
construction of our ethanol plant. In addition, we did not capitalize interest during 2009 as we
did in 2008 while we were completing the construction of our ethanol plant. Based on current
interest rates and debt levels, we expect interest expense in 2010 to be in the range of $2.5
million to $3.0 million.
21
Table of Contents
Losses on derivative financial instruments
We recognized losses of approximately $0.2 million and $4.7 million during the fiscal years
ended December 31, 2009 and 2008, respectively related to interest rate swap agreements. In
general, declining interest rates have a negative effect on our interest rate swaps as our swaps
fixed the interest rate of variable rate debt. Should interest rates continue to decline, we would
expect to experience continued losses on the interest rate swaps. We would expect to incur gains
on the interest rate swaps should interest rates increase. We cannot predict the future movements
in interest rates; thus, we are unable to predict the likelihood or amounts of future gains or
losses related to interest rate swaps.
Net income/loss
As a result of the foregoing, net income for the fiscal year ended December 31, 2009 was $11.2
million, an increase of $16.0 million from a loss of $4.8 million for the fiscal year ended
December 31, 2008.
Additional Information
The following table shows additional data regarding production and price levels for our
primary inputs and products for the fiscal year ended December 31, 2009.
Fiscal Year Ended | ||||
December 31, 2009 | ||||
Production: |
||||
Ethanol sold (gallons) |
50,560,316 | |||
Distillers grains sold (tons) |
143,095 | |||
Revenues: |
||||
Ethanol average price per gallon |
$ | 1.65 | ||
Distillers grains average price per ton |
$ | 103.34 | ||
Primary Inputs: |
||||
Corn ground (bushels) |
18,600,712 | |||
Natural gas purchased (MMBTU) |
1,483,285 | |||
Costs of Primary Inputs: |
||||
Corn average price per bushel ground |
$ | 3.613 | ||
Natural gas average price per MMBTU |
$ | 3.844 | ||
Other Costs: |
||||
Chemical and additive costs per gallon of ethanol sold |
$ | 0.051 | ||
Denaturant cost per gallon of ethanol sold |
$ | 0.040 | ||
Electricity cost per gallon of ethanol sold |
$ | 0.038 | ||
Direct labor cost per gallon of ethanol sold |
$ | 0.028 |
During the fiscal year ended December 31, 2009, the market price of ethanol varied between
approximately $1.45 per gallon and approximately $2.15 per gallon. Our average price per gallon of
ethanol sold was approximately $1.65. If our average price received per gallon of ethanol had been
10% lower, our net income for the
fiscal year ended December 31, 2009 would have decreased by approximately $8.4 million assuming our
other revenues and costs remained unchanged.
22
Table of Contents
During the fiscal year ended December 31, 2009, the market price of distillers grains varied
between approximately $89.00 per ton and approximately $162.00 per ton. Our average price per ton
of distillers grains sold was approximately $103.34. If our average price received per ton of
distillers grains had been 10% lower, our net income for the fiscal year ended December 31, 2009
would have decreased by approximately $1.5 million assuming our other revenues and costs remained
unchanged.
During the fiscal year ended December 31, 2009, the market price of corn varied between
approximately $3.04 per bushel and approximately $4.44 per bushel. Our average price per bushel of
corn ground was approximately $3.61. If our average price paid per bushel of corn had been 10%
higher, our net income for the fiscal year ended December 31, 2009 would have decreased by
approximately $6,576,000 assuming our other revenues and costs remained unchanged.
During the fiscal year ended December 31, 2009, the market price of natural gas varied between
approximately $2.05 per MMBTU and approximately $6.26 per MMBTU. Our average price per MMBTU of
natural gas was approximately $3.84. If our average price paid per MMBTU of natural gas had been
10% higher, our net income for the fiscal year ended December 31, 2009 would have decreased by
approximately $560,000, assuming our other revenues and costs remained unchanged.
We are currently operating at full, or nearly full, capacity. However, in the event that we
decrease our production of ethanol, our production of distillers grains would also decrease
accordingly. Such a decrease in our volume of production of ethanol and distillers grains would
result in lower revenues. However, if we decreased production, we would require a corresponding
decreased quantity of corn and natural gas, thereby lowering our costs of goods sold. Therefore,
the effect of a decrease in our product volume would be largely dependent on the market prices of
the products we produce and the inputs we use to produce our products at the time of such a
production decrease. We anticipate operating at less than full capacity only if operating margins
become unfavorable or we experience technical difficulties in operating the plant.
Comparison of Fiscal Years Ended December 31, 2008 and October 31, 2007
During our fiscal years ended December 31, 2008 and October 31, 2007, we were a development
stage company and were primarily focused on the construction of our ethanol plant and other related
issues. Accordingly, we do not have production, sales and related data for the years ended December
31, 2008 or October 31, 2007.
Selling, General and Administrative Expense
Our selling, general and administrative expenses were $0.3 million for the fiscal year ended
December 31, 2008 compared to $0.7 million for the fiscal year ended October 31, 2007. The
decrease is primarily related to higher legal and professional fees incurred for the fiscal year
ended October 31, 2007 related to financing matters and negotiations with potential equity
investors.
Interest and Other Income
Interest and other income was $213,000 for the fiscal year ended December 31, 2008 and was
consistent with the fiscal year ended October 31, 2007 results.
Interest Expense
Interest expense was $119,000 for the fiscal year ended October 31, 2007 and related to
interim financing needed while we were conducting efforts to attract and obtain equity financing.
There was no interest expense reported for the fiscal year ended December 31, 2008 as we
capitalized interest during that year since we were completing the construction of our ethanol
plant.
23
Table of Contents
Losses on derivative financial instruments
We recognized losses of approximately $4.7 million during the fiscal year ended December 31,
2008 related to interest rate swap agreements. Since we entered into the swap agreements
subsequent to October 31, 2007, we reported no gains or losses from derivative financial
instruments during the fiscal year ended October 31, 2007. In general, declining interest rates
have a negative effect on our interest rate swaps as our swaps fixed the interest rate of variable
rate debt. Should interest rates continue to decline, we would expect to experience continued
losses on the interest rate swaps. We would expect to incur gains on the interest rate swaps
should interest rates increase. We cannot predict the future movements in interest rates; thus, we
are unable to predict the likelihood or amounts of future gains or losses related to interest rate
swaps.
Net loss
As a result of the foregoing, net loss for the fiscal year ended December 31, 2008 was $4.8
million, an increase of $4.1 million from a loss of $0.7 million for the fiscal year ended October
31, 2007.
Discussion of Two Months Ended December 31, 2007
During the two months ended December 31, 2007, we incurred selling, general and administrative
expenses of $0.1 million; these costs were associated with our planning and other activities
related to plant construction. During the two months ended December 31, 2007, we recognized losses
of approximately $0.9 million related to interest rate swap agreements. We spent approximately
$6.6 million during the two months ended December 31, 2007 on capital expenditures as we began
construction of our ethanol plant.
Changes in Financial Condition for the Fiscal Year Ended December 31, 2009
We experienced an increase in our current assets at December 31, 2009 compared to December 31,
2008. We experienced an increase of approximately $6.3 million in the value of our inventory at
December 31, 2009 compared to December 31, 2008, as a result of the commencement of operations at
our plant. Additionally, at December 31, 2009 we had trade accounts receivable of approximately
$5.5 million compared to no trade accounts receivable at December 31, 2008; again, the result of
the commencement of operations at our plant. We also had cash of $12.1 million at December 31,
2009, compared to cash of $0.02 million at December 31, 2008 as we generated cash from operations
during the year ended December 31, 2009. We had prepaid and other current assets of $2.9 million
at December 31, 2009, compared to $0.1 million at December 31, 2008; the increase results from
activities associated with commencement of operations at our plant. At December 31, 2009, we had
prepaid natural gas and other prepaid manufacturing supplies of $1.1 million and we also had
property taxes refundable of $1.0 million.
We experienced an increase in our total current liabilities on December 31, 2009 compared to
December 31, 2008. We experienced an increase of approximately $7.0 million in the current portion
of our long term debt at December 31, 2009 compared to December 31, 2008 due to the conversion of
our construction loan to a term loan with principal and interest payments becoming due on a
quarterly basis commencing in July 2009. We also experienced an increase of approximately $3.1
million for accrued expenses at December 31, 2009 compared to December 31, 2008; and an increase of
approximately $1.0 million in our accounts payable for corn purchases and other items at December
31, 2009 compared to December 31, 2008. All of these increases relate primarily to the commencement
of operations at our plant. Such increases were partially offset by a decrease in our construction
payable of approximately $9.8 million at December 31, 2009 compared to December 31, 2008.
We experienced an increase in our long-term liabilities as of December 31, 2009 compared to
December 31, 2008. At December 31, 2009, we had approximately $89.9 million outstanding in the form
of long-term loans, compared to approximately $55.0 million at December 31, 2008. This increase is
attributed to cash we borrowed from our long-term loans to complete the construction of our
facility and commence operations.
24
Table of Contents
Critical Accounting Policies
We believe the application of the following accounting policies, which are important to our
financial position and results of operations, require significant assumptions, judgments and
estimates on the part of management. We base our assumptions, judgments, and estimates on
historical experience, current trends and other factors that management believes to be relevant at
the time our financial statements are prepared. On a regular basis, management reviews the
accounting policies, assumptions, estimates and judgments to ensure that our financial statements
are presented in accordance with generally accepted accounting principles (GAAP). However, because
future events and their effects cannot be determined with certainty, actual results could differ
from our assumptions and estimates, and such differences could be material. Further, if different
assumptions, judgments and estimates had been used, the results could have been different and such
differences could be material. For a summary of all of our accounting policies, including the
accounting policies discussed below, see Note 1 of the Notes to the Financial Statements.
Management believes that the following accounting policies are the most critical to aid in fully
understanding and evaluating our reported financial results, and they require managements most
difficult, subjective or complex judgments, resulting from the need to make estimates about the
effect of matters that are inherently uncertain.
Inventory Reserves Inventory is recorded at the lower of cost or market. The market value
of inventory is often dependent upon fluctuating commodity prices. If these estimates are
inaccurate, we may be exposed to market conditions that require an additional reduction in the
value of certain inventories affected. We permanently write down inventory for items that have a
cost greater than net realizable value. There were no inventory reserves or write downs at
December 31, 2009 and December 31, 2008. Assumptions we use to estimate the necessary reserve or
write down have not significantly changed over the last two fiscal years. The assumptions we
currently use include our estimates of the selling prices of ethanol and distillers grains and the
cost of corn.
Financial Instruments Forward grain purchase and ethanol sale contracts are accounted for
under the normal purchases and normal sales scope exemption of ASC 815, Derivatives and Hedging
(ASC 815) because these arrangements are for purchases of corn and sales of ethanol that will be
delivered in quantities expected to be used by us over a reasonable period of time in the normal
course of business. We use derivative financial instruments to manage our balance of fixed and
variable rate debt. We do not hold or issue derivative financial instruments for trading or
speculative purposes. Interest rate swap agreements involve the exchange of fixed and variable
rate interest payments and do not represent an actual exchange of the notional amounts between the
parties. Our swap agreements were not designated for hedge accounting pursuant to ASC 815. The
interest rate swaps are recorded at their fair values and the changes in fair values are recorded
as gain or loss on derivative financial instruments in the accompanying statements of operations.
Recoverability of Long-Lived Assets We review long-lived assets for impairment whenever
events or changes in circumstances indicate that the related carrying amounts may not be
recoverable. Impairment testing for assets requires various estimates and assumptions, including an
allocation of cash flows to those assets and, if required, an estimate of the fair value of those
assets. Given the significant assumptions required and the possibility that actual conditions will
differ, we consider the assessment of the recoverability of long-lived assets of property and
equipment to be a critical accounting estimate. Any adverse change in the spread between ethanol
and corn prices could result in impairment charges. Factors that affect the spread between ethanol
and corn prices include overall market conditions for ethanol and corn, the availability and price
of locally supplied corn and our ability to sell ethanol to existing customers.
25
Table of Contents
Trends and Uncertainties Impacting the Ethanol Industry and Our Operations
We are subject to industry-wide factors, trends and uncertainties that affect our operating
and financial performance. These factors include, but are not limited to, the available supply and
cost of corn from which our ethanol and distillers grains are processed; the cost of natural gas,
which we use in the production process; new technology developments in the industry; dependence on
our ethanol marketer and distillers grains marketer to market and distribute our products; the
intensely competitive nature of the ethanol industry; and possible changes in
legislation/regulations at the federal, state and/or local level. These factors as well as other
trends and uncertainties are described in more detail below.
Economic Downturn
The U.S. stock markets crumbled during the winter of 2009 upon the collapse of multiple major
financial institutions, the federal governments takeover of two major mortgage companies, Freddie
Mac and Fannie Mae, and the Presidents enactment of a $700 billion bailout plan pursuant to which
the federal government directly invested in troubled financial institutions. Financial institutions
across the country have lost billions of dollars due to the extension of credit for the purchase
and refinance of over-valued real property. The U.S. economy is in the midst of a recession, with
increasing unemployment rates and decreasing retail sales. These factors have caused significant
economic stress and upheaval in the financial and credit markets in the United States, as well as
abroad. Credit markets have tightened and lending requirements have become more stringent. Oil
prices and demand for fuel has fluctuated greatly and generally trended downward during our 2009
fiscal year. We believe that these factors have contributed to a decrease in the prices at which we
are able to sell our ethanol which may persist throughout all or parts of fiscal year 2010.
Corn Prices
Our cost of goods sold consists primarily of costs relating to the corn and natural gas
supplies necessary to produce ethanol and distillers grains for sale. On December 10, 2009, the
USDA released its Crop Production report, which estimated the 2009 grain corn crop at approximately
12.9 billion bushels, approximately 7% higher than the USDAs estimate of the 2008 corn crop of
12.1 billion bushels. Corn prices reached historical highs in June 2008, but have come down sharply
since that time as stronger than expected corn yields materialized and the global financial crisis
brought down the prices of most commodities generally. We expect continued volatility in the price
of corn, which could significantly impact our cost of goods sold. The number of operating ethanol
plants nationwide has declined over the past year due to the economic down turn and failed risk
taking by some large competitors.
The price at which we will purchase corn depends on prevailing market prices. There is no
assurance that a corn shortage will not develop, particularly if there is an extended drought or
other production problems in the 2010 crop year. We anticipate that our plants profitability could
be negatively impacted during periods of high corn prices that are not offset by increased ethanol
prices. Although we expect the negative impact on profitability resulting from high corn prices to
be mitigated, in part, by the increased value of the distillers grains we intend to market (as the
price of corn and the price of distillers grains tend to fluctuate in tandem), we still may be
unable to operate profitably if high corn prices are sustained for a significant period of time.
Ethanol Industry Competition
We operate in a competitive industry and compete with a number of larger ethanol producers.
The significant economic down turn in the ethanol industry has driven many large and small
producers out of the industry. The ethanol industry is starting to emerge from the difficult
collapse that has occurred since the commencement of our operations in June 2009.
Distillers Grains Marketing
With the advancement of research into the feeding of distillers grains based rations to
poultry, swine and beef, we anticipate these markets will continue to expand, creating additional
demand for distillers grains.
Technology Developments
One current trend in ethanol production research is to develop an efficient method of
producing ethanol from cellulose-based biomass, such as agricultural waste, forest residue,
municipal solid waste, and energy crops. This trend is driven by the fact that cellulose-based
biomass is generally cheaper than corn, and producing ethanol from cellulose-based biomass would
create opportunities to produce ethanol in areas which are unable to grow corn. Although current
technology is not sufficiently efficient to be competitive, the United States Congress is
consistently increasing the availability of incentives to promote the development of commercially
viable cellulose based ethanol production technology.
Advances and changes in the technology used to produce ethanol may make the technology we are
installing in our plant less desirable or obsolete. As of this date there are no known technologies
that would cause
our plant to become uncompetitive or completely obsolete.
26
Table of Contents
Government Legislation and Regulations
The ethanol industry and our business are assisted by various federal ethanol supports and tax
incentives, including those included in the Energy Policy Act of 2005 and the Energy Independence
and Security Act of 2007. Government incentives for ethanol production, including federal tax
incentives, may be reduced or eliminated in the future, which could hinder our ability to operate
at a profit. Federal ethanol supports, such as the renewable fuels standard (RFS), help support a
market for ethanol that might disappear without this incentive; as such, a waiver of minimum levels
of renewable fuels included in gasoline could have a material adverse effect on our results of
operations. The elimination or reduction of tax incentives to the ethanol industry, such as the
VEETC available to gasoline refiners and blenders, could reduce the market for ethanol, causing
prices, revenues, and profitability to decrease. VEETC is set to expire on December 31, 2010.
Liquidity and Capital Resources
Based on financial forecasts performed by our management, we anticipate that we will have
sufficient cash from our current credit facilities and cash from our operations to continue to
operate the ethanol plant for the next 12 months. We do not anticipate seeking additional equity or
debt financing during our 2010 fiscal year. However, should we experience unfavorable operating
conditions in the future, we may have to secure additional debt or equity sources for working
capital or other purposes.
As a result of current conditions in the ethanol market that have presented favorable
operating conditions, we have been able to eliminate any borrowing from our revolving line of
credit. However, should we experience unfavorable operating conditions in the ethanol industry that
prevent us from profitably operating the ethanol plant; we could have difficulty maintaining our
liquidity.
Cash Flows Provided By/ Used in Operating Activities
Net cash provided by operating activities was approximately $4.8 million for the fiscal year
ended December 31, 2009 compared to cash used of approximately $0.1 million for the fiscal year
ended December 31, 2008. For the fiscal year ended December 31, 2009, cash was provided by net
income of $11.2 million, adjusted for non-cash items of $4.6 million, which consisted of
depreciation and amortization and changes in the fair value of derivative financial instruments.
Increases in accounts receivable, inventory and prepaid expenses and other assets used cash of $5.5
million, $6.3 million and $3.4 million, respectively, a result of the plant becoming operational
during the current year. In addition, increases in accounts payable, accrued real estate taxes and
other liabilities provided cash of $1.0 million, $1.9 million and $1.1 million, respectively, a
result of the plant becoming operational during the current year.
Net cash used in operating activities was $0.1 million for the fiscal year ended December 31,
2008 compared to $0.6 million for the fiscal year ended October 31, 2007. For the fiscal year
ended December 31, 2008, cash was used by net loss of $4.8 million, adjusted for non-cash items of
$4.7 million, which consisted of depreciation and amortization and changes in the fair value of
derivative financial instruments.
Cash Flows Used in Investing Activities
Net cash used in investing activities was approximately $24.9 million for the fiscal year
ended December 31, 2009 compared to approximately $86.2 million for the fiscal year ended December
31, 2008. The majority of these cash flows related to the construction of our ethanol plant during
2008 and 2009.
Net cash used in investing activities was approximately $86.2 million for the fiscal year
ended December 31, 2008 compared to approximately $26.1 million for the fiscal year ended October
31, 2007. The majority of these cash flows related to the construction of our ethanol plant during
2007 and 2008.
27
Table of Contents
Cash Flows Provided by Financing Activities
Net cash provided by financing activities was approximately $32.2 million for the fiscal year
ended December 31, 2009 compared to approximately $56.0 million for the fiscal year ended December
31, 2008. Borrowings on our construction loan were $39.2 million during the fiscal year ended
December 31, 2009. As we converted the construction loan into a term loan during the fiscal year
ended December 31, 2009, we made principal payments of $7.0 million on the term loan.
Net cash provided by financing activities was approximately $56.0 million for the fiscal year
ended December 31, 2008 compared to approximately $63.7 million for the fiscal year ended October
31, 2007. Borrowings on our construction loan were $56.0 million during the fiscal year ended
December 31, 2008, used to fund expenditures incurred with the construction of our ethanol plant.
Credit Facilities
On September 20, 2007, we entered into a loan agreement with First National Bank of Omaha
establishing a senior credit facility for the construction of our plant. The credit facility was in
the amount of $111,000,000 consisting of a $100,000,000 construction note, a $10,000,000 revolving
line of credit and a $1,000,000 letter of credit. In September 2008, we extended the $10,000,000
revolving line of credit to expire in September 2009, which is subject to certain borrowing base
limitations. In September 2009, we extended this revolving line of credit to expire in
September 2010. In September 2010, we extended this revolving line of credit to expire in May
2011. At December 31, 2009, there were no outstanding borrowings on the revolving line of credit.
We are subject to certain financial covenants under the loan agreement. The most restrictive of
which are debt service coverage ratio requirements, net worth requirements and working capital
requirements. We are required to maintain a fixed charge coverage ratio of no less than 1.25:1.0
for all periods after July 31, 2009. For the first fiscal quarter after July 31, 2009 our fixed
charge coverage ratio is measured on a rolling one quarter basis, for the second fiscal quarter
after July 31, 2009 our fixed charge coverage ratio is measured on a rolling two quarter basis, and
for the third fiscal quarter after July 31, 2009 our fixed charge coverage ratio is measured on a
rolling three quarter basis. Thereafter, our fixed charge coverage ratio will be measured on a
rolling four quarter basis. Our fixed charge coverage ratio is calculated by comparing our
adjusted EBITDA, meaning EBITDA less taxes, capital expenditures and allowable distributions, to
our scheduled payments of the principal and interest on our obligations to our lender, other than
principal repaid on our revolving loan and long term revolving note. For the period ended December
31, 2009, our fixed charge coverage ratio was 3.67:1.0.
We are also required to maintain a minimum net worth of approximately $58.5 million. It shall
be measured annually at the end of each fiscal year. In subsequent years, our minimum net worth
requirement will increase by the greater of $500,000 or the amount of undistributed earnings
accumulated during the prior fiscal year. At December 31, 2009, our net worth was approximately
$69.8 million.
We are also required to maintain a minimum amount of working capital, which is calculated as
our current assets plus the amount available for drawing under our Long Term Revolving Note, less
current liabilities. From November 1, 2009 through February 28, 2010, our minimum working capital
had to be $4,000,000. Beginning March 1, 2010 through July 31, 2010, our minimum working capital
must be $7,000,000. After August 1, 2010, our minimum working capital must be $10,000,000. At
December 31, 2009, our working capital was approximately $22.7 million.
Outlook
We believe we have sufficient working capital and credit availability to fund our commitments
and to maintain our operations at their current levels for the next twelve months and foreseeable
future. We plan to construct corn silos at our plant during 2010; we expect to use cash from
operations to pay for these capital expenditures, which we anticipate will cost approximately $5
million.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
28
Table of Contents
Tabular Disclosure of Contractual Obligations
In the ordinary course of business, we enter into agreements under which we are obligated to
make legally enforceable future cash payments. These agreements include obligations related to
purchasing inventory, incurring indebtedness, interest rate management and utility agreements.
The following table summarizes by category expected future cash outflows associated with
contractual obligations in effect as of December 31, 2009 (amounts in thousands):
Payment due by period | ||||||||||||||||||||
Less | ||||||||||||||||||||
than 1 | 1-3 | 3-5 | More than | |||||||||||||||||
Contractual Obligations | Total | Year | Years | Years | 5 Years | |||||||||||||||
Lease obligations (a) |
$ | 59 | $ | 20 | $ | 39 | $ | | $ | | ||||||||||
Forward corn purchase
contracts |
12,448 | 12,448 | | | | |||||||||||||||
Long-term debt obligations |
97,999 | 8,089 | 30,735 | 59,175 | | |||||||||||||||
Interest on variable rate
debt (b) |
12,816 | 3,186 | 8,024 | 1,606 | | |||||||||||||||
Other (c) |
6,457 | 1,480 | 2,750 | 1,314 | 913 | |||||||||||||||
Total (d) |
$ | 129,779 | $ | 25,223 | $ | 41,548 | $ | 62,095 | $ | 913 | ||||||||||
(a) | Amounts include rentals of $20,000 per year for the lease of our well site. |
|
(b) | The interest rates effective as of December 31, 2009 for variable rate loans were used
to calculate future payments of interest on variable rate debt. |
|
(c) | Amounts represent payments due related to railcar agreements and utility agreements. |
|
(d) | We are not able to determine the likely settlement period, if any, for interest rate
swaps, accordingly, $5,231,000 of liabilities for derivative financial instruments have
been excluded from the table above. |
Seasonality of Ethanol Sales
We experience some seasonality of demand for our ethanol. Since ethanol is predominantly
blended with conventional gasoline for use in automobiles, ethanol demand tends to shift in
relation to gasoline demand. As a result, we experience some seasonality of demand for ethanol in
the summer months related to increased driving. In addition, we experience some increased ethanol
demand during holiday seasons related to increased gasoline demand.
Impact of Inflation
The impact of inflation has not been material to our results of operations for the past three
fiscal years.
29
Table of Contents
ITEM 7A. 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.
Interest Rate Risk
We are exposed to market risk from changes in interest rates. Exposure to interest rate risk
results primarily from holding term and revolving loans that bear variable interest rates.
Specifically, we have approximately $98.0 million outstanding in debt as of December 31, 2009, all
of which is variable-rate. Interest rates on our variable-rate debt are determined based upon the
market interest rate of LIBOR plus 300 to 310 basis points. A 10% adverse change (for example from
4.0% to 4.4%) in market interest rates would affect our interest cost on such debt by approximately
$0.3 million per year in the aggregate.
We entered into two forward interest rate swaps in the notional amounts of $50.0 million and
$25.0 million with the First national Bank of Omaha during the fiscal years ended December 31, 2008
and 2007. The $50.0 million swap fixed the variable interest rate of a portion of our term loan at
7.9%, while the $25.0 million swap fixed the variable interest rate of a portion of our term loan
at 5.49%. The swap settlements commenced on July 31, 2009; the $50.0 million swap terminates on
July 8, 2014 and the $25.0 million swap terminates on July 31, 2011. A hypothetical 10% change
(for example, from 4.0% to 3.6%) in market interest rates at December 31, 2009 would change the
fair value of the interest rate swaps by approximately $0.5 million.
Commodity Price Risk
We do not employ derivative instruments such as futures and options to hedge our commodity
price risk. Our strategy is to flat price a portion of our electricity and natural gas
requirements, and to purchase the remainder on a floating index. We purchase all of our corn
through Alliance Grain.
A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural
gas price risk. Market risk related to these factors is estimated as the potential change in income
resulting from a hypothetical 10% adverse change in the fair value of our corn and natural gas
prices and average ethanol price as of December 31, 2009. The volumes are based on our actual use
and sale of these commodities for the year ended December 31, 2009. The results of this analysis
are as follows:
Hypothetical | Approximate | |||||||||||||||
Volume for the year ended | Adverse Change in | Adverse Change to | ||||||||||||||
December 31. 2009 | Unit of Measure | Price | Income | |||||||||||||
Natural Gas |
1,483,285 | MMBtu | 10 | % | $ | 570,000 | ||||||||||
Ethanol |
50,560,316 | Gallons | 10 | % | $ | 8,342,000 | ||||||||||
Corn |
18,600,712 | Bushels | 10 | % | $ | 6,720,000 |
30
Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ONE EARTH ENERGY, LLC
BALANCE SHEETS
(Amounts in Thousands)
BALANCE SHEETS
(Amounts in Thousands)
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 12,099 | $ | 16 | ||||
Accounts receivable |
5,457 | | ||||||
Inventory |
6,290 | | ||||||
Prepaid expenses |
1,579 | 54 | ||||||
Other current assets |
1,276 | | ||||||
Total current assets |
26,701 | 70 | ||||||
Property and equipment, net |
148,709 | 128,639 | ||||||
Deferred financing costs, net |
1,259 | 1,364 | ||||||
Restricted cash |
20 | 20 | ||||||
Other assets |
595 | 16 | ||||||
Total assets |
$ | 177,284 | $ | 130,109 | ||||
Liabilities and equity: |
||||||||
Current liabilities: |
||||||||
Accounts payable, trade |
$ | 1,016 | $ | 7 | ||||
Construction payable |
| 9,750 | ||||||
Current portion of long-term debt |
8,089 | 1,085 | ||||||
Accrued real estate taxes |
1,930 | 7 | ||||||
Derivative financial instruments |
1,413 | 1,069 | ||||||
Other current liabilities |
1,332 | 194 | ||||||
Total current liabilities |
13,780 | 12,112 | ||||||
Long-term liabilities: |
||||||||
Long-term debt |
89,910 | 54,957 | ||||||
Derivative financial instruments |
3,818 | 4,494 | ||||||
Total long-term liabilities |
93,728 | 59,451 | ||||||
Commitments and contingencies |
||||||||
Members equity: |
||||||||
Members capital (13,781 units issued and outstanding in
2009 and 2008 ) |
65,215 | 65,215 | ||||||
Retained earnings (accumulated deficit) |
4,561 | (6,669 | ) | |||||
Total members equity |
69,776 | 58,546 | ||||||
Total liabilities and equity |
$ | 177,284 | $ | 130,109 | ||||
See notes to financial statements.
F-1
Table of Contents
ONE EARTH ENERGY, LLC
STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Unit Amounts)
STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Unit Amounts)
Transition | ||||||||||||||||
Period Two | ||||||||||||||||
Year Ended | Year Ended | Months Ended | ||||||||||||||
December 31, | October 31, | December 31, | ||||||||||||||
2009 | 2008 | 2007 | 2007 | |||||||||||||
Revenues |
$ | 98,190 | $ | | $ | | $ | | ||||||||
Cost of sales |
84,057 | | | | ||||||||||||
Gross profit |
14,133 | | | | ||||||||||||
Selling, general and administrative expenses |
(903 | ) | (336 | ) | (684 | ) | (87 | ) | ||||||||
Operating income (loss) |
13,230 | (336 | ) | (684 | ) | (87 | ) | |||||||||
Interest and other income |
105 | 213 | 109 | 338 | ||||||||||||
Interest expense |
(1,886 | ) | | (119 | ) | | ||||||||||
Losses on derivative financial instruments, net |
(219 | ) | (4,704 | ) | | (859 | ) | |||||||||
Net income (loss) |
$ | 11,230 | $ | (4,827 | ) | $ | (694 | ) | $ | (608 | ) | |||||
Weighted average units outstanding basic and diluted |
14 | 14 | 1 | 14 | ||||||||||||
Basic and diluted net income (loss) per unit |
$ | 802.14 | $ | (344.79 | ) | $ | (694.00 | ) | $ | (43.43 | ) | |||||
See notes to financial statements.
F-2
Table of Contents
ONE EARTH ENERGY, LLC
STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
Transition | ||||||||||||||||
Period Two | ||||||||||||||||
Year Ended | Year Ended | Months Ended | ||||||||||||||
December 31, | October 31, | December 31, | ||||||||||||||
2009 | 2008 | 2007 | 2007 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||||||
Net income (loss) |
$ | 11,230 | $ | (4,827 | ) | $ | (694 | ) | $ | (608 | ) | |||||
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities: |
||||||||||||||||
Depreciation and amortization |
4,949 | 18 | 3 | | ||||||||||||
Derivative financial instruments |
(332 | ) | 4,704 | | 859 | |||||||||||
Expiration of land option |
| | 17 | | ||||||||||||
Changes in assets and liabilities: |
||||||||||||||||
Accounts receivable, net |
(5,457 | ) | (4 | ) | | (4 | ) | |||||||||
Inventory, net |
(6,290 | ) | | | | |||||||||||
Prepaid expenses and other assets |
(3,381 | ) | 11 | (20 | ) | (19 | ) | |||||||||
Accounts payable, trade |
1,009 | (12 | ) | 43 | (122 | ) | ||||||||||
Accrued real estate taxes |
1,923 | | | | ||||||||||||
Other current liabilities |
1,138 | (4 | ) | 51 | 153 | |||||||||||
Net cash provided by (used in) operating
activities |
4,789 | (114 | ) | (600 | ) | 259 | ||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||
Restricted cash |
| (20 | ) | | | |||||||||||
Payments for land options |
| | (10 | ) | | |||||||||||
Capital expenditures |
(24,879 | ) | (86,143 | ) | (26,076 | ) | (6,637 | ) | ||||||||
Net cash used in investing activities |
(24,879 | ) | (86,163 | ) | (26,086 | ) | (6,637 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||
Payments for financing costs |
(35 | ) | | (1,174 | ) | (190 | ) | |||||||||
Payments for deferred offering costs |
| | (598 | ) | (5 | ) | ||||||||||
Payments due to rescinders |
| | 44 | | ||||||||||||
Proceeds from long-term debt |
39,208 | 56,042 | 1,010 | | ||||||||||||
Member contributions |
| | 64,378 | 253 | ||||||||||||
Payments of long-term debt |
(7,000 | ) | | | (1,010 | ) | ||||||||||
Net cash provided by (used in) financing
activities |
32,173 | 56,042 | 63,660 | (952 | ) | |||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS |
12,083 | (30,235 | ) | 36,974 | (7,330 | ) | ||||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
16 | 30,251 | 607 | 37,581 | ||||||||||||
CASH AND CASH EQUIVALENTS, END OF YEAR |
$ | 12,099 | $ | 16 | $ | 37,581 | $ | 30,251 | ||||||||
Non cash activities Accrued capital expenditures |
$ | | $ | | $ | 753 | $ | 2,563 | ||||||||
Non cash activities Payable related to plant
construction refinanced to long-term debt |
$ | | $ | 9,750 | $ | | $ | | ||||||||
Non cash activities Member unit recissions in
accounts payable |
$ | | $ | | $ | 45 | $ | | ||||||||
Non cash activities Deferred offering costs
included in accounts payable |
$ | | $ | | $ | 24 | $ | | ||||||||
Non cash activities Deferred offering costs
offset against member contributions |
$ | | $ | | $ | 834 | $ | | ||||||||
Non cash activities Deposit applied to land
purchase |
$ | | $ | | $ | 30 | $ | |
See notes to financial statements.
F-3
Table of Contents
ONE EARTH ENERGY, LLC
STATEMENTS OF CHANGES IN MEMBERS EQUITY
(Amounts in thousands)
STATEMENTS OF CHANGES IN MEMBERS EQUITY
(Amounts in thousands)
Accumulated Earnings | ||||||||||||
Members Capital | (Deficit) | Total | ||||||||||
Balance October 31, 2006 |
$ | 1,425 | (540 | ) | 885 | |||||||
Contributions from
members |
64,620 | 64,620 | ||||||||||
Unit subscriptions
receivable |
(253 | ) | (253 | ) | ||||||||
Costs of raising equity
capital |
(834 | ) | (834 | ) | ||||||||
Net loss |
(694 | ) | (694 | ) | ||||||||
Units exchanged for
lease agreement |
10 | | 10 | |||||||||
Balance October 31, 2007 |
64,968 | (1,234 | ) | 63,734 | ||||||||
Contributions from
members |
252 | 252 | ||||||||||
Offering costs |
(5 | ) | | (5 | ) | |||||||
Net loss for two months
ended December 31, 2007 |
| (608 | ) | (608 | ) | |||||||
Balance, December 31,
2007 |
65,215 | (1,842 | ) | 63,373 | ||||||||
Net loss for year ended
December 31, 2008 |
| (4,827 | ) | (4,827 | ) | |||||||
Balance, December 31,
2008 |
65,215 | (6,669 | ) | 58,546 | ||||||||
Net income for year
ended December 31, 2009 |
| 11,230 | 11,230 | |||||||||
Balance, December 31,
2009 |
$ | 65,215 | $ | 4,561 | $ | 69,776 | ||||||
See notes to financial statements.
F-4
Table of Contents
ONE EARTH ENERGY, LLC
Notes to Financial Statements
Notes to Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
One Earth Energy, LLC (the Company), was organized on November 28, 2005, as an Illinois
limited liability company. The Company is a majority-owned subsidiary of Farmers Energy One Earth,
LLC (Farmers Energy), which is an indirect, wholly owned, subsidiary of REX American Resources
Corporation. The Company was formed to construct, own, and operate a 100 million gallon design
capacity ethanol production facility located near Gibson City, Illinois. The Company financed
construction of the facility through member equity contributions and from bank financing. The
Company exited the development stage and began production of fuel ethanol and other ethanol
co-products in late June 2009. The Company operates in one reportable segment, alternative energy.
Fiscal Reporting Period
The Company originally adopted a fiscal year ending October 31 for financial reporting
purposes, but the Company elected to change its fiscal year end to December 31, effective November
1, 2007.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities 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.
Concentration of Credit Risk
The Company maintains cash and cash equivalents in accounts with financial institutions,
which, at times, exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company does not believe there is significant credit risk associated with its
cash and cash equivalents.
Three customers accounted for approximately 86% of the Companys sales during 2009. At December 31,
2009, three customers comprised approximately 83% of the Companys accounts receivable balance.
Cash Equivalents
All highly liquid investments with a maturity of three months or less at the time of purchase
are considered to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization.
Depreciation is determined using the straight-line method for financial reporting purposes over the
estimated useful lives of the assets ranging from five to 40 years. The Company capitalizes
interest on its construction in progress activities. The Company capitalized $1,530,126 and
$1,080,148 of interest during the years ended December 31, 2009 and 2008, respectively. The
Company capitalized $27,000 and $42,000 of interest during the year ended October 31, 2007 and the
two month period ended December 31, 2007, respectively.
The Company evaluates the recoverability of the carrying amount of long-lived assets
(including property and equipment) whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. The Company evaluates events or changes
in circumstances based on historical operating results, business plans, general and industry trends
and forecasted cash flows. Impairment is assessed when the undiscounted expected future cash flows
derived from an asset are less than its carrying amount. Impairment losses are measured as the
amount by which the carrying value of an asset exceeds its fair value. No long-lived asset
impairment charges were recorded during 2009, 2008, the year ended October 31, 2007, or the two
month period
ended December 31, 2007.
F-5
Table of Contents
Interest Rate Swap
The interest rate swap is recorded at fair value and is included in the accompanying balance
sheets as Interest rate swap derivative liability. Changes in the fair value of the interest rate
swap (net of settlements) are reported in current period earnings since the interest rate swap was
not designated as a cash flow hedge (see Note 5).
Deferred Financing Costs
Costs incurred in connection with the acquisition of financing for the facility were deferred
and amortized over the term of the respective financing using the effective interest method.
Accumulated amortization was approximately $140,000 and $0 at December 31, 2009 and 2008,
respectively. Future amortization of deferred financing costs is as follows(amounts in thousands):
Years Ended December 31, | Amortization | |||
2010 |
$ | 315 | ||
2011 |
286 | |||
2012 |
248 | |||
2013 |
213 | |||
2014 |
197 | |||
Total |
$ | 1,259 | ||
Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out method.
Inventory includes direct production costs and certain overhead costs, such as depreciation,
property taxes, and utilities related to producing ethanol and related by-products. Reserves are
established, if necessary, for obsolescence and estimated net realizable value based upon recent
commodity prices. No reserves were recorded at December 31, 2009 and 2008. The components of
inventory are as follows (amounts in thousands):
December 31, 2009 | ||||
Ethanol and other finished goods, net |
$ | 1,558 | ||
Work in process, net |
1,235 | |||
Grain and other raw materials |
3,497 | |||
Total |
$ | 6,290 | ||
Revenue Recognition
The Company recognizes sales from the production of ethanol and distillers grains when title
transfers to customers upon shipment from the Companys plant. Shipping and handling charges to
ethanol customers are included in revenues. Revenues by product are as follows (amounts in
thousands):
Year Ended December 31,2009 | ||||
Ethanol |
$ | 83,402 | ||
Dried distillers grains |
14,705 | |||
Other |
83 | |||
Total |
$ | 98,190 | ||
F-6
Table of Contents
Cost of Sales
Cost of sales includes depreciation, costs of raw materials, inbound freight charges,
purchasing and receiving costs, inspection costs, shipping costs, other distribution expenses,
warehousing costs, plant management, certain compensation costs, and general facility overhead
charges.
Selling, General and Administrative Expenses
The Company includes non-production related costs such as professional fees and certain
payroll in selling, general and administrative expenses.
Income Taxes
The Company is organized as a limited liability company. This provides that in lieu of
corporation income taxes, the members are to account separately for their proportionate share of
the Companys items of income, deductions, losses, and credits. Therefore, these financial
statements do not include a provision for federal income taxes.
The Company is required to file and pay Illinois taxes at a rate of 1.5% of adjusted taxable
income, which approximates federal taxable income. This tax is not passed on to members. No income
taxes were paid during 2009, 2008, 2007 or 2006.
Impact of New Accounting Pronouncements
Effective, July 1, 2009, the Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) became the single official source of authoritative, nongovernmental accounting
principles generally accepted in the United States of America (GAAP). The historical GAAP hierarchy
was eliminated and the ASC became the only level of authoritative GAAP. The Companys accounting
policies were not affected by the conversion to ASC.
In September 2006, the FASB issued a new accounting standard regarding the accounting for fair
value measurements and disclosures. This standard defines the fair value of financial and
nonfinancial assets and liabilities, establishes a framework for measuring fair value in GAAP, and
expands disclosures about fair value measurements. This standard applies to fair value measurements
that are already required or permitted by existing standards except for measurements of share-based
payments and measurements that are similar to, but not intended to be, fair value and eliminates
the Emerging Issues Task Force guidance that prohibited recognition of gains or losses at the
inception of derivative financial instrument transactions whose fair value is estimated by applying
a model. This standard clarifies that fair value is the amount that would be exchanged to sell an
asset or transfer a liability, in an orderly transaction between market participants. This standard
is effective for the Companys year ended December 31, 2008. On November 14, 2007, the FASB
approved to defer the effective date for all nonfinancial assets and liabilities until fiscal years
beginning after November 15, 2008. The Company adopted this guidance, as it relates to nonfinancial
assets and liabilities as of January 1, 2009 (see Note 6).
In March 2008, the FASB issued a new accounting standard regarding the accounting for
derivatives and hedging. This standard requires, among other things, enhanced disclosure about the
volume and nature of derivative and hedging activities and a tabular summary showing the fair value
of derivative instruments included in the statement of financial position and statement of
operations. This standard also requires expanded disclosure of contingencies included in derivative
instruments related to credit risk. This guidance is effective for the Companys year ended
December 31, 2009. The adoption of this standard did not have a material effect on the Companys
financial statements other than providing certain enhanced disclosures (see Note 5).
In May 2009, the FASB issued a new accounting standard regarding the accounting for subsequent
events, which sets forth general standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are issued or are available to be
issued. This standard is effective for periods ending after June 15, 2009. The adoption of this
standard did not have a material effect on the Companys financial statements other than providing
certain enhanced disclosures.
F-7
Table of Contents
Net Income or Loss per Unit
Basic net income or loss per unit is computed by dividing net income or loss by the weighted
average number of members units outstanding during the period. Diluted net income or loss per unit
is computed by dividing net income or loss by the weighted average number of members units and
members unit equivalents outstanding during the period. There were no member unit equivalents
outstanding during the periods presented; accordingly, the Companys basic and diluted net income
or loss per unit are the same.
Comprehensive Income (Loss)
For all periods presented, net income (loss) equals comprehensive income (loss) as the Company
had no income or expense items that were not reported on the statement of operations.
2. PROPERTY AND EQUIPMENT
In May 2007, the Company entered into an agreement with Fagen, Inc. (Fagen), the
designer/builder of the Companys fuel ethanol plant (the Plant). Fagen was responsible for all
engineering, labor, materials, and equipment to design, construct, startup, and achieve guaranteed
performance criteria of the Plant. The contract price was $120 million, subject to adjustments as
provided by the general conditions of the agreement. Construction of the plant began in October
2007, and was substantially completed in July 2009. See Note 7 for a discussion of related-party
transactions. A summary of property and equipment at December 31, 2009 and 2008, is as follows:
2009 | 2008 | |||||||
Land and land improvements |
$ | 14,317 | $ | 10,334 | ||||
Plant and equipment |
117,442 | | ||||||
Buildings |
21,237 | 452 | ||||||
Office equipment |
519 | 170 | ||||||
Construction in process |
24 | 117,705 | ||||||
Gross property and equipment |
153,539 | 128,661 | ||||||
Less: accumulated depreciation |
(4,830 | ) | (22 | ) | ||||
Net property and equipment |
$ | 148,709 | $ | 128,639 | ||||
3. MEMBERS EQUITY
The Company has one class of membership units, which include certain transfer restrictions as
specified in the operating agreement and pursuant to applicable tax and securities laws. Income and
losses are allocated to all members based upon their respective percentage of units held. In
February 2006, the Company raised $1,425,000 from five seed capital investors in exchange for 855
Class A units. The Company filed a Form SB-2 Registration Statement with the Securities and
Exchange Commission (SEC). The original offering was for a minimum of 6,020 Class B units and up
to 12,020 Class B units at $5,000 per unit for minimum offering proceeds of $30,100,000 and maximum
offering proceeds of $60,100,000, before any costs of raising capital. The registration became
effective November 7, 2006.
F-8
Table of Contents
In June 2007, the Company filed an amendment to its Form SB-2 Registration Statement with the
SEC. The new offering was for a minimum of 12,891 units and up to 14,000 units at $5,000 per unit
for minimum offering proceeds of $64,455,000 and maximum offering proceeds of $70,000,000, before
any costs of raising capital. As a
result of the amendments to the amended and restated operating agreement as required by the
Farmers Energy agreement (discussed below), the separate classes of units were eliminated and the
Company now has one class of units.
In May 2007, the Company entered into an agreement with Farmers Energy, a subsidiary of REX
American Resources Corporation, whereby Farmers Energy agreed to purchase a minimum of 7,011 units
for a minimum purchase price of $35,055,000 and a maximum of 12,491 units for a maximum purchase
price of $62,455,000. The actual number of units purchased by Farmers Energy was dependent upon
the number and amount of rescissions resulting from a rescission offer, as described below, and the
total number of new subscribers. Farmers Energy has the right to appoint a majority of the board
members of the Company and has the majority vote regardless of the number of board members.
In July 2007, The Company conducted a rescission offer with the current subscribers due to the
Company changing the terms of the initial public offering. A total of 171 subscribers with 2,602
units chose to withdraw their subscriptions and have their deposits returned totaling $1,330,500,
plus interest. On October 31, 2007, after meeting the terms of the escrow agreement, the Company
terminated its escrow account and the offering proceeds were released to the Company. The Company
closed the public offering on November 7, 2007. As of December 31, 2009, the Company had issued
13,781 units totaling $66,055,000 ($65,215,000 net of issuance costs). Through December 31, 2009,
the Company had not made any distributions to members for income tax payments or other purposes.
4. LONG-TERM DEBT
In September 2007, the Company entered into an $111,000,000 financing agreement consisting of
a construction loan agreement for $100,000,000 together with a $10,000,000 revolving loan and a
$1,000,000 letter of credit with First National Bank of Omaha (the Bank). The construction loan
was converted into a term loan on July 31, 2009, and bears interest at rates ranging from London
InterBank Offered Rate (LIBOR), plus 300 basis points to LIBOR, plus 310 basis points. The term
loan is secured by all of the Companys assets. Pursuant to the terms of the loan agreement with
the Bank, the Company has certain restrictions on its distributions to members based upon taxable
income and net income in a given period. The Companys restricted net assets total approximately
$66.0 million at December 31, 2009. Such net assets may not be paid in the form of dividends or
advances to members per the terms of the loan agreement with First National Bank of Omaha.
Beginning with the first quarterly payment on October 8, 2009, payments are due in 19 equal
quarterly payments of principal and accrued interest, with the principal portion calculated based
on a 120-month amortization schedule. One final installment will be required on the maturity date,
July 8, 2014, for the remaining unpaid principal balance with accrued interest.
The term loan is secured by all property of the Company, regardless of date acquired. As of
December 31, 2009, approximately $98,000,000 was outstanding on the term loan. The Company is also
subject to certain financial covenants under the loan agreement, including required levels of
Earnings Before Interest, Taxes, Depreciation, and Amortization, debt service coverage ratio
requirements, net worth requirements, and other common covenants. The Company was in compliance
with all covenants at December 31, 2009.
The Company paid approximately $1,398,717 to the Bank and other parties since inception for
various fees associated with the construction and term loan commitment. These amounts were recorded
as prepaid loan fees by the Company in the accompanying balance sheets; such amounts are amortized
using the effective interest method, beginning with the first payment on the term loan and ending
with the term loan maturity date. The carrying values of the construction loan and term loan
approximate fair value at December 31, 2009. In accordance with the agreement, the Company entered
into an interest rate swap contract to minimize its interest risk exposure (see Note 5).
F-9
Table of Contents
Annual expected maturities on notes payable at December 31, 2009, are as follows (amounts in
thousands):
Years Ended December 31, | Maturities | |||
2010 |
$ | 8,089 | ||
2011 |
9,311 | |||
2012 |
10,497 | |||
2013 |
10,927 | |||
2014 |
59,175 | |||
Total |
$ | 97,999 | ||
The Company has no outstanding borrowings on the $10,000,000 revolving loan as of December 31,
2009. The Company has issued letters of credit that total approximately $543,000 outstanding as of
December 31, 2009. The maximum amount borrowed under the revolving loan in 2009 was $2,000,000.
5. FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to manage the balance of fixed- and
variable-rate debt. The Company does not hold or issue derivative financial instruments for trading
or speculative purposes. Interest rate swap agreements involve the exchange of fixed- and
variable-rate interest payments and do not represent an actual exchange of the notional amounts
between the parties. The swap agreements were not designated for hedge accounting pursuant to
accounting standards.
The Company entered into a forward interest rate swap with First National Bank of Omaha in the
notional amount of $50 million during 2007 (a requirement of the construction and term loan
agreement) and in the notional amount of $25 million during 2008. The swaps fixed the interest rate
on $50 million and $25 million of the term loan at 7.9% and 5.49%, respectively. The 2007 swap was
effective as of December 11, 2007, swap settlements commenced as of July 31, 2009, and the
termination date is July 8, 2014. The 2008 swap was effective as of December 11, 2008, swap
settlements commenced as of July 31, 2009, and the termination date is July 31, 2011. During 2009,
swap settlement payments to the counterparty totaled approximately $551,000.
At December 31, 2009, the Company recorded a liability of approximately $5.2 million related
to the fair value of the swap. The Company believes the risk of nonperformance by the counterparty
with this agreement is not material to the financial statements.
The notional amounts and fair values of derivatives, all of which are not designated as cash
flow hedges at December 31, 2009 are summarized in the table below (amounts in thousands):
Notional | Fair Value | |||||||
Amount | Liability | |||||||
Interest rate swaps |
$ | 73,469 | $ | 5,231 |
As the interest rate swaps are not designated as cash flow hedges, the unrealized gain and
loss on the derivatives is reported in current earnings and is included in gains or losses on
derivative financial instruments. The Company reported losses of approximately $219,000 and
$4,704,000 in 2009 and 2008, respectively.
F-10
Table of Contents
6. FAIR VALUE
Effective January 1, 2008, the Company adopted accounting standards which provide a framework
for measuring fair value under GAAP. The accounting standard defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. The accounting
standard also eliminated the deferral of gains and losses at inception of certain derivative
contracts whose fair value was not evidenced by market observable data. The accounting standards
requires that the impact of this change in accounting for derivative contracts be recorded as an
adjustment to beginning retained earnings in the period of adoption. There was no impact on the
beginning balance of retained earnings as a result of adopting this accounting standard because the
Company held no financial instruments in which a gain or loss at inception was deferred.
Effective January 1, 2008, the Company began determining the fair market values of its
financial instruments based on the fair value hierarchy established in the accounting standards
which requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standards describe three levels of inputs that
may be used to measure fair values which are provided below. The Company carries derivative assets
and liabilities at fair value.
Level 1 Quoted prices in active markets for identical assets or liabilities. Level 1 assets and
liabilities include debt and equity securities and derivative contracts that are traded in an
active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are
actively traded in over-the-counter markets.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities, quoted prices in markets that are not active, or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of the assets or
liabilities. Level 2 assets and liabilities include derivative contracts whose value is determined
using a pricing model with inputs that are observable in the market or can be derived principally
or corroborated by observable market data.
Level 3 Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include
financial instruments whose value is determined using pricing models, discounted cash flow methods,
or similar techniques, as well as instruments for which the determination of fair value requires
significant management judgment or estimation. Unobservable inputs shall be developed based on the
best information available, which may include the Companys own data.
The fair values of derivative assets and liabilities traded in the over-the-counter market are
determined using quantitative models that require the use of multiple market inputs, including
interest rates, prices, and indices to generate pricing and volatility factors, which are used to
value the position. The predominance of market inputs are actively quoted and can be validated
through external sources, including brokers, market transactions, and third-party pricing services.
Estimation risk is greater for derivative asset and liability positions that are either option
based or have longer maturity dates where observable market inputs are less readily available or
are unobservable, in which case interest rate, price, or index scenarios are extrapolated in order
to determine the fair value. The fair values of derivative assets and liabilities include
adjustments for market liquidity, counterparty credit quality, the Companys own credit standing,
and other specific factors, where appropriate. Financial liabilities measured at fair value at
December 31, 2009, on a recurring basis are summarized below:
Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
Derivative liabilities |
$ | | $ | 5,231 | $ | | $ | 5,231 |
No financial instruments were elected to be measured at fair value in accordance with the
accounting standards.
Financial assets and liabilities measured at fair value on a recurring basis at December 31, 2008
are summarized below (amounts in thousands):
Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
Derivative liabilities |
$ | | $ | 5,563 | $ | | $ | 5,563 |
F-11
Table of Contents
7. RELATED-PARTY TRANSACTIONS
The Company entered into a design-build contract with Fagen, an equity investor in the
Company, for the
design and construction of the ethanol plant. The Company has paid approximately $120.2 million at
December 31, 2009, to Fagen.
During 2009, the Company purchased approximately $69.2 million of corn from the Alliance Grain
Company (Alliance Grain), an equity investor. The Company leases land from a related party on
which it has constructed water wells. The lease allows the Company to use the land for 99 years.
Annual payments of $20,000 are due the first day of each calendar year through January 1, 2011. One
final payment of $19,000 is due January 1, 2012.
During 2009, the Company used the services of the Bloomer Line to move railcars to ship ethanol. An
officer of the Company is the acting general manager of the Bloomer Line. During 2009, the Company
paid the Bloomer Line approximately $157,000 for such services.
8. COMMITMENTS AND CONTINGENCIES
The Company has forward purchase contracts for 3,500,500 bushels of corn, the principal raw
material for its ethanol plant. The Company expects to take delivery of the corn by March 2010. The
unrealized gain of such contracts is approximately $1.9 million at December 31, 2009.
The Company has sales commitments for 10,347,000 gallons of ethanol and 25,168 tons of
distillers grains. The Company expects to deliver the ethanol and the distillers grains by March
2010. The unrealized loss of such contracts is approximately $2.0 million at December 31, 2009.
Forward grain purchase and ethanol sale contracts are accounted for under the normal
purchases and normal sales scope exemption of the accounting standards because these arrangements
are for purchases of grain and sales of ethanol and distillers grains that will be delivered in
quantities expected to be used by the Company over a reasonable period of time in the normal course
of business.
The Company has entered into an agreement with an unrelated party for the use of a portion of
the partys natural gas pipeline. The term of the agreement is 10 years, and the amount is
$4,380,000, which is spread over 120 equal payments of $36,500. Payments began in February 2009.
The Company has entered into an agreement with an unrelated party for the lease of 150
railcars that will be used to ship ethanol. The lease is set to expire on May 31, 2012, with an
automatic 36-month extension, unless notified in writing 60 days prior to the initial expiration
date. The Company pays a monthly lease amount per railcar. The Company paid $343,849 pursuant to
the lease in 2009.
The Company has a nonexclusive contract with an unrelated party (Ethanol Marketer) for
ethanol marketing services. Under the terms of the contract, the Ethanol Marketer will purchase
some of the Companys ethanol production during the term of the contract. The Company will pay a
fee of $0.005 per net gallon of ethanol for the Ethanol Marketers services during the term of the
contract. The contract matures December 1, 2012, with automatic renewals for one year, unless the
Company provides written notice of at least 90 days prior to the end of the initial term.
The Company has a contract with an unrelated party (Distillers Grains Marketer) for
distillers grains marketing services. Under the terms of the contract, the Distillers Grains
Marketer will purchase all of the Companys distillers grain production during the term of the
contract. The Company will pay a fee of $0.75 to $3 per ton of distillers grains for the Distillers
Grains Marketers services during the term of the contract. The contract matures July 1, 2012.
The Company has a grain origination agreement with Alliance Grain, under which it purchased
100% of its grain during 2009.
F-12
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Members of One Earth Energy, LLC
Gibson City, Illinois
Gibson City, Illinois
We have audited the accompanying balance sheets of One Earth Energy, LLC (the Company) as of
December 31, 2009 and 2008, and the related statements of operations, cash flows, and changes in
members equity for the years ended December 31, 2009 and 2008 and the two-month period ended
December 31, 2007. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audits. The
financial statements of the Company for the year ended October 31, 2007 were audited by other
auditors whose report, dated January 28, 2008, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial
position of One Earth Energy, LLC at December 31, 2009 and 2008, and the results of its operations
and its cash flows for the years ended December 31, 2009 and 2008 and the two-month period ended
December 31, 2007 in conformity with accounting principles generally accepted in the United States
of America.
/s/ DELOITTE & TOUCHE LLP |
Cincinnati, Ohio |
November 8, 2010 |
F-13
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
One Earth Energy, LLC
Gibson City, Illinois
One Earth Energy, LLC
Gibson City, Illinois
We have audited the balance sheet of One Earth Energy, LLC as of October 31, 2007 and the related
statement of operations, change in members equity, and cash flows for the year then ended. One
Earth Energys management is responsible for these financial statements. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of One Earth Energy, LLC as of October 31, 2007, and the results
of its operations and its cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P. |
Certified Public Accountants |
Minneapolis, Minnesota |
January 28, 2008 |
F-14
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Boulay, Heutmaker, Zibell & Co., P.L.L.P. (Boulay) was our independent auditor since the
Companys inception. No further business was transacted between the Company and Boulay since SEC
reporting was suspended. The Company subsequently decided to engage the services of the same
independent auditor of our parent company, REX American Resources Corporation., who is Deloitte &
Touche, LLP. The Company has had no disagreements with either of its auditors.
ITEM 9A(T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Management of One Earth Energy (the Company) is responsible for maintaining disclosure
controls and procedures that are designed to ensure that information required to be disclosed in
the reports that the Company files or submits under the Securities Exchange Act of 1934 (the
Exchange Act) is recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that such information is
accumulated and communicated to the Companys management, including its Principal Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial
and other required disclosures.
As of December 31, 2009, and at the end of the period covered by this report, an evaluation of
the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Exchange Act was carried out under the supervision and with the participation of
our Principal Executive Officer, Steve Kelly, and our Chief Financial Officer, Larry Brees. Based
on their evaluation of our disclosure controls and procedures, they have concluded that during the
period covered by this report, such disclosure controls and procedures were not effective because:
Our disclosure controls and procedures did not adequately ensure the timely filing of our
annual report on Form 10-K for the year ended December 31, 2009.
We had a material weakness in our internal control over financial reporting with respect to
our controls over reconciliation of member share counts, as described below in Managements Report
on Internal Control over Financial Reporting.
Managements Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
our financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control
over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles (GAAP). Our internal
control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect our transactions and
dispositions of company assets; (ii) provide reasonable assurance that transactions are recorded as
necessary for preparation of our financial statements in accordance with GAAP; (iii) provide
reasonable assurance that receipts and expenditures of the company are made in accordance with
management authorization; and (iv) provide reasonable assurance that unauthorized acquisition, use
or disposition of company assets that could have a material effect on our financial statements
would be prevented or detected on a timely basis.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because changes in conditions may occur or
the degree of compliance with the policies or procedures may deteriorate.
31
Table of Contents
Management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2009. This assessment was based on the framework in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on its assessment, management concluded that our internal control over financial reporting as
of December 31, 2009 was not effective based on the criteria described in the COSO Internal
ControlIntegrated Framework.
As of December 31, 2009, the Principal Executive Officer and Chief Financial Officer have
identified the following material weakness in the Companys internal controls over its financial
reporting processes:
Reconciliation of Member share counts currently there is not a proper and timely review and
reconciliation of transfers of member shares by the appropriate level of management. This lack of a
proper and timely review resulted in our missing deadlines for reports required to be filed under
the Exchange Act beginning with the Form 10-K for the year ended December 31, 2009. The lack of
review and approval amounts to a material weakness to the Companys internal controls over its
financial reporting processes.
A material weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements will not be prevented or detected on a timely basis.
This annual report does not include an attestation report of our registered public accounting
firm regarding internal control over financial reporting. Managements report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only managements report in this annual report
This report shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange
Act of 1934, or otherwise subject to the liabilities of that section, and is not incorporated by
reference into any filing of the Company, whether made before or after the date hereof, regardless
of any general incorporation language in such filing.
Remediation Efforts
We intend to implement and test controls to remediate the material weakness in the operation
of our controls over the member share count reconciliation process by December 31, 2010, including
implementation of proper reviews and approvals.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS; EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Identification of Directors, Executive Officers and Significant Employees
The following table shows the directors and officers of One Earth Energy, as of December 31,
2009:
Name | Age | Position | Address | |||||
Scott Docherty
|
47 | Chairman/ Director | 9 Fir Court Monticello, IL 61856 |
|||||
Joseph Thompson
|
50 | Vice President/ Director | 49 Deer Run Place Monticello, IL 61856 |
|||||
Jack Murray
|
53 | Secretary / Treasurer / Director |
2607 County Rd 1000E Champaign, IL 61822 |
|||||
Bruce Bastert
|
52 | Director | 110 Mohican Lane Loda, IL 60948 |
|||||
Roger Miller
|
56 | Director | 804 East Boone Street Tolono, IL 61880 |
|||||
Zafar Rizvi
|
60 | Director | 2875 Needmore Road Dayton, Ohio 45414 |
|||||
Steve Kelly
|
53 | President/General Manager |
225 E. 700 N. Road Gibson City, IL 60936 |
32
Table of Contents
Business Experience of Directors and Officers
The following is a brief description of the business experience and background of our officers
and directors, as of December 31, 2009.
Scott Docherty, Chairman and Director, Age 47. Mr. Docherty is the general manager of
Topflight Grain Coop and has been since June 2004. Topflight Grain Coop is farmer-owned, with 10
facilities in 4 counties. Prior to accepting the general manager position, he was a merchandiser
for Topflight Grain Coop. from 1998 until May 2004. Mr. Docherty has served as a director since
our inception in 2006. Mr. Dochertys experience as the general manager provides him with unique
insights into strategic planning and the ability to identify opportunities for organizational
growth.
Joseph Thompson, Vice President and Director, Age 50. Mr. Thompson has been the general
manager of Alliance Grain Company, a 13 facility grain cooperative with annual net sales of
approximately $260 million, since September 1, 2007. As general manager, Mr. Thompson supervises
the day-to-day operations of the cooperative facilities. From June 1999 to September 1, 2007, Mr.
Thompson served as Alliances controller and was responsible for monthly management financial
statements presentations, reconciliation of general ledger accounts and implementation of general
financial recording practices. He was the Ag Finance Manager for Piatt Service from May 1995 to
June 1999. Mr. Thompsons experience with Alliance provides invaluable insight into the grain
industry and guidance for the boards understanding and implementation of sound financial reporting
and practices. Mr. Thompson has also served as a director of Bloomer Shipper Railway Redevelopment
League from September 2007 to the present. Mr. Thompson received his bachelor of science in
accounting from Illinois College in Jacksonville, Illinois.
Jack Murray, Secretary / Treasurer and Director, Age 53. Mr. Murray has run Murray Farms,
Inc., a farming operation in Champaign, IL, and has done so since May of 1976, serving as the
companys president. Since August 2009, Mr. Murray has served as Premier Cooperative, Inc.s
president. He previously served as president of the Fisher Farmers Grain & Coal Co., having served
on that board for a total of nineteen years. Mr. Murray has served as a Company director since our
inception. Mr. Murrays knowledge of the local agricultural economy and experience as an
entrepreneur brings a valuable perspective to the Board.
Bruce Bastert, Director, Age 52. Mr. Bastert is the general manager of Ludlow Cooperative
Elevator Company, a cooperative grain company with 11 facilities in Buckley, Clarence, Danforth,
Del Rey, Gilman, La Hogue, Loda, Ludlow, Paxton, Purdueville, and Piper City, Illinois. Before his
appointment as Ludlows general manager in March 2006, Mr. Bastert was general manager of
Williamsville Farmers Cooperative from May 1999 through February 2006. In both positions, Mr.
Bastert performed chief executive functions associated with grain handling operations and hedging
functions for customer accounts. Previously he has worked in the grain industry as general
manager, commodity risk management consultant, terminal manager, merchandiser and in corn
origination, risk management, logistics, and co-product sales. His knowledge of commodity risk and
merchandising make him a valuable addition to the Board. Mr. Bastert is an Agricultural Industries
graduate of the University of Illinois. Mr. Bastert has been a director since March 2006.
Roger Miller, Director, Age 56. Mr. Miller has served as general manager of Premier
Cooperative, Inc. since August 2009. This agricultural business is a licensed grain dealer and
warehouse that handles corn, soybeans and wheat in East-Central Illinois. Premier has twenty
locations in Champaign and Piatt Counties. At Premier, Mr. Miller is responsible for the
operational direction of Premiers twenty facilities and supervision of 72 full-time employees.
Prior to this, Mr. Miller served as general manager of Grand Prairie Co-op from 1993 until it
merged with Fisher Farmers Grain & Coal Co. into Premier Cooperative in 2009. His knowledge of the
local agricultural
community combined with his experience in managing multiple locations adds much value to the Board.
Mr. Miller has served as a director of the Company since February 2006.
33
Table of Contents
Zafar Rizvi, Director, Age 60. Zafar Rizvi has served as Vice President of REX American
Resources Corporation (NYSE: REX), our parent company, and President of Farmers Energy
Incorporated, REXs alternative energy investment subsidiary, since 2006. From 1991 through 2006,
Mr. Rizvi served as REXs Vice President of Loss Prevention. Prior to such dates, Mr. Rizvi was
employed in the video retailing industry in a variety of management positions. Mr. Rizvi also
serves on the board of directors of several non-reporting ethanol companies. Mr. Rizvi holds a
B.A. in Economics from Punjab University in Pakistan, an H.N.D. in Business Studies from City of
London Polytechnic in England and an M.B.A. from the University of Phoenix. His executive
experience combined with his knowledge of the ethanol industry make Mr. Rizvi a valuable addition
to the Board. Mr. Rizvi has been a director of the Company since June 2007.
Business Experience of Significant Employees
Steven Kelly, President/General Manager, Age 53. Mr. Kelly has been employed as our General
Manager and President since September 2007. In such capacity, Mr. Kelly is responsible for
overseeing and managing the day-to-day operations of the Companys facility. Mr. Kelly also
currently serves as general manager of Bloomer Connecting Shippers Railroad Co. Before assuming
the Companys general manager position, Mr. Kelly was the general manager of Alliance Grain Company
from January 1988 to September 2007. Alliance is a locally-owned cooperative that has 13 elevators
in 12 East-Central Illinois communities. Mr. Kelly served as a director of One Earth Energy from
our inception until September 2007 when he was employed by the Company.
Larry Brees, Controller, Age 53. Larry Brees began serving as the Companys Controller in
November 2007. As Controller, Mr. Brees directs the Companys financial affairs including
assumption of accounting and treasury functions alongside our treasurer, Jack Murray. Previously,
Mr. Brees served as the Chief Financial Officer for E Energy Adams and interim Controller at the
HON Company during 2007. Prior to that, he was the Controller of Big River Resources, a 92 million
gallon per year ethanol plant in Iowa, from February 2004 through March 2007, and for 12 years
served in various accounting and finance roles at Aventine Renewable Energy. Mr. Brees is a
Certified Public Accountant, and holds a B.S. in Accounting from Illinois State University, and an
M.B.A. from the University of Phoenix. At the time of this report, but subsequent to the end of
the 2009 fiscal year, Mr. Brees was appointed and continues to serve as the Companys Chief
Financial Officer.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act of 1934 (the Exchange Act) requires our directors,
executive officers and certain beneficial owners holding 10% or more of the Companys membership
units to file reports of ownership and changes of ownership with the Securities and Exchange
Commission (the SEC). To our knowledge, and based solely on a review of the copies of such
reports furnished to us and written representations from our officers and directors, all Section
16(a) filing requirements were complied with during the fiscal 2009 year because we were not
subject to these requirements during our fiscal year 2009.
Code of Ethics
Our board of directors has adopted a Code of Ethics that sets forth standards regarding
matters such as honest and ethical conduct, compliance with the law, and full, fair, accurate and
timely disclosure in reports and documents that we file with the SEC and in other public
communications. The Code of Ethics applies to all of our employees, officers and directors,
including our President and General Manager, Steve Kelly, and Treasurer, Jack Murray. The Code of
Ethics is available free of charge upon written request to One Earth Energy, LLC, 202 N. Jordan
Dr., Gibson City, IL 60936.
Identification of Audit Committee
In January 2008, the board of directors appointed an Audit Committee consisting of our
directors Scott Docherty, Joe Thompson, Jack Murray, Zafar Rizvi and Roger Miller. Joe Thompson is
serving as the Chairman of the Audit Committee.
34
Table of Contents
Audit Committee Financial Expert
Our board of directors has determined that Joe Thompson, who serves as Chairman of the Audit
Committee, is an audit committee financial expert by reason of his experience in public accounting
and as a controller of Alliance Grain Company. Mr. Thompson is not an independent director, as
defined in NASDAQ Rule 5605(a), as discussed further in Item 13 below.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview
The Compensation Committee has responsibility for establishing, implementing and regularly
monitoring adherence to the Companys compensation philosophy and objectives. The Compensation
Committee ensures that the total compensation paid to Mr. Kelly, our principal executive officer is
fair, reasonable and competitive. Mr. Murray, our Treasurer (and acting Chief Financial
Officer), does not receive any compensation in addition to his director compensation, discussed
below in Compensation of Named Executive Officers and Directors.
The Compensation Committee:
(1) establishes and administers a compensation policy for all of our employees; and
(2) reviews and monitors our financial performance as it affects our compensation policies or
the administration of those policies.
All of the Committees actions are reported to the board of directors and, where appropriate,
submitted to the board of directors for ratification. In determining Mr. Kellys compensation, the
Committee considers evaluations prepared by the directors. From time to time, the Compensation
Committee may delegate to Mr. Kelly the authority to implement certain decisions of the Committee,
to set compensation for lower officers and management employees or to fulfill administrative
duties.
Compensation Philosophy and Objectives
Our compensation programs are designed to achieve the following objectives:
(1) | Attract, retain and motivate highly qualified and talented employees who will
contribute to the Companys success by reason of their ability, ingenuity and industry; |
||
(2) | Link compensation realized to the achievement of the Companys short and
long-term financial and strategic goals; |
||
(3) | Align management and member interests by encouraging long-term member value
creation; |
||
(4) | Maximize the financial efficiency of the compensation program from tax,
accounting, cash flow and dilution perspectives; and |
||
(5) | Support important corporate governance principles and comply with best
practices. |
To achieve these objectives, the Compensation Committee implements and maintains compensation
plans that tie a portion of Mr. Kellys overall compensation to the Companys financial
performance.
Compensation Committee Procedures
The Compensation Committee is responsible for determining the nature and amount of
compensation for the Companys executive officers. Our entire board of directors serves as our
Compensation Committee.
The Compensation Committee receives input from Mr. Kelly on the personal performance
achievements of other officers and management employees who report to him. This individual
performance assessment determines a portion of the annual compensation for each officer and
employee. In addition, Mr. Kelly provides input on salary
increases, incentive compensation opportunities and long-term incentive grants for the officers and
management employees who report to him, which the Committee considers when making compensation
decisions.
35
Table of Contents
The Compensation Committee annually evaluates Mr. Kellys performance in light of the goals
and objectives of the Companys compensation plans and determines and approves Mr. Kellys
compensation level based on this evaluation. In determining the long-term incentive components of
Mr. Kellys compensation, the Compensation Committee will consider all relevant factors, including
the Companys performance, the value of similar awards to chief executive officers of comparable
companies and the awards given to Mr. Kelly in past years. Mr. Kelly is not present at
Compensation Committee or board-level deliberations concerning his compensation.
Compensation Components
Base Salary
Base salaries for our executive officers and employees are established based on the scope of
their roles, responsibilities, experience levels and performance, and taking into account
competitive market compensation paid by comparable companies for similar positions. Base salaries
are reviewed approximately annually, and may be adjusted from time to time to realign salaries with
market levels after taking into account individual performance and experience. Following the end
of our 2008 fiscal year, due to conditions in the ethanol industry and the United States economy
generally, the board of directors increased Mr. Kellys base salary only slightly in an effort to
remain competitive.
Cash Bonus
In addition to the base salaries, our Committee and board of directors approved a bonus
payable to Mr. Kelly for the 2009 fiscal year. The total amount of the cash bonus was $6,427. For
our 2008 fiscal year, the total cash bonus was $0. The increase paid in 2009 relates to the
Companys increased production and stronger financial performance. The maximum bonus amount for
2009 was 12% and, if approved by the board, was awarded based on the number of points earned, out
of a total 100 points, during any given month of operation. The number of points earned is based
on the achievement of certain production/plant thresholds. The monthly points earned are then
multiplied by an employees base wage/salary pool, with each employee earning an amount equal to
the ratio of his salary to total salaries paid by the Company. Mr. Kelly is also eligible for an
additional bonus of .5% to 1% of the Companys monthly net income above a specified threshold, as
determined by our unaudited, monthly financial statements, prorated based on the ratio of his pay
to total management payroll.
All bonuses are presented to the board of directors for approval before being paid. The
Company believes that the above bonuses are reasonable as they tie the bonus paid to the Companys
financial success and are easily quantified by the Company. Specifically, the cash bonuses align
the goals of the members and the management employees and executive officers, as each group
benefits from the Companys financial success. Further, the net income bonus aligns the goals of
management with the long- and short-term financial goals of the Company, namely to maximize net
income.
Benefits and Perquisites
We do not provide any material executive perquisites. We have no supplemental retirement
plans or pension plans and we have no intentions of implementing any such plans in our 2010 fiscal
year.
No Pension Benefit Plan, Deferred Compensation Plan or Change of Control or Severance Agreements
We offer no pension benefit or deferred compensation plans to Mr. Kelly. Mr. Kelly does not
have change of control or severance agreements, which means our board of directors retains
discretion over severance arrangements if it decides to terminate his employment.
Accounting and Tax Treatment of Awards
Neither Mr. Kelly nor any of our officers, directors or employees receives compensation in
excess of $1,000,000. Therefore the entire amount of their compensation is deductible by the
Company as a business expense.
Certain large executive compensation awards are not tax deductible
by companies making such awards. None of our compensation arrangements are likely to reach this cap
in the foreseeable future.
36
Table of Contents
Executive Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis
with management. Based upon this review and discussion, the Compensation Committee recommended to
the board of directors that the Compensation Discussion and Analysis be included in this annual
report.
Compensation Committee
Scott Docherty, Chairman
Jack Murray
Joe Thompson
Bruce Bastert
Roger Miller
Zafar Rizvi
Jack Murray
Joe Thompson
Bruce Bastert
Roger Miller
Zafar Rizvi
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee is or has been an employee of the Company.
There are no interlocking relationships between our Company and other entities that might affect
the determination of the compensation of our executive officers.
Compensation of Named Executive Officers and Directors
Scott Docherty is currently serving as our Chairman. Joe Thompson is serving as our Vice
President and Jack Murray is our Treasurer and Secretary. Mr. Kelly is serving as our
President/General Manager on a full-time basis. As of December 31, 2009, we paid Mr. Kelly a total
of $179,334 for such services. As of December 31, 2009, none of our directors nor any officer had
a written employment agreement with the Company nor received any stock awards, options, warrants or
other similar rights to purchase securities of the Company.
Summary Compensation Table. The following table sets forth all compensation paid or payable
by the Company during the last two fiscal years to Mr. Kelly, our principal executive officer.
Name and | ||||||||||||||||
Principal Position | Year | Salary | Bonus | Total | ||||||||||||
Steve Kelly, |
2009 | $ | 172,907 | $ | 6,427 | $ | 179,334 | |||||||||
President and General Manager
|
2008 | $ | 170,000 | $ | 0 | $ | 170,000 |
The following table sets forth all compensation paid or payable by the Company during the
last fiscal year to our directors.
Name | Fees Earned or Paid in Cash |
All Other Compensation |
Total | |||||||||
Scott Docherty |
$ | 1,300 | (1) | $ | 0 | $ | 1,300 | |||||
Joe Thompson |
$ | 1,300 | (2) | $ | 0 | $ | 1,300 | |||||
Jack Murray |
$ | 900 | (3) | $ | 0 | $ | 900 | |||||
Bruce Bastert |
$ | 1,000 | (4) | $ | 0 | $ | 1,000 | |||||
Roger Miller |
$ | 1,100 | (5) | $ | 0 | $ | 1,100 | |||||
Zafar Rizvi |
$ | 1,200 | (6) | $ | 0 | $ | 1,200 |
(1) | Compensation earned by Mr. Dochertys attendance at board meetings is made payable to
Topflight Grain Cooperative. |
|
(2) | Compensation earned by Mr. Thompsons attendance at board meetings is made payable to
Alliance Grain Company. |
|
(3) | Compensation earned by Mr. Murrays attendance at board meetings is made payable to
Jack Murray. |
|
(4) | Compensation earned by Mr. Basterts attendance at board meetings is made payable to
Ludlow Cooperative Elevator Company. |
|
(5) | Compensation earned by Mr. Millers attendance at board meetings is made payable to
Premier Cooperative, Inc. and Grand Prairie Co-op, Inc.; Grand Prairie Co-op, Inc. merging
with Premier Cooperative after the commencement of the 2009 fiscal year. |
|
(6) | Compensation earned by Mr. Rizvis attendance at board meetings is made payable to REX
American Resources Corporation. |
37
Table of Contents
Director Compensation Arrangements
We compensate our directors $100 per regular monthly and special board meeting they attend.
Except for payments made to Mr. Murray, this per meeting fee is not paid directly to the director
but instead to the company appointing the respective director, each appointed director already
receiving compensation from the appointing company for his services. We will not pay the fee if the
director does not attend the regular monthly or special meeting, committee meeting or pre-approved
industry and other meetings and conferences. There were thirteen board meetings called for the
fiscal year ending December 31, 2009. Mr. Murray, Mr. Bastert, Mr. Miller and Mr. Rizvi each
missed one or more meetings, as evidenced by the payments received by each of them and disclosed in
the above table. Directors receive no other compensation for their participation on the board.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBER MATTERS
Security Ownership of Certain Beneficial Owners
As of December 31, 2009 we had the following persons or entities known by us to be the
beneficial owners of more than 5% of the outstanding units:
Amount and Nature of | ||||||||
Title of Class | Name (1) | Beneficial Owner | Percent of Class | |||||
Membership Units |
Farmers Energy Incorporated | 10,153 units | 73.67 | % |
(1) | Farmers Energy Incorporateds address is 2875 Needmore Rd., Dayton, Ohio 45414. |
Security Ownership of Management
As of December 31, 2009, our directors and officers owned membership units as follows:
Amount and | ||||||||
Nature of | ||||||||
Name and Address of | Beneficial | Percent of | ||||||
Title of Class | Beneficial Owner(1) | Ownership | Class | |||||
Membership Units |
Steve Kelly(2) | 10 units | 0.07 | % | ||||
Membership Units |
Jack Murray(3) | 226 units | 1.64 | % | ||||
Membership Units |
Bruce Bastert(4) | 177 units | 1.28 | % | ||||
Membership Units |
Roger Miller | 5 units | 0.04 | % | ||||
Membership Units |
Zafar Rizvi(5) | 10,153 units | 73.67 | % | ||||
All Directors and Officers as a Group: | 10,571 Units | 76.70 | % |
(1) | The address of the beneficial owner is deemed to be the same address indicated above in Item
10. |
|
(2) | Mr. Kellys units are owned jointly with his wife, Kathleen Kelly. |
|
(3) | 171 units are owned by Premier Cooperative, Inc., as successor-in-interest of Fisher Farmers
Grain & Coal Co., 20 units are owned by Keith Farms, 5 units are owned by JN & JM Farms and 20
units are owned by Murray Farms. Our director, Jack Murray is a principal of Premier
Cooperative, Keith Farms, JN & JM Farms and Murray Farms. Mr. Murrays remaining 10 units are
owned jointly with his wife Patricia Murray. |
|
(4) | Includes 171 units owned by Top Flight Grain Cooperative of which Bruce Bastert is a
cooperative owner. |
|
(5) | Units are owned by Farmers Energy Incorporated. Zafar Rizvi, our director, is the President
of Farmers Energy Incorporated. |
38
Table of Contents
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions
The Companys board of directors reviews all transactions with related parties, as that term
is defined in Item 404 of SEC Regulation S-K, or any transaction in which related persons have an
indirect interest. The Companys Second Amended and Restated Operating Agreement (the or our
Operating Agreement) includes a written policy that requires that any such related transaction be
made on terms and conditions which are no less favorable to the Company than if the transaction had
been made with an independent third party. Further, our Operating Agreement requires our directors
to disclose any potential financial interest in any transaction being considered by the board of
directors prior to voting on such matter. Since our inception, we have engaged in transactions with
seven related parties. Should we engage in any such transactions in the future, all such
arrangements will be analyzed and approved in accordance with the above-referenced written
policies.
Alliance Grain Company
Alliance Grain Company is one of our seed capital members and pursuant to our Operating
Agreement has the right to appoint one member of our board of directors. On June 27, 2007, we
entered into an exchange agreement with Alliance Grain Company. Pursuant to this agreement, we
exchanged approximately $2,000 and 5.0 acres of real estate located in Ford County, Illinois, for
approximately 5.4 acres of real estate owned by Alliance Grain Company valued at approximately
$34,000 located near our site in Ford County, Illinois.
In addition, we entered into a Grain Handling Agreement with Alliance Grain Company on
February 15, 2008. Under this Agreement, Alliance has agreed to provide the Company with its
annual corn requirements for the term of the Agreement. Alliance will acquire corn on the
Companys behalf on pricing terms, as determined in separate written contracts customary in the
grain industry, including, without limitation, cash forward pricing arrangements. The initial term
of the Agreement expires in early June 2011. The Agreement, however, automatically renews for one
(1) year terms until (i) the Company or Alliance provides written notice to the other stating its
intent to terminate (such written notice to be received no less than 60 days before the expiration
of the current term); (ii) either party remains in default following its receipt of a written
notice of default and the expiration of a 10-day cure period; (iii) the bankruptcy of or
appointment of receivership for either party; or (iv) the mutual agreement of the parties to
terminate. In consideration of Alliances grain handling and procurement, the Company has agreed
to pay Alliance a specified amount per bushel. Topflight Grain Cooperative, Inc., Fisher Farmers
Grain & Coal Company, Ludlow Cooperative Elevator Company and Grand Prairie Coop, Inc. are to
receive a certain share, on a per bushel of corn basis, of the amount we pay Alliance for each
bushel of corn Alliance originates with each of them. Fisher Farmers Grain & Coal Company and
Grand Prairie Coop., Inc. have since merged with Premier Cooperative, Inc. As a result, Premier
Cooperative, Inc. is now entitled to the per bushel amount Fisher Farmers and Grand Prairie would
have received under the Agreement.
If Alliance fails to deliver the corn required by the Agreement, the Company may purchase
substitute corn, seek an injunction or specific enforcement, offset amounts owed to Alliance
against the additional cost of substituted corn requirements and/or terminate the Agreement.
Alliance may recover payments, cease delivery of corn requirements, seek an injunction or specific
enforcement and/or terminate the Agreement if the Company fails to
perform as required. The parties have agreed to alternative resolution of all disputes
arising under the Agreement, specifically submitting to arbitration with the National Grain and
Food Association, or if unavailable, the American Arbitration Association.
39
Table of Contents
Farmers Energy Incorporated (FEI)
FEI is our majority member. In addition, FEI has the right to appoint up to six (6) members
of our board of directors. However, regardless of the number of directors actually appointed by
it, FEI has the right to a majority of the available director votes so long as it holds a majority
of our membership units. FEI has appointed Zafar Rizvi as its representative. On behalf of FEI,
Mr. Rizvi hold six votes on each matter submitted to the board of directors for approval.
Topflight Grain Cooperative, Inc., Fisher Farmers Grain & Coal Company, Ludlow Cooperative Elevator
Company and Grand Prairie Coop, Inc.
Our directors, Jack Murray and Roger Miller, are principals of Premier Cooperative, Inc. and
are each appointed to the board of directors by Premier Cooperative, Inc. Additionally, our
director Bruce Bastert is an owner in Topflight Grain Cooperative, Inc., a general manager of
Ludlow Cooperative Elevator Company and Ludlows appointed director on our board. Premier
Cooperative, Inc., as a successor of Fisher Farmers Grain & Coal Company and Grand Prairie Coop,
Inc, Topflight Grain Cooperative, Inc. and Ludlow Cooperative Elevator Company receive certain
payments for each bushel of corn originated at each such cooperative and purchased for the Company
by Alliance under the Grain Handling Agreement discussed above.
Bloomer Connecting Shippers Railroad Co.
Our general manager/president, Steve Kelly, is acting general manager for Bloomer Connecting
Shippers Railroad Co. On January 15, 2008, we entered into a Switching Agreement with Bloomer,
granting it the non-exclusive right to perform switching services for railcars entering and exiting
our Facility on the Norfolk Southern Railway and the Bloomer Shippers Railway Redevelopment League
industry lead tracks. Bloomer has agreed to provide the workforce and locomotives necessary for
the switching services. In consideration of these services, we have agreed to pay a fee based on a
per car amount set in the Agreement and based on industry practice. We have also agreed to pay
Bloomer an additional fee, to be later agreed on by the parties, for services incidental to the
switching services and related to the storing of railcars at Bloomers Gibson City Yard for a
period exceeding two weeks. Each party has agreed to indemnify the other for losses or injuries
related to its own negligence and to share in any loss arising from the negligence of both parties.
The Agreement has an indefinite term, commencing on January 15, 2008 and ending upon
termination, which can occur no earlier than the one (1) year anniversary of Facility operations.
Thereafter, either party may terminate the Agreement with ninety (90) days written notice if (i)
either party is in default and continues in default after thirty (30) days from the receipt of a
notice of default; or (ii) Norfolk Southern Railway notifies us that Bloomers charges are
detrimental to Norfolks haul business. All disputes arising under the Agreement must be submitted
to the American Arbitration Association, subject to the Commercial Arbitration Rules, with the
arbitrators decision to be final and conclusive on the parties. The expense of the arbitrator is
to be shared equally by the parties, with the parties otherwise responsible for their own related
costs and expenses.
Under this Agreement, the Company expended approximately $157,000 during the 2009 fiscal year.
Mr. Thompson, our director, was Bloomers general manager when the Agreement was executed, but did
not receive any direct financial interest from the Companys and/or Bloomers entry into such
Agreement. Mr. Kelly, our director, as Bloomers general manager does not receive any direct
financial interest from the Companys and/or Bloomers participation in the Switching Agreement.
However, any money paid to Bloomer under the Agreement would directly affect Bloomers net income
and may indirectly affect Mr. Kellys compensation for his services as Bloomers general manager.
Director Independence
Our independent directors are Scott Docherty, Bruce Bastert and Roger Miller. Our directors
that are not independent are Joe Thompson, Jack Murray and Zafar Rizvi. The determination of
independence is made by reference to NASDAQ Rule 5605(a)(2). Under such Rule, a director is not
independent if he is an executive officer or employee of the Company or otherwise has a
relationship, which in the board of directors opinion, would interfere with the ability to
independently conduct his corporate responsibilities. Joe Thompson and Jack Murray are not
considered independent because they are serving as our executive officers. Zafar Rizvi is not
considered independent because he is a principal of our majority member FEI. While a majority of
our board of directors is not independent, thereby failing the majority independence requirement of
NASDAQ Rule 5605(b), the Company is not required to comply with such requirement, and instead only
references these NASDAQ Rules for the sole purpose of defining independence. In making these
determinations of independence, and the related determinations set forth below, the board of
directors considered the related-party transactions discussed above.
40
Table of Contents
Audit Committee
Our board of directors appointed an Audit Committee consisting of Scott Docherty, Joe
Thompson, Jack Murray, Zafar Rizvi and Roger Miller. The Audit Committee is exempt from
independence listing standards because our securities are not listed on a national securities
exchange or listed in an automated inter-dealer quotation system of a national securities
association or to issuers of such securities. Nevertheless, Roger Miller and Scott Docherty are
independent within the definition of independence provided by NASDAQ Rule 5605(c)(2), which adopts
the Rule 5605(a)(2) definition of independence and further requires a member to meet the criteria
of independence under Exchange Act Rule 10A-3(b)(1). Mr. Miller and Mr. Docherty are independent
under NASDAQ Rule 5605(a)(2). Further, because neither Mr. Miller nor Mr. Docherty has accepted
any consulting, advisory or other compensatory fee from the Company, or any of its subsidiaries,
nor is an affiliate, each are also independent under the heightened standards of Exchange Act Rule
10A-3(b)(1). For the reasons set forth above, Jack Murray, Joe Thompson and Zafar Rizvi are not
considered independent.
Compensation Committee
Jack Murray, Bruce Bastert, Roger Miller, Zafar Rizvi, Scott Docherty and Joe Thompson serve
as our Compensation Committee. Bruce Bastert, Roger Miller and Scott Docherty are considered
independent within the definition of independence provided by NASDAQ Rule 5605(a)(2). For the
reasons set forth above, Jack Murray, Joe Thompson and Zafar Rizvi are not considered independent.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent Registered Public Accounting Firm
The Audit Committee selected Deloitte & Touche LLP to serve as our independent registered
public accounting firm for the fiscal years ended December 31, 2008 and 2009. Boulay, Heutmaker,
Zibell & Co., P.L.L.P., previously served in such capacity for the fiscal years ending October 31,
2006 through October 31, 2007. The Audit Committee elected to change to Deloitte & Touche LLP
because its provides similar services to the Companys parent company, REX, with whom the Company,
as REXs majority-owned subsidiary, files consolidated financial statements. Boulay, Heutmaker,
Zibell & Co., P.L.L.P. neither resigned nor was dismissed based on any disagreement between it and
the Company.
Our board of directors annually appoints the independent registered public accounting firm for
the Company after receiving the Audit Committees recommendations, typically following the Annual
Meeting. The Audit Committee has again appointed Deloitte & Touche LLP as our independent
registered public accounting firm for the fiscal year ending December 31, 2010.
Audit Fees
The aggregate fees billed by the principal independent registered public accountants to the
Company for the last two fiscal years are as follows:
Category | Fiscal Year | Fees | ||||||
Audit Fees(1) |
2009 | $ | 55,000 | |||||
2008 | $ | 35,000 | ||||||
Audit-Related Fees |
2009 | $ | 0 | |||||
2008 | $ | 0 | ||||||
Tax Fees |
2009 | $ | 0 | |||||
2008 | $ | 0 | ||||||
All Other Fees |
2009 | $ | 0 | |||||
2008 | $ | 0 |
(1) | Audit Fees consist of fees billed for professional services rendered for the audit of our
annual financial statements and services that are normally provided by Deloitte & Touche LLP in
connection with statutory and regulatory filings or engagements for the fiscal years ended
December 31, 2009 and 2008. |
|
(2) | We incurred no other reportable fees in the fiscal years ended December 31, 2008 and December
31, 2009. |
41
Table of Contents
Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services
The Audit Committees policy is to pre-approve all audit and non-audit services provided by
our independent registered public accounting firm, and related services, in accordance with Section
10A of the Exchange Act and 17 C.F.R. § 210.2-01(c)(7)(i)(B). The Audit Committee will generally
pre-approve a list of specific services and categories of services, including audit, audit-related,
tax and other services, for the upcoming or current fiscal year, subject to a specified dollar
limit. Any material service not included in the approved list of services, and all services in
excess of the pre-approved dollar limit, must be separately pre-approved by the Audit Committee.
Our independent registered public accounting firm and management are required to periodically
report to the Audit Committee all services performed and fees charged to date by the firm pursuant
to the pre-approval policy. One hundred percent (100%) of all audit services, audit-related
services and tax-related services were pre-approved by our Audit Committee and no such fees were
rendered pursuant to the de minimus exception under SEC rules.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following exhibits are filed as part of, or are incorporated by reference into, this report:
Exhibit No. | Description | Method of Filing |
||||
10.1 | Ethanol Merchandising Agreement dated June
5, 2009 between One Earth Energy, LLC and
Lansing Ethanol Services, LLC.+
|
* | ||||
10.2 | Natural Gas Pipeline Company of America LLC
(Natural) Transportation Rate Schedule Its
dated June 29, 2009 between One Earth
Energy, LLC and Natural Gas Pipeline
Company of America LLC.
|
* | ||||
10.3 | Grain Handling Agreement dated February 15,
2008 between One Earth Energy, LLC and
Alliance Grain Co.+
|
* | ||||
10.4 | Mutual Release and Termination of Ethanol
Marketing Contract Agreement dated May 14,
2009 between One Earth Energy, LLC and
Eco-Energy Inc.
|
* | ||||
10.5 | Agreement for Assignment of an Undivided
Interest in Real Property and Its
Appurtenances dated December 9, 2008
between One Earth Energy, LLC and Ameren
Energy Generating Company.+
|
* | ||||
10.6 | System Extension or Modification Guarantee
Agreement dated January 18, 2008 between
One Earth Energy, LLC and Central Illinois
Public Service Company d/b/a AmerenCIPS
|
* | ||||
10.7 | First Amendment of Construction Loan
Agreement dated September 19, 2008 between
One Earth Energy, LLC and First National
Bank of Omaha. |
* | ||||
31.1 | Certificate Pursuant to 17 CFR 240.13a-14(a)
|
* | ||||
31.2 | Certificate Pursuant to 17 CFR 240.13a-14(a)
|
* | ||||
32.1 | Certificate Pursuant to 18 U.S.C. § 1350
|
* | ||||
32.2 | Certificate Pursuant to 18 U.S.C. § 1350.
|
* |
(*) | Filed herewith. |
|
(+) | Material has been omitted pursuant to a request for confidential treatment and such materials
have been filed separately with the Securities and Exchange Commission |
42
Table of Contents
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
ONE EARTH ENERGY, LLC |
||||
Date: November 8, 2010 | /s/ Steve Kelly | |||
Steve Kelly | ||||
President (Principal Executive Officer) |
||||
Date: November 8, 2010 | /s/ Larry Brees | |||
Larry Brees | ||||
Chief Financial Officer (Principal Financial and Accounting Officer) |
||||
Date: November 8, 2010 | /s/ Joe Thompson | |||
Joe Thompson | ||||
Vice President and Director | ||||
Date: November 8, 2010 | /s/ Scott Docherty | |||
Scott Docherty | ||||
Chairman and Director | ||||
Date: November 8, 2010 | /s/ Jack Murray | |||
Jack Murray | ||||
Treasurer/Secretary and Director | ||||
Date: November 8, 2010 | /s/ Bruce Bastert | |||
Bruce Bastert | ||||
Director | ||||
Date: November 8, 2010 | /s/ Roger Miller | |||
Roger Miller, Director | ||||
Date: November 8, 2010 | /s/ Zafar Rizvi | |||
Zafar Rizvi, Director | ||||
43