Attached files
file | filename |
---|---|
EX-32.1 - EXHIBIT 32.1 - Western Iowa Energy, L.L.C. | c08520exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - Western Iowa Energy, L.L.C. | c08520exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - Western Iowa Energy, L.L.C. | c08520exv31w1.htm |
EX-10.3 - EXHIBIT 10.3 - Western Iowa Energy, L.L.C. | c08520exv10w3.htm |
EX-31.2 - EXHIBIT 31.2 - Western Iowa Energy, L.L.C. | c08520exv31w2.htm |
EX-10.2 - EXHIBIT 10.2 - Western Iowa Energy, L.L.C. | c08520exv10w2.htm |
EX-10.1 - EXHIBIT 10.1 - Western Iowa Energy, L.L.C. | c08520exv10w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended September 30, 2010.
OR
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the transition period from to .
COMMISSION FILE NUMBER 00051965
WESTERN IOWA ENERGY, LLC
(Exact name of registrant as specified in its charter)
Iowa (State or other jurisdiction of incorporation or organization) |
41-2143913 (I.R.S. Employer Identification No.) |
|
1220 S. Center Street, P.O. Box 399 | ||
Wall Lake, Iowa | 51466 | |
(Address of principal executive offices) | (Zip Code) |
(712) 664-2173
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the Registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.:
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer þ | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date:
As of November 11, 2010, there were 26,447 membership units outstanding.
INDEX
3 | ||||||||
3 | ||||||||
18 | ||||||||
28 | ||||||||
29 | ||||||||
30 | ||||||||
30 | ||||||||
30 | ||||||||
32 | ||||||||
32 | ||||||||
32 | ||||||||
32 | ||||||||
32 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 10.2 | ||||||||
Exhibit 10.3 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
WESTERN IOWA ENERGY, LLC
BALANCE SHEETS
BALANCE SHEETS
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(UNAUDITED) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 149,077 | $ | 300 | ||||
Margin deposits |
67,358 | 58,445 | ||||||
Accounts receivable: |
||||||||
Trade |
901,546 | | ||||||
Related party |
| 3,106,676 | ||||||
Other receivables |
| 387,883 | ||||||
Incentive receivables |
| 2,946,499 | ||||||
Inventory |
622,344 | 383,528 | ||||||
Prepaid expenses |
200,471 | 540,890 | ||||||
Total current assets |
1,940,796 | 7,424,221 | ||||||
PROPERTY, PLANT AND EQUIPMENT |
||||||||
Land and land improvements |
1,288,157 | 1,364,842 | ||||||
Office building and equipment |
876,595 | 645,542 | ||||||
Plant and process equipment |
33,826,668 | 33,854,309 | ||||||
Construction in progress |
| 8,136 | ||||||
Total, at cost |
35,991,420 | 35,872,829 | ||||||
Less accumulated depreciation |
9,340,889 | 7,669,210 | ||||||
Total property, plant and equipment |
26,650,531 | 28,203,619 | ||||||
OTHER ASSETS |
||||||||
Land options |
| 596 | ||||||
Other investments |
124,078 | 107,198 | ||||||
Loan origination fees, net of amortization |
55,782 | 69,355 | ||||||
Total other assets |
179,860 | 177,149 | ||||||
TOTAL ASSETS |
$ | 28,771,187 | $ | 35,804,989 | ||||
LIABILITIES AND MEMBERS EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Checks issued in excess of bank balance |
$ | | $ | 333,008 | ||||
Accounts payable: |
||||||||
Trade |
165,829 | 824,979 | ||||||
Related party |
20,579 | 88,277 | ||||||
Current portion of long-term debt |
384,722 | 2,459,722 | ||||||
Derivative instruments |
29,657 | 2,587 | ||||||
Accrued interest |
6,273 | 22,226 | ||||||
Accrued wages and benefits |
61,570 | 107,664 | ||||||
Accrued payroll taxes |
2,149 | 3,678 | ||||||
Accrued expenses related party |
4,687 | 103,537 | ||||||
Other current liabilities |
50,770 | 46,304 | ||||||
Total current liabilities |
726,236 | 3,991,982 | ||||||
LONG-TERM LIABILITIES |
||||||||
Long-term debt, less current portion above |
1,573,055 | 3,262,222 | ||||||
Total liabilities |
2,299,291 | 7,254,204 | ||||||
MEMBERS EQUITY |
||||||||
Contributed capital |
23,516,376 | 23,516,376 | ||||||
Retained earnings |
2,955,520 | 5,034,409 | ||||||
Total members equity |
26,471,896 | 28,550,785 | ||||||
TOTAL LIABILITIES AND MEMBERS EQUITY |
$ | 28,771,187 | $ | 35,804,989 | ||||
See accompanying notes.
3
Table of Contents
WESTERN IOWA ENERGY, LLC
STATEMENTS OF OPERATIONS (UNAUDITED)
STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
September 30, 2010 | September 30, 2009 | September 30, 2010 | September 30, 2009 | |||||||||||||
REVENUES |
||||||||||||||||
Related parties |
$ | 1,917,696 | $ | 16,026,679 | $ | 8,452,526 | $ | 28,848,407 | ||||||||
Unrelated parties |
901,546 | | 901,546 | | ||||||||||||
Incentive funds |
78,997 | 1,011,205 | 78,997 | 3,055,599 | ||||||||||||
Total revenues |
2,898,239 | 17,037,884 | 9,433,069 | 31,904,006 | ||||||||||||
COST OF SALES |
3,354,338 | 15,430,919 | 10,327,564 | 30,222,543 | ||||||||||||
Gross profit (loss) |
(456,099 | ) | 1,606,965 | (894,495 | ) | 1,681,463 | ||||||||||
OPERATING EXPENSES |
||||||||||||||||
Consulting and professional fees |
98,237 | 152,300 | 380,698 | 526,936 | ||||||||||||
Office and administrative expenses |
178,664 | 389,135 | 791,362 | 1,019,562 | ||||||||||||
Total operating expenses |
276,901 | 541,435 | 1,172,060 | 1,546,498 | ||||||||||||
OTHER INCOME (EXPENSE) |
||||||||||||||||
Interest income |
808 | 1,338 | 3,293 | 2,690 | ||||||||||||
Interest expense |
(22,940 | ) | (79,356 | ) | (81,879 | ) | (256,303 | ) | ||||||||
Grant income |
| 131,525 | | 231,525 | ||||||||||||
Patronage dividends |
| | 66,252 | 116,734 | ||||||||||||
Total other income (expense) |
(22,132 | ) | 53,507 | (12,334 | ) | 94,646 | ||||||||||
NET INCOME (LOSS) |
$ | (755,132 | ) | $ | 1,119,037 | $ | (2,078,889 | ) | $ | 229,611 | ||||||
BASIC AND DILUTED INCOME (LOSS) PER UNIT |
$ | (28.55 | ) | $ | 42.31 | $ | (78.61 | ) | $ | 8.68 | ||||||
WEIGHTED AVERAGE UNITS OUTSTANDING,
BASIC AND DILUTED |
26,447 | 26,447 | 26,447 | 26,447 | ||||||||||||
See accompanying notes.
4
Table of Contents
WESTERN IOWA ENERGY, LLC
STATEMENTS OF CASH FLOWS (UNAUDITED)
STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended | Nine Months Ended | |||||||
September 30, 2010 | September 30, 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income (loss) |
$ | (2,078,889 | ) | $ | 229,611 | |||
Adjustments to reconcile net loss to net cash
provided by operating activities |
||||||||
Depreciation and amortization |
1,685,252 | 1,676,391 | ||||||
Provision for bad debts |
105,715 | | ||||||
Non cash portion of patronage dividends |
(16,880 | ) | (26,303 | ) | ||||
Non cash forgiveness of debt |
| (100,000 | ) | |||||
Effects of changes in operating assets and liabilities |
||||||||
Margin deposits |
(8,913 | ) | 145,583 | |||||
Accounts receivable |
2,099,415 | (1,177,902 | ) | |||||
Other receivables |
387,883 | 47,792 | ||||||
Incentive receivables |
2,946,499 | 96,137 | ||||||
Inventory |
(238,816 | ) | 1,285,710 | |||||
Derivative instruments |
27,070 | 37,402 | ||||||
Prepaid expenses and other assets |
340,419 | 10,584 | ||||||
Accounts payable |
(726,848 | ) | 698,191 | |||||
Accrued interest |
(15,953 | ) | (11,790 | ) | ||||
Accrued wages and benefits |
(46,094 | ) | 36,469 | |||||
Accrued payroll taxes |
(1,529 | ) | 208 | |||||
Accrued expenses related party |
(98,850 | ) | (102,964 | ) | ||||
Other current liabilities |
4,466 | 4,394 | ||||||
Net cash provided by operating activities |
4,363,947 | 2,849,513 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchase of property, plant and equipment, including
construction in progress |
(117,995 | ) | (136,040 | ) | ||||
Net cash used in investing activities |
(117,995 | ) | (136,040 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Net decrease in checks issued in excess of bank balance |
(333,008 | ) | | |||||
Proceeds from long-term debt |
3,475,000 | 9,077,000 | ||||||
Payments on long-term debt |
(7,239,167 | ) | (11,781,167 | ) | ||||
Net cash used in financing activities |
(4,097,175 | ) | (2,704,167 | ) | ||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
148,777 | 9,306 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
300 | 66,400 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 149,077 | $ | 75,706 | ||||
See accompanying notes.
5
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Western Iowa Energy, LLC located in Wall Lake, Iowa was organized on September 21, 2004 to own and
operate a 30 million gallon biodiesel plant for the production of fuel grade biodiesel. The
Companys fiscal year ends on December 31. Significant accounting policies followed by the Company
are presented below.
Use of Estimates in Preparing Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Basis of Accounting
The Company uses the accrual basis of accounting in accordance with accounting principles generally
accepted in the United States of America. This method recognizes revenues as earned and expenses
as incurred.
In the opinion of management, all adjustments have been made that are necessary to fairly present
the financial position, results of operations and cash flows of the Company.
These financial statements should be read in conjunction with the financial statements and notes
included in the Companys financial statements for the year ended December 31, 2009.
Revenue Recognition
Revenue from the production of biodiesel and related products is recorded upon transfer of the
risks and rewards of ownership which generally occurs upon delivery to customers.
Interest income is recognized as earned. Patronage dividends are recognized when received.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be cash equivalents.
The Company maintains its accounts primarily at one financial institution. At times throughout the
year, the Companys cash and equivalents balances may exceed amounts insured by the Federal Deposit
Insurance Corporation.
Accounts Receivable
Accounts receivable are presented at face value, net of the allowance for doubtful accounts. The
allowance for doubtful accounts is established through provisions charged against income and is
maintained at a level believed adequate by management to absorb estimated bad debts based on
historical experience and current economic conditions. Management has established an allowance for
doubtful accounts of $-0- and $105,712 at September 30, 2010 and December 31, 2009.
6
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
The Companys policy is to charge simple interest on trade receivables past due balances; accrual
of interest is discontinued when management believes collection is doubtful. Receivables are
considered past due based upon payment terms set forth at the date of the related sale. The
Company has no receivables accruing interest at September 30, 2010 and December 31, 2009.
Derivative Instruments and Hedging Activities
Topic 815 of the Accounting Standards Codification (ASC), Derivatives and Hedging, requires a
company to evaluate its contracts to determine whether the contracts are derivatives. Certain
contracts that literally meet the definition of a derivative may be exempted from ASC 815 as normal
purchases or normal sales. Normal purchases and normal sales are contracts that provide for the
purchase or sale of something other than a financial instrument or derivative instrument that will
be delivered in quantities expected to be used or sold over a reasonable period in the normal
course of business. Contracts that meet the requirements of normal purchase or normal sales are
documented as such, and exempted from the accounting and reporting requirements of ASC 815. The
Company does enter into agreements to purchase soybean oil for anticipated production needs. These
contracts are considered normal purchase contracts and exempted from ASC 815.
Inventories
Inventory is stated at the lower of cost, determined on a first in, first out basis, or market
value.
Property, Plant, and Equipment
Property and equipment are stated at cost. Significant additions are capitalized, while
expenditures for maintenance, repairs and minor renewals are charged to operations when incurred.
Depreciation and amortization are computed using the straight-line method over the estimated useful
lives of the assets determined as follows:
Years | ||
Land improvements |
20-40 | |
Office building |
5-40 | |
Office equipment |
5-20 | |
Plant and process equipment |
10-40 |
Depreciation expense for the three months and nine months ended September 30, 2010 was $558,047 and
$1,671,678, respectively. Depreciation expense for the three months and nine months ended
September 30, 2009 was $555,804 and $1,662,818, respectively.
The Company reviews its property and equipment for impairment whenever events indicate that the
carrying amount of the asset may not be recoverable. An impairment loss is recorded when the sum
of the future cash flows is less than the carrying amount of the asset. The amount of the loss is
determined by comparing the fair market values of the asset to the carrying amount of the asset.
7
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
Loan Origination Fees
Loan origination fees are stated at cost and are amortized on the straight-line method over the
life of the loan agreements. Amortization commenced as the Company borrowed funds on the loans.
Amortization for the three and nine months ended September 30, 2010 and 2009 was $4,524 and
$13,572, respectively.
Other Investments
Other investments consist of investments in the capital stock and patron equities of the Companys
primary lenders. The investments are stated at cost and adjusted for non cash patronage equities
received.
Grant Income
Grant income consists of amounts received from unaffiliated organizations to assist in the
organization and development of the Company. Amounts are recorded as other income when there is no
obligation to repay the organization.
Income Taxes
The Company is organized as a limited liability company under state law and is treated as a
partnership for income tax purposes. Under this type of organization, the Companys earnings pass
through to the partners and are taxed at the partner level. Accordingly, no income tax provision
has been calculated. Differences between financial statement basis of assets and tax basis of
assets is related to capitalization and amortization of organization and start-up costs for tax
purposes, whereas these costs are expensed for financial statement purposes. Differences also
exist in the treatment of expenses capitalized for inventory for tax purposes, prepaid expenses,
and differences between depreciable lives and methods used for book and tax purposes.
Loss Per Unit
Losses per unit are calculated based on the period of time units have been issued and outstanding.
For purposes of calculating diluted earnings per capital unit, units subscribed for but not issued
are included in the computation of outstanding capital units based on the treasury stock method.
As of September 30, 2010 and December 31, 2009, there was not a difference between basic and
diluted earnings per unit as there were no units subscribed.
Cost of Sales
The primary components of cost of sales from the production of biodiesel products are raw materials
(soybean oil, animal fats, hydrochloric acid, methanol, and sodium methylate), energy (natural gas
and electricity), labor and depreciation on process equipment.
Fixed costs during the periods when the plant is idle are classified in cost of sales. Cost of
sales during these periods primarily consists of labor, depreciation on process equipment, and
other indirect costs.
8
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
Shipping and Handling Costs
Shipping and handling costs are expensed as incurred and are included in the cost of sales.
Environmental Liabilities
The Companys operations are subject to federal, state and local environmental laws and
regulations. These laws require the Company to investigate and remediate the effects of the
release or disposal of materials at its location. Accordingly, the Company has adopted policies,
practices and procedures in the areas of pollution control, occupational health, and the
production, handling, storage and use of hazardous materials to prevent material environmental or
other damage; and to limit the financial liability which could result from such events.
Environmental liabilities are recorded when the liability is probable and the costs can be
reasonably estimated.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument held by the Company:
Current assets and current liabilities The carrying value approximates fair value due to
the short maturity of these items.
Long-term debt The carrying amount of long-term obligations approximated fair value based
on estimated interest rates for comparable debt.
New Accounting Standards
In February 2010, FASB issued Accounting Standards Update (ASU) 2010-09 Subsequent Events (Topic
855) Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09 removes the
requirement for an SEC filer to disclose a date in both issued and revised financial statements.
Revised financial statements include financial statements revised as a result of either correction
of an error or retrospective application of GAAP. All of the amendments in ASU 2010-09 are
effective upon issuance of the final ASU, except for the use of the issued date for conduit debt
obligors. That amendment is effective for interim or annual periods ending after September 15,
2010. The Company adopted ASU 2010-09 and it did not have a material impact on the Companys
interim financial statements.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820),
Improving Disclosures about Fair Value Measurements, amending ASC 820. ASU 2010-06 requires
entities to provide new disclosures and clarify existing disclosures relating to fair value
measurements. The new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in Level 3 fair value measurements, which are
effective for fiscal years beginning after December 15, 2010 and for interim periods within those
fiscal years. The adoption of ASU 2010-06 did not have a material impact on the Companys financial
position or results of operations.
9
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTE 2 INCENTIVE PAYMENTS AND RECEIVABLE
Revenue from federal incentive programs is recorded when the Company has sold blended biodiesel and
satisfied the reporting requirements under the applicable program. When it is uncertain that the
Company will receive full allocation and payment due under the federal incentive program, it
derives an estimate of the incentive revenue for the relevant period based on various factors
including the most recently used payment factor applied to the program. The estimate is subject to
change as management becomes aware of increases or decreases in the amount of funding available
under the incentive programs or other factors that affect funding or allocation of funds under such
programs.
The Company receives federal incentive revenues from the Volumetric Ethanol Tax Credit (VEETC)
and Commodity Credit Corporation (CCC) Bioenergy Programs. The VEETC expired on December 31, 2009.
The amount of incentives receivable was $-0- and $2,946,499 as of September 30, 2010 and December
31, 2009.
NOTE 3 INVENTORY
Inventory consists of the following:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Raw material |
$ | 165,638 | $ | 273,791 | ||||
Work in process |
359,350 | 49,398 | ||||||
Finished goods |
97,356 | 60,339 | ||||||
Total |
$ | 622,344 | $ | 383,528 | ||||
10
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTE 4 DEBT AND FINANCING
Long-Term Debt
Long-term obligations of the Company are summarized as follows:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Note payable to Farm Credit Services of America and
CoBank under term note agreement see details
below. |
$ | 275,000 | $ | 2,350,000 | ||||
Note payable to Farm Credit Services of America and
CoBank under reducing revolving credit note see
details below. |
1,025,000 | 2,630,000 | ||||||
Note payable to the Iowa Department of Economic Development see details below. |
185,000 | 207,500 | ||||||
Note payable to Glidden Rural Electric Cooperative see details below |
472,777 | 534,444 | ||||||
Total |
1,957,777 | 5,721,944 | ||||||
Less current portion |
384,722 | 2,459,722 | ||||||
Long-term portion |
$ | 1,573,055 | $ | 3,262,222 | ||||
The estimated future maturities of long-term debt at September 30, 2010 are as follows:
2011 |
$ | 384,722 | ||
2012 |
112,222 | |||
2013 |
209,722 | |||
2014 |
507,222 | |||
2015 |
682,223 | |||
Thereafter |
61,666 | |||
Total |
$ | 1,957,777 | ||
The Company has available loan commitments from Farm Credit Services of America and CoBank. The
commitments consisted of a $10,000,000 term note, a $5,510,000 reducing revolving credit note and a
$490,000 letter of credit. The commitment under the reducing revolving credit note reflects a
$2,000,000 reduction which is effective until January 31, 2011. As of September 30, 2010 and
December 31, 2009, the balance outstanding under the term note was $275,000 and $2,350,000,
respectively. Principal payments of $450,000 as amended, are required under the term loan and
commenced December 20, 2006 and due each quarter thereafter, with a final payment due no later than
December 20, 2011. As of September 30, 2010 and December 31, 2009, the balance outstanding under
the reducing revolving credit note was $1,025,000 and $2,630,000, respectively. Advances under the
reducing revolving credit note are available through the life of the commitment. The commitment
reduces by $900,000
semi-annually beginning July 1, 2012 and continuing through January 1, 2016, with a final reduction
at the expiration of the commitment on July 1, 2016, at which time any outstanding balance shall be
due and payable in full. The notes require interest payments based on unpaid principal. The
agreements also include a provision for additional payments for the fiscal years ending 2006
through 2010 based on the free cash flows of the Company. The agreements provide for several
different interest rate options including variable and fixed options (3.25% and 3.50% variable on
the term note and revolving credit note, as of September 30, 2010 and December 31, 2009,
respectively). The variable interest rate options are based on Libor or the agents base rate and
include adjustments for performance which is based on the Companys debt to net worth ratio,
measured quarterly. The Company has issued a $490,000 irrevocable letter of credit through CoBank
in favor of Glidden Rural Electric Cooperative. The notes are secured by essentially all of the
Companys assets. At September 30, 2010, the Company had $4,485,000 of available borrowings under
the reducing revolving credit note.
11
Table of Contents
WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
The loan agreements with Farm Credit and CoBank contain various covenants pertaining to minimum
working capital and minimum net worth requirements. As of September 30, 2010 and December 31,
2009, the Company believes it is in compliance with said covenants.
The Company was awarded $400,000 from the Iowa Department of Economic Development (IDED) consisting
of a $300,000 zero interest deferred loan and a $100,000 forgivable loan, the balance of which was
$185,000 and $207,500 at September 30, 2010 and December 31, 2009, respectively. The zero interest
deferred loan requires monthly installments of $2,500 beginning January 2008, with remaining unpaid
principal due at maturity, December, 2012. The Company was required to satisfy the terms of the
agreement to receive a permanent waiver of the forgivable loan. In April 2009, the Company
received notice from the IDED that the Company had satisfied the terms of the agreement and had
forgiven the forgivable loan. The forgiveness of the loan is reflected in other income in the
accompanying statement of operations for the three months ended March 31, 2009. The loan is
secured by a security agreement including essentially all of the Companys assets.
In July 2006, the Company entered into a rural development loan agreement under the Rural
Electrification Act of 1936 with Glidden Rural Electric Cooperative. The original loan amount was
$740,000 and requires monthly installments of $6,851, requiring no interest and commencing July 31,
2007. The loan is to be paid in full on or before the tenth anniversary date of the first advance
of funds. The Company has issued an irrevocable letter of credit through CoBank in favor of
Glidden Rural Electric Cooperative as security for the note.
NOTE 5 MEMBERS EQUITY
The Companys operating agreement provides that the net profits or losses of the Company will be
allocated to the members in proportion to the membership units held. Members will not have any
right to take part in the management or control of the Company. Each membership unit entitles the
member to one vote on any matter which the member is entitled to vote. Transfers of membership
units are prohibited except as provided in the operating agreement.
12
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WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTE 6 CASH FLOW DISCLOSURES
Supplemental disclosure for interest paid:
Nine Months | Nine Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2010 | 2009 | |||||||
Cash paid for interest |
$ | 97,832 | $ | 268,093 | ||||
NOTE 7 RELATED PARTY TRANSACTIONS
The Companys general contractor (Renewable Energy Group, LLC) used to construct the plant is an
entity related to West Central Coop who was originally contracted to provide the management and
operational services for the Company. Renewable Energy Group, LLC was also issued member units in
July 2006 and December 2006 in exchange for a reduction in the construction payable. In July 2006,
West Central Coop and Renewable Energy Group, LLC joined forces and created Renewable Energy Group,
Inc. (REG, Inc.). On September 21, 2006, the Company consented to the assignment of the contract
to construct the facility and the management and operational services agreement to REG, Inc.
The Company incurred management and operational service fees, feed stock procurement fees and
marketing fees with REG, Inc. For the three and nine months ended September 30, 2010, the Company
incurred service fees of $9,729 and $102,639, respectively. For the three and nine months ended
September 30, 2009, the Company incurred service fees of $200,212 and $370,657, respectively. The
Company also purchases feed stock from West Central Coop and Bunge North America, Inc. an entity
related by common ownership in REG, Inc. For the nine months ended September 30, 2010 and 2009,
the Company purchased feed stocks of $-0- and $757,377, respectively, from these related parties.
The amount payable to REG, Inc. as of September 30, 2010 and December 31, 2009 was $20,579 and
$88,277, respectively.
On April 3, 2009, the Company received from REG, Inc., a notice of termination of its management
and operational services agreement. The notification from REG, Inc. states that it shall
constitute such twelve month advance termination notice required by the terms of the agreement.
The agreement expired in 2010.
NOTE 8 MAJOR CUSTOMER AND COMMITMENTS
On September 24, 2010, the Company entered into three agreements with Archer-Daniels-Midland (ADM)
for product marketing, feedstock procurement and other services. The marketing agreement provides
that ADM will purchase from the Company and the Company will sell to ADM all of the biodiesel and
related products produced by the Company. The feedstock agreement provides that ADM will procure
feedstock for the Companys production plant. The services agreement provides that ADM will
provide certain services to the Company such as; safety, regulatory and environmental compliance,
operations assistance and quality control and lab testing. The agreements are effective for one
year commencing on the first day of the month in which the Company commences production of
biodiesel. The agreements may also be terminated by either party upon thirty days written notice.
Revenues from this customer for
the three and nine months ended September 30, 2010 were $901,546. Trade accounts receivable due
from this customer as of September 30, 2010 were $901,546.
13
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WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTE 9 LEASE COMMITMENTS
During July 2006, the Company entered into an operating lease agreement for rail equipment which
expires in 2011. The lease agreement has a monthly payment amount of $2,969. The following is a
schedule of future minimum lease payments under a non-cancelable lease at September 30, 2010:
2011 |
$ | 26,720 | ||
Lease expense for the three and nine months ended September 30, 2010 and 2009 was $8,907 and
$26,720, respectively.
NOTE 10 RETIREMENT AND SAVINGS PLAN
The Company has a 401(k) retirement and savings plan, which is available to substantially all
employees. The participants may contribute up to 18% of their compensation. The Companys
matching contribution is discretionary for each plan year. The Company contributions for the nine
months ended September 30, 2010 and 2009, was $14,680 and $15,498, respectively.
NOTE 11 FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows the guidance set forth in ASC Topic 820 for assets and liabilities recognized
at fair value on a recurring basis. This guidance provides a comprehensive framework for measuring
fair value and expands disclosures which are required about fair value measurements. Specifically,
the guidance sets forth a definition of fair value and establishes a hierarchy prioritizing the
inputs to valuation techniques, giving the highest priority to quoted prices in active markets for
identical assets and liabilities and the lowest priority to unobservable value inputs. The
adoption of this guidance had an immaterial impact on the companys financial statements. The
guidance defines levels within the hierarchy as follows:
| Level 1Unadjusted quoted prices for identical assets and liabilities in active
markets; |
| Level 2Quoted prices for similar assets and liabilities in active markets (other
than those included in Level 1) which are observable for the asset or liability, either
directly or indirectly; and |
| Level 3Valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable. |
14
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WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
The following tables set forth financial assets and liabilities measured at fair value in the
consolidated statement of financial position and the respective levels to which the fair value
measurements are classified within the fair value hierarchy as of September 30, 2010 and December
31, 2009:
September 30, 2010 | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Carrying | Active Markets for | Observable | Unobservable | |||||||||||||
Amount on | Identical Assets | Inputs | Inputs | |||||||||||||
Balance Sheet | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Financial liabilities: |
||||||||||||||||
Commodity derivatives |
$ | (29,657 | ) | $ | (29,657 | ) | $ | | $ | | ||||||
December 31, 2009 | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Carrying | Active Markets for | Observable | Unobservable | |||||||||||||
Amount on | Identical Assets | Inputs | Inputs | |||||||||||||
Balance Sheet | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Financial liabilities: |
||||||||||||||||
Commodity derivatives |
$ | (2,587 | ) | $ | (2,587 | ) | $ | | $ | | ||||||
The Company enters into various commodity derivative instruments, including forward contracts,
futures, options and swaps. The fair value of the Companys derivatives are determined using
unadjusted quoted prices for identical instruments on the applicable exchange in which the Company
transacts. When quoted prices for identical instruments are not available, the Company uses forward
price curves derived from market price quotations. Market price quotations are obtained from
independent brokers, exchanges, direct communication with market participants and actual
transactions executed by the Company.
NOTE 12 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company adopted ASC Topic 815, Derivatives and Hedging, on January 1, 2009. This guidance was
intended to improve financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their effects on an
entitys financial position, financial performance, and cash flows.
Objectives and Strategies for Holding Derivative Instruments
In the ordinary course of business, the Company enters into contractual arrangements (derivatives)
as a means of managing exposure to changes in biodiesel prices and feedstock costs under
established procedures and controls. The Company has established a variety of approved derivative
instruments to be utilized in each risk management program, as well as varying levels of exposure
coverage and time horizons based on an assessment of risk factors related to each hedging program.
As part of its trading activity, the Company uses futures, option and swap contracts offered
through regulated commodity exchanges to reduce risk and is exposed to risk of loss in the market
value of biodiesel inventories and input costs.
15
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WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
Commodity Risk Management
Commodity price risk management programs serve to reduce exposure to price fluctuations on
purchases of feedstocks and biodiesel prices. The Company enters into over-the-counter and
exchange-traded derivative commodity instruments to hedge the commodity price risk associated with
feedstocks and commodity exposures. These agreements expire throughout 2010.
Accounting for Derivative Instruments and Hedging Activities
All derivatives are designated as non-hedge derivatives. Although the contracts may be effective
economic hedges of specified risks, they do not meet the hedge accounting criteria of ASC 815. At
September 30, 2010 and December 31, 2009, the Company had net derivative liabilities of $(29,657)
and $(2,587), respectively, related to these instruments, with the related mark-to-market effects
included in Cost of sales in the statements operations.
The following tables set forth the fair value of derivatives not designated as hedging instruments
as of September 30, 2010 and December 31, 2009, respectively:
Asset Derivatives | Liability Derivatives | |||||||||||
September 30, 2010 | December 31, 2009 | |||||||||||
Balance Sheet | Balance Sheet | |||||||||||
Location | Fair Value | Location | Fair Value | |||||||||
Commodity contracts - |
||||||||||||
Heat oil swaps |
Current liabilities | $ | (29,657 | ) | Current liabilities | $ | (2,587 | ) | ||||
During the three months and nine months ended September 30, 2010 and 2009, net realized and
unrealized losses on derivative transactions were recognized in the statement of operations as
follows:
Derivative (Gain) Loss | Derivative (Gain) Loss | |||||||||||
Three Months Ended | Three Months Ended | |||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||
Statement of | Statement of | |||||||||||
Operations | Operations | |||||||||||
Location | (Gain) Loss | Location | (Gain) Loss | |||||||||
Commodity contracts - |
||||||||||||
Heat oil swaps |
Cost of sales | $ | (41,043 | ) | Cost of sales | $ | (103,583 | ) | ||||
Derivative (Gain) Loss | Derivative (Gain) Loss | |||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||
Statement of | Statement of | |||||||||||
Operations | Operations | |||||||||||
Location | (Gain) Loss | Location | (Gain) Loss | |||||||||
Commodity contracts - |
||||||||||||
Heat oil swaps |
Cost of sales | $ | (147,344 | ) | Cost of sales | $ | 696,484 | |||||
16
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WESTERN IOWA ENERGY, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTES TO FINANCIAL STATEMENTS
September 30, 2010
NOTE 13 UNCERTAINTIES
The Company has produced biodiesel for sale to customers since September of 2006. During the
Companys short history, it has dealt with the lack of a direct correlation between the cost of its
inputs and the selling price of the products that it produces. On the input side, it has to work
within the Agricultural market; and on the output side, it has to work within the Energy market.
Historically, there has been no consistent relationship between those two markets. Because of the
relationship of its business within differing markets, it is necessary that management stay abreast
of the varying market conditions to determine the economic relationship that exists at any given
time and under certain market conditions. Because of the subjectivity involved with the
determination and relationships of market conditions, the uncertainties are exacerbated. The
flexibility of the production facilities to process varying feed stocks adds to the Companys
ability to respond to the varying market conditions and to reduce some of the market uncertainties.
The expiration of the federal blenders tax credit on December 31, 2009, subject to any action
that Congress may take in 2010, may also materially impair the Companys ability to profitably
produce and sell biodiesel. The Company warm idled its facility in April 2010 and has had reduced
production since that time. For the nine months ended September 30, 2010 the Company generated net
losses of $2,078,889 as a result of the aforementioned factors.
The accompanying financial statements have been prepared assuming the Company will continue as a
going concern. Due to certain items discussed above, our ability to continue to generate positive
cash flow is uncertain.
NOTE 14 GAIN CONTINGENCIES
The Companys former primary customer and marketer (REG, Inc.) has agreed to an arbitration hearing
with a European customer. The Company and REG, Inc. allege breach of contract as the customer
failed to take delivery of the Companys product. The Companys portion of damages associated with
arbitration hearing is $1,054,488. At this time, no estimate can be made as to the time or the
amount, if any, of the ultimate recovery. As such no revenues have been recorded in the
accompanying statement of operations for the nine months ended September 30, 2010 relating to
estimated damages recoverable. Revenues will be recorded at which time the actual damages are
determinable, which will likely occur upon receipt.
NOTE 15 SUBSEQUENT EVENTS
Management evaluated subsequent events through the date the financial statements were issued.
On October 25, 2010 the Company entered into an agreement with Farm Credit Services of America to
extend the $2,000,000 reduction in the commitment under the revolving credit note to January 31,
2011 (see also Note 4).
17
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of
Operations. |
We prepared the following discussion and analysis to help you better understand our financial
condition, changes in our financial condition, and results of operations for the period ended
September 30, 2010, compared to the same period in fiscal year 2009. This discussion should be
read in conjunction with the financial statements and notes and the information contained in the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
Cautionary Statements Regarding Forward Looking Statements
This report contains historical information, as well as forward-looking statements. These
forward-looking statements include any statements that involve known and unknown risks and relate
to future events and our expectations regarding future performance or conditions. Words such as
may, should, anticipate, believe, expect, will, plan, future, intend, could,
estimate, predict, hope, potential, continue, or the negative of these terms or other
similar expressions are intended to identify forward-looking statements, but are not the exclusive
means of identifying such statements. These forward-looking statements, and others we may make
from time to time, are subject to a number of risks and uncertainties. Many factors could cause
actual results to differ materially from those projected in forward-looking statements. While it
is impossible to identify all such factors, factors that could cause actual results to differ
materially from those estimated by us include, but are not limited to:
| Changes in federal, state, or local incentives for biodiesel production, including
without limitation the federal biodiesel blenders tax credit; |
||
| The availability and adequacy of our cash flow to meet our requirements; |
||
| Changes to the rules related to the Renewable Fuels Standard and the value of
renewable identification numbers (RINs); |
||
| Competition with other manufacturers in the biodiesel industry; |
||
| Results of our hedging strategies; |
||
| Changes in interest rates and the availability of credit to support capital
improvements, development, expansion, and operations; |
||
| Changes in the amounts available under our credit facilities with Farm Credit; |
||
| Our ability to keep up with the latest technology for the production of biodiesel; |
||
| Decrease in the demand for biodiesel; |
||
| Changes in plant production capacity or technical difficulties in operating the
plant; |
||
| Actual biodiesel and co-product production varying from expectations; |
||
| Availability and cost of products and raw materials, particularly soybean oil and
animal fats; |
||
| Changes in the price and market for biodiesel and its co-products; |
||
| Our ability to market and our reliance on ADM to market our products; |
||
| Fluctuations in petroleum prices; |
||
| Our ability to procure and our reliance on ADM to procure feedstock for our plant; |
||
| Competition from alternative fuels and alternative fuel additives; |
||
| Changes in our business strategy, capital improvement, or development plans; |
||
| Consequences of the domestic and global economic downturn and ongoing financial
crisis; |
||
| Our ability to generate free cash flow to invest in our business and service our
debt; |
||
| Changes in general economic conditions or the occurrence of certain events causing
an economic impact in the agriculture, oil, or transportation industries; |
||
| Changes in the environmental regulations or in our ability to comply with the
environmental regulations that apply to our plant operations; |
||
| Changes and advances in biodiesel production technology; |
||
| Our ability to export our biodiesel; |
||
| Overcapacity within the biodiesel industry resulting in increased competition and
costs for feedstock and/or decreased prices for our biodiesel and co-products; |
||
| Our ability to successfully re-start operations following the warm-idling of our
plant; |
||
| The imposition of tariffs or other duties on biodiesel imported into Europe; |
18
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| Our ability to comply with the financial covenants in our loan agreements; |
||
| Changes to our operations related to the engagement of ADM as our biodiesel and
co-product marketer and feedstock procurer; |
||
| Our ability to hire qualified personnel to operate the plant if and when we re-start
operations following our warm-idling; and |
||
| Other factors described elsewhere in this report. |
We do not undertake any duty to update forward-looking statements after the date they are made
or to conform them to actual results or to changes in circumstances or expectations. Furthermore,
we cannot guarantee future results, events, levels of activity, performance, or achievements. We
caution you not to put undue reliance on any forward-looking statements, which speak only as of the
date of this report. You should read this report and the documents that we reference in this
report and have filed as exhibits completely and with the understanding that our actual future
results may be materially different from what we currently expect. We qualify all of our
forward-looking statements by these cautionary statements.
Overview
Western Iowa Energy, LLC (WIE) is an Iowa limited liability company formed on September 21,
2004, for the purpose of developing, constructing, and operating a 30 million gallon per year
biodiesel manufacturing facility in Sac County, Iowa. References to we, us, and our refer to
Western Iowa Energy, LLC. Since May 2006, we have been engaged in the production of biodiesel and
its co-products, including glycerin, fatty acids and soapstock. We derive our revenues from the
sale and distribution of our biodiesel and co-products throughout the continental United States and
overseas.
In mid-April 2010 we warm-idled our plant due to limited sales and reduced sales forecasts
related to the failure of Congress to extend the blenders tax credit for biodiesel mixtures, which
expired on December 31, 2009. So long as our plant is warm-idled, we expect to generate only
limited revenues. The expiration of the blenders credit and our subsequent decision to warm-idle
our plant led to discussions with CoBank, as administrative agent of Farm Credit, regarding certain
changes to our credit facilities. In particular, on May 14, 2010, we agreed with Farm Credit to
reduce the amount available under our revolving credit loan and reduce the amount of minimum
working capital required pursuant to our loan covenants. The term of this agreement has since been
extended through January 31, 2011, and we therefore expect the reduction in the amount available
under our revolving credit loan to last through that date at a minimum, unless Farm Credit
otherwise agrees to increase the available amount under the loan prior to that date. For
additional detail regarding our credit facilities, see Liquidity and Capital Resources
Indebtedness.
During the quarter ended September 30, 2010, we finalized three agreements dated September 21,
2010 with Archer-Daniels-Midland Company (ADM): (i) a Product Marketing Agreement, (ii) a
Feedstock Agreement, and (iii) a Services Agreement. Pursuant to the Product Marketing Agreement,
ADM will purchase, and we will sell, all of the biodiesel and co-products produced at our biodiesel
plant. Under this agreement, we will receive an amount equal to the sales price charged by ADM to
third party purchasers for our products (or to be paid by ADM, if there is no underlying third
party sale), less ADMs marketing costs such as freight, fuel surcharges, brokerage fees, off-site
storage and any applicable shrink, independent lab fees, and other related costs. Under the
Feedstock Agreement, ADM will procure the feedstock for our biodiesel plant. Finally, pursuant to
the Services Agreement, ADM will provide us with certain other services, including: (i) annual site
audits for BQ 9000, safety, and regulatory and environmental compliance, (ii) ongoing operations
assistance, and (iii) annual quality control lab audits and routine round robin lab testing. The
initial terms of the Product Marketing Agreement, Feedstock Agreement and Services Agreement are
one year, commencing on the first day of the month in which the production of biodiesel resumes at
our production facilities, subject to earlier termination by either party upon thirty days written
notice.
ADM will provide some of the services formerly provided to us by REG, Inc (REG). Our
management and operational services agreement (MOSA) with REG, as extended, expired on June 11,
2010, although we continued our working relationship with REG for a period of time following that
date upon the same general terms without a written agreement. Our MOSA with REG provided that REG
would provide us with certain management personnel and services. However, our agreements with ADM
do not contemplate the provision of management services because we desired to move all management
functions in-house. For this reason, we hired a General
Manager effective September 4, 2010, as well as an Operations Manager. During the nine months
ended September 30, 2010 and September 30, 2009, we incurred management and operational service
fees to REG of $102,639 and $370,657, respectively. The amount payable to REG as of September 30,
2010 was $20,579.
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Although the expiration of the federal blenders credit has resulted in decreased demand for
biodiesel, it is possible that the federal Renewable Fuels Standard (RFS) could help increase
demand, as it sets minimum usage requirements for biodiesel and other types of biomass-based
diesel. The Energy Policy Act of 2005 created the RFS, which initially required refiners to use
7.5 billion gallons of renewable fuels by 2012. The Energy Independence and Security Act of 2007
(EISA) expanded the existing RFS (often referred to as RFS2) to require the use of 9 billion
gallons of renewable fuel in 2008, increasing to 36 billion gallons of renewable fuel by 2022. In
February 2010, the EPA published final regulations to implement the RFS2 program. The new rules
set volume standards with respect to the amount of specific categories of renewable fuels. In
particular, the EPA combined the 2010 biomass-based diesel requirement of 650 million gallons with
the 2009 biomass-based diesel requirement of 500 million gallons to require the use of 1.15 billion
gallons of biomass-based diesel by the end of 2010. In 2011, at least 800 million gallons of
biomass-based diesel must be blended into the nations fuel pool; and in 2012, at least 1 billion
gallons of biomass-based diesel must be blended into the national fuel pool. In each year
thereafter, EPA must determine the level of biomass-based diesel required, which amount cannot be
less than 1 billion gallons. RFS2 is enforced through a system of registration, recordkeeping and
reporting requirements for obligated parties and renewable fuel producers through renewable
identification numbers (RINs). Obligated parties such as refiners and fuel importers must
acquire a certain number of biodiesel RINs in order to comply with RFS2. Some estimates have
provided that, given total biodiesel production from January 2009 through July 2010, obligated
parties will be required to purchase an additional approximate 350 million gallons of biodiesel
from August 2010 through December 2010, which could lead to increased demand for biodiesel.
However, we cannot guarantee that RFS2 will result in increased demand, that any increase in demand
will offset the loss of the federal blenders tax credit or, because U.S. biodiesel production
capacity exceeds the RFS2 requirements, that production of biodiesel will not continually exceed
any demand for biodiesel created by RFS2.
Results of Operations for the Three Months Ended September 30, 2010 and 2009
The following table shows the results of our operations for the three months ended September
30, 2010 and 2009, and the percentage of revenues, cost of sales, operating expenses, and other
items to total revenues in our statement of operations:
Three Months Ended | Three Months Ended | |||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Statement of Operations Data | Amount | % | Amount | % | ||||||||||||
Revenues |
$ | 2,898,239 | 100.00 | % | $ | 17,037,884 | 100.00 | % | ||||||||
Cost of Sales |
$ | 3,354,338 | 115.74 | % | $ | 15,430,919 | 90.57 | % | ||||||||
Gross Profit (Loss) |
$ | (456,099 | ) | (15.74 | %) | $ | 1,606,965 | 9.43 | % | |||||||
Operating Expenses |
$ | 276,901 | 9.55 | % | $ | 541,435 | 3.18 | % | ||||||||
Other Income (Expense) |
$ | (22,132 | ) | (0.76 | %) | $ | 53,507 | 0.31 | % | |||||||
Net Income (Loss) |
$ | (755,132 | ) | (26.05 | %) | $ | 1,119,037 | 6.57 | % | |||||||
20
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Revenues
Our revenues from operations come primarily from our sales of biodiesel and, to a lesser
extent, our sales of crude glycerin and fatty acids. The following table shows the sources of our
revenues for the three months ended September 30, 2010 and 2009:
Three Months Ended | Three Months Ended | |||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||
% of | % of | |||||||||||||||
Revenue Sources | Amount | Revenues | Amount | Revenues | ||||||||||||
Biodiesel Sales |
$ | 2,831,440 | 97.70 | % | $ | 16,477,362 | 96.71 | % | ||||||||
Glycerin Sales |
$ | 47,899 | 1.65 | % | $ | 194,850 | 1.14 | % | ||||||||
Fatty Acid Sales and Soapstock Sales |
$ | 18,900 | 0.65 | % | $ | 365,672 | 2.15 | % | ||||||||
Total Revenues |
$ | 2,898,239 | 100.00 | % | $ | 17,037,884 | 100.00 | % | ||||||||
Revenues from operations for the three months ended September 30, 2010 decreased by
approximately 83.0% compared to revenues from operations for the three months ended September 30,
2009. Revenue from sales of biodiesel decreased by approximately 82.8% for the three months ended
September 30, 2010 compared to the three months ended September 30, 2009 This decrease in
revenues is due primarily to a decrease in our number of gallons of biodiesel sold. During the
three months ended September 30, 2010, we sold approximately 83.9% fewer gallons of biodiesel as
compared to the same period in 2009. This decrease in number of gallons sold is a direct result of
the expiration of the blenders tax credit for biodiesel mixtures. Unless and until this tax
credit is extended, it may be uneconomical for blenders of petroleum-based diesel to blend
biodiesel with petroleum-based diesel fuel due to the higher cost of biodiesel. Our decrease in
quantity of gallons sold was offset slightly by an increase in biodiesel prices. The average price
per gallon we received for our biodiesel during the three months ended September 30, 2010 increased
approximately 3.8% compared to the same period from the prior year.
Revenue from sales of glycerin decreased by approximately 75.4% for the three months ended
September 30, 2010 compared to the three months ended September 30, 2009. This decrease in revenue
is the net result of a decrease in quantity sold, offset by an increase in glycerin prices. The
average sales price for our glycerin increased by approximately 123.8% during the three months
ended September 30, 2010 compared to the same period the prior year. However, our quantity of
glycerin sold decreased by approximately 89.0% during the three months ended September 30, 2010
compared to the same period the prior year due to decreased production. Revenue from sales of
fatty acids decreased approximately 94.8% for the three months ended September 30, 2010 compared to
the three months ended September 30, 2009. The average sales price for our fatty acids increased
by approximately 19.6% during the three months ended September 30, 2010 compared to the same period
the prior year. However, our quantity of fatty acids sold decreased by approximately 95.7% during
the three months ended September 30, 2010 compared to the same period the prior year due to
decreased production.
During the three months ended September 30, 2010, we received $78,997 in incentive funds from
the federal government related to the USDA Bioenergy Program, compared to the same period the prior
year when we received $1,011,205 in incentive funds related to the federal blenders tax credit.
We do not expect to receive any additional incentive funds so long as the federal blenders tax
credit is not extended. The incentive funds we received during the three months ended September
30, 2010 and 2009 are included in our biodiesel sales revenue in the table above.
During the three-month period ended September 30, 2010, we produced a small quantity of
biodiesel and sold additional amounts of our existing biodiesel inventory. During the first
quarter of 2010, we rebuilt our in-house biodiesel inventories to establish our typical working
inventory of approximately one million gallons. Prior to the first quarter of 2010 our inventory
levels had been reduced to near zero in order for us to take advantage of the blenders credit as
much as we could in 2009 prior to the expiration of the credit at year-end. So long as the federal
blenders credit is not extended, we do not anticipate significantly rebuilding our in-house
inventories again. During the three months ended September 30, 2010, we operated at an average of
approximately 2.2% of our nameplate capacity, compared to the same period the prior year when we
operated at an average of approximately 69.6% of our capacity.
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Cost of Sales
While our absolute cost of sales for our products decreased during the three-month period
ended September 30, 2010 compared to the three-month period from the prior year, our cost of sales
as a percentage of our revenues increased from 90.57% of our revenues for the three months ended
September 30, 2009, to 115.74% of our revenues
for the three months ended September 30, 2010. This percentage increase is primarily due to
price increases for our raw materials and energy compared to the previous year, and due to the fact
that we had lower production rates compared to the previous year while fixed costs remained
relatively consistent.
The primary components of cost of goods sold from the production of biodiesel are feedstock
(primarily soybean oil and animal fats) and other raw materials (methanol and other chemicals),
energy (natural gas and electricity), labor, and depreciation on process equipment. During the
three months ended September 30, 2010, approximately 63.1% of our total feedstock usage consisted
of choice white grease, which is consistent with the same period in 2009, when 61.4% of our total
feedstock usage was choice white grease. Animal fat prices remain less than soybean oil prices.
The average price we paid for feedstock for the three months ended September 30, 2010 was
approximately 1.2% higher than our feedstock prices for the same period in 2009. Our average price
paid for methanol, another input into the biodiesel production process, increased by approximately
47.8% during the three months ended September 30, 2010 compared to the same period in the prior
year. Finally, our average price paid for natural gas increased by approximately 173.2% during the
three months ended September 30, 2010 compared to the same period in the prior year. This large
increase in natural gas prices is largely a result of our fixed costs associated with natural gas.
Operating Expense
Although our absolute operating expenses decreased during the three-month period ended
September 30, 2010 compared to the three-month period from the prior year, our operating expenses
as a percentage of revenues were higher for the three-month period ended September 30, 2010 than
they were for the three-month period ended September 30, 2009. The decrease in our absolute
operating expenses was due to the fact that we had increased consulting and professional fees
during the three-month period ended September 30, 2009 in connection with our proposed
consolidation with REG. The decrease in our absolute operating costs is also attributable to
decreased office and administrative expenses. Our decreased office and administrative expenses are
a result of a decrease in management fees paid to REG during the three months ended September 30,
2010 compared to the same period the prior year, decreased National Biodiesel Board dues related to
our lower production rates, and the elimination of our bad debt reserve related to marketing
services performed by REG.
In mid-April 2010 we warm-idled our plant due to limited sales and reduced sales forecasts
related to the failure of Congress to extend the blenders tax credit for biodiesel mixtures, which
expired on December 31, 2009. In connection with our plant warm-idling, we laid off 15 full-time
employees to reduce operating expenses, although we agreed to pay the health and dental insurance
policy premiums for these individuals through mid-August 2010. Effective August 13, 2010, we laid
off seven additional full-time employees, leaving us with six full-time employees. We will also
temporarily pay a portion of the health and dental insurance premiums of these laid-off employees.
Since these most recent layoffs, we have hired three full-time employees, including our General
Manager and Operations Manager. We have also hired four employees on a temporary basis for a
limited production run. We do not expect to hire any additional employees until demand for
biodiesel improves.
Other Income (Expenses)
Our other income (expenses) decreased from a net other income of $53,507, or 0.31% of
revenues, for the three-month period ended September 30, 2009, to a net other expense of $22,132,
or (0.76%) of revenues, for the three-month period ended September 30, 2010. This change resulted
primarily from the net result of a decrease in interest expense related to our credit facilities,
and a decrease in grant income. During the three months ended September 30, 2009, we received
grant income in the amount of $131,525 from the Iowa Department of Economic Developments New Jobs
Training Program.
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Results of Operations for the Nine Months Ended September 30, 2010 and 2009
The following table shows the results of our operations for the nine months ended September
30, 2010 and 2009, and the percentage of revenues, cost of sales, operating expenses, and other
items to total revenues in our statement of operations:
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Statement of Operations Data | Amount | % | Amount | % | ||||||||||||
Revenues |
$ | 9,433,069 | 100.00 | % | $ | 31,904,006 | 100.00 | % | ||||||||
Cost of Sales |
$ | 10,327,564 | 109.48 | % | $ | 30,222,543 | 94.73 | % | ||||||||
Gross Profit (Loss) |
$ | (894,495 | ) | (9.48 | %) | $ | 1,681,463 | 5.27 | % | |||||||
Operating Expenses |
$ | 1,172,060 | 12.43 | % | $ | 1,546,498 | 4.85 | % | ||||||||
Other Income (Expense) |
$ | (12,334 | ) | (0.13 | %) | $ | 94,646 | 0.30 | % | |||||||
Net Income (Loss) |
$ | (2,078,889 | ) | (22.04 | %) | $ | 229,611 | 0.72 | % | |||||||
Revenues
In addition to revenues from sales of biodiesel, crude glycerin and fatty acids, during the
nine months ended September 30, 2010, we also derived revenues from custom processing and storage.
The following table shows the sources of our revenues for the nine months ended September 30, 2010
and 2009:
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||
% of | % of | |||||||||||||||
Revenue Sources | Amount | Revenues | Amount | Revenues | ||||||||||||
Biodiesel Sales |
$ | 8,689,482 | 92.12 | % | $ | 30,706,418 | 96.25 | % | ||||||||
Glycerin Sales |
$ | 201,739 | 2.14 | % | $ | 534,058 | 1.67 | % | ||||||||
Fatty Acid Sales and Soapstock Sales |
$ | 333,620 | 3.54 | % | $ | 663,530 | 2.08 | % | ||||||||
Custom Processing and Storage |
$ | 208,228 | 2.21 | % | $ | | | % | ||||||||
Total Revenues |
$ | 9,433,069 | 100.00 | % | $ | 31,904,006 | 100.00 | % | ||||||||
Revenues from operations for the nine months ended September 30, 2010 decreased by
approximately 70.4% compared to revenues from operations for the nine months ended September 30,
2009. This decrease in revenues is due primarily to decreased biodiesel and co-products sales.
This decrease in product sales is a consequence of the expiration of the blenders tax credit for
biodiesel mixtures. Additionally, during the nine months ended September 30, 2010, we received
$78,997 in incentive funds from the federal government, compared to the same period the prior year
when we received $3,055,599 in incentive funds. The incentive funds we received during the nine
months ended September 30, 2010 were related to the USDA Bioenergy Program, while the incentive
funds we received during the nine months ended September 30, 2009 were related to the federal
blenders tax credit. The incentive funds we received are included in our biodiesel sales revenue
in the table above.
For the nine months ended September 30, 2010, we also derived revenues from custom processing
and storage. Our revenues from custom processing are attributable to experimental processing that
we conducted on behalf of another company. Our revenues from storage are attributable to storing
product sold by us until the time the purchaser took possession of the product. We do not expect to
derive substantial revenues from custom processing or storage in the future. During the nine months
ended September 30, 2010, we operated at an average of approximately 13.7% of our nameplate
capacity.
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Cost of Sales
While our absolute cost of sales for our products decreased during the nine months ended
September 30, 2010 compared to the same nine months in the prior year, our cost of sales as a
percentage of our revenues increased from 94.73% of our revenues for the nine months ended
September 30, 2009, to 109.48% of our revenues for the nine months ended September 30, 2010. This
percentage increase is primarily due to price increases for our feedstock, raw materials and energy
compared to the previous year, and due to the fact that we had lower production rates compared to
the previous year while fixed costs remained relatively consistent.
Operating Expense
Our operating expenses were lower for the nine months ended September 30, 2010 than they were
for the nine months ended September 30, 2009. This decrease was primarily due to the fact that we
had decreased office and administrative expenses during the nine months ended September 30, 2010
compared to the same period the prior year due decreased management fees, association dues, and the
elimination of our bad debt reserve. Additionally, the decrease in operating expenses was also a
result of our increased consulting and professional fees during the nine months ended September 30,
2009 in connection with our proposed consolidation with REG. However, our operating expenses as a
percentage of revenues were higher for the nine months ended September 30, 2010 than they were for
the nine months ended September 30, 2009 due to lower production levels, while fixed costs remained
relatively stable.
Other Income (Expenses)
Our other income (expense) decreased from a net other income of $94,646, or 0.30% of revenues,
for the nine months ended September 30, 2009, to a net other expense of $12,334, or (0.13%) of
revenues, for the nine months ended September 30, 2010. This change is a net result of decreased
interest expense related to our credit facilities for the nine months ended September 30, 2010
compared to the same period the prior year, offset by the non-reoccurring grant income we
recognized during the nine months ended September 30, 2009 related to our forgivable loan from the
Iowa Department of Economic Development and the Iowa Department of Economic Developments New Jobs
Training Program and a decrease in patronage dividends from our lender during the nine months ended
September 30, 2010 compared to the same period the prior year.
Changes in Financial Condition for the Nine Months Ended September 30, 2010
The following table highlights the changes in our financial condition for the nine months
ended September 30, 2010:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Current Assets |
$ | 1,940,796 | $ | 7,424,221 | ||||
Current Liabilities |
$ | 726,235 | $ | 3,991,982 | ||||
Long-Term Debt |
$ | 1,573,055 | $ | 3,262,222 | ||||
Members Equity |
$ | 26,471,897 | $ | 28,550,785 |
Current Assets. The decrease in current assets from $7,424,221 as of December 31,
2009, to $1,940,796 as of September 30, 2010, is primarily a result of a decrease in incentive
receivables, a decrease in trade account receivables and other receivables, a decrease in prepaid
expenses, and payments made on our long-term debt, partially offset by an increase in inventory and
an increase in cash and cash equivalents. Our receivables were relatively high at December 31,
2009 due to our continued production through that date in order to take advantage of the federal
blenders tax credit as much as we could in 2009 prior to the expiration of the credit at year-end.
Since this tax credit expired, our production has been limited. For similar reasons, our
inventory was relatively low at December 31, 2009, but has since increased again. During the nine
months ended September 30, 2010, we made payments on our term note totaling $2,075,000 and reduced
the amount outstanding under our revolving credit loan by $1,605,000.
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Current Liabilities. Our current liabilities decreased from $3,991,982 as of December
31, 2009, to $726,235 as of September 30, 2010. This decrease was due primarily to a decrease in
the current portion of our long-term debt related to our free cash flow payment and regular
quarterly payments on our term note, a decrease in checks issued in excess of our bank balance, a
decrease in accounts payable, and a decrease in accrued expenses.
Long-Term Debt. The decrease in our long-term debt, net of current maturities, at
September 30, 2010, as compared to December 31, 2009, was due to a decrease in the balance under
our term note and our reducing revolving credit note with Farm Credit Services. During the
nine-month period ended September 30, 2010, we made payments totaling $2,075,000 to Farm Credit
Services under our term note and net payments totaling $1,605,000 under our revolving credit note.
Members Equity. Members contributions at September 30, 2010 and December 31, 2009
are $23,516,377. Retained earnings as of September 30, 2010 are $2,955,520 compared to $5,034,409
at December 31, 2009 due to our net loss during the nine months ended September 30, 2010.
Liquidity and Capital Resources
Cash Flows
The following table shows cash flows for the nine months ended September 30, 2010 and 2009:
2010 | 2009 | |||||||
Net cash provided by operating activities |
$ | 4,364,544 | $ | 2,849,513 | ||||
Net cash used in investing activities |
$ | (118,591 | ) | $ | (136,040 | ) | ||
Net cash used in financing activities |
$ | (4,097,176 | ) | $ | (2,704,167 | ) | ||
Net increase in cash and equivalents |
$ | 148,777 | $ | 9,306 | ||||
Operating Cash Flows
For the nine months ended September 30, 2010, cash provided by operating activities increased
by $1,515,031 compared to the nine months ended September 30, 2009. This increase was primarily
the result of changes in our receivables, including trade account receivables, incentive
receivables and other receivables, prepaid expenses and other assets, provision for bad debts and
non-cash forgiveness of debt, netted against our net loss for the nine months ended September 30,
2010 compared to the net gain during the same period the prior year and changes in our inventory,
margin deposits, accrued wages and benefits and accounts payable. Most of the changes in operating
cash flows for the nine months ended September 30, 2010 compared to the nine months ended September
30, 2009 are directly attributable to our decreased production during the nine months ended
September 30, 2010.
In mid-April 2010 we warm-idled our plant due to limited sales and reduced sales forecasts
related to the failure of Congress to extend the blenders tax credit for biodiesel mixtures, which
expired on December 31, 2009. So long as our plant is warm-idled, we expect to generate only
limited revenues. Although our capital needs are currently being adequately met through our credit
facilities, any further reductions in the amount available for advancement under our revolving
credit loan beyond the current reduction may cause us to be unable to meet our capital needs. See
Liquidity and Capital Resources Indebtedness.
Investing Cash Flows
For the nine months ended September 30, 2010, cash used in investing activities decreased by
$17,449 compared to the nine months ended September 30, 2009. This decrease in cash used resulted
from a decrease in expenditures for property, plant, and equipment during the nine months ended
September 30, 2010 compared to the same period the prior year.
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Financing Cash Flows
For the nine months ended September 30, 2010, cash used in financing activities increased by
$1,393,009, compared to the nine months ended September 30, 2009. This increase is a result of a
net decrease in checks issued in excess of our bank balance and payments on our long-term debt
exceeding proceeds from our long-term debt by approximately $1,060,001 more during the nine months
ended September 30, 2010 compared to the nine months ended September 30, 2009.
Indebtedness
Short-Term Debt Sources
We obtained a $570,000 declining balance standby irrevocable letter of credit from Farm Credit
in favor of Glidden Rural Electric Cooperative (Glidden REC) as security for our loan with
Glidden REC (discussed below under Long-Term Debt Sources). The letter of credit was set to
expire on June 30, 2010, but was extended in July 2010 at the lower amount of $490,000. The letter
of credit will now expire on June 30, 2011.
Long-Term Debt Sources
On June 6, 2005, we closed on $18,000,000 of long-term debt financing with Farm Credit
pursuant to a Master Loan Agreement (MLA). CoBank, ACB is the administrative agent of Farm
Credit pursuant to an Administrative Agency Agreement dated June 6, 2005. Pursuant to supplements
to the MLA, the loan commitments from Farm Credit consist of a $10,000,000 term loan and an
$8,000,000 reduced revolving credit loan. However, the expiration of the blenders tax credit on
December 31, 2009 and our subsequent decision to warm-idle our plant led to discussions with
CoBank, as administrative agent of Farm Credit, regarding certain changes to our credit facilities.
In particular, on May 14, 2010, we agreed with Farm Credit to reduce the amount available under
our revolving credit loan from $8,000,000 to $6,000,000 (inclusive of our $490,000 irrevocable
letter of credit in favor of Glidden Rural Electric Cooperative, discussed above under Short-Term
Debt Sources). The term of this agreement has since been extended through January 31, 2011, and
we therefore expect the reduction in the amount available under our revolving credit loan to last
through that date at a minimum, unless Farm Credit otherwise agrees to increase the available
amount under the loan prior to that date. We have also agreed to amend the covenant in our loan
agreement with Farm Credit pertaining to minimum working capital so that the reduction of the
amount available for advancement under the revolving credit loan does not cause us to fall out of
compliance with the minimum working capital covenant in our loan agreement with Farm Credit. Our
prior minimum working capital requirement was $6,000,000 and our amended minimum working capital
requirement is $4,000,000. As of September 30, 2010, the balance outstanding on our term loan was
$275,000. At September 30, 2010, the balance outstanding under the revolving credit loan was
$1,025,000.
Our term loan requires quarterly payments of principal in the amount of $450,000, with a final
payment due no later than December 20, 2011. We are also required to make annual payments of 50%
of our free cash flow, as defined in our term loan agreement. Because the balance outstanding on
our term loan is $275,000 and our term loan requires principal payments in the amount of $450,000
each quarter, we expect to pay off the term loan in full within the next fiscal quarter. However,
our term loan agreement provides that in the event our term loan is paid in full prior to the end
of fiscal year 2012, we must continue to make 50% free cash flow payments for each fiscal year
through fiscal year 2012 in the form of early reductions to the amount of our revolving credit loan
commitment.
Subject to our May 14, 2010 agreement with Farm Credit, as extended, advances under the
revolving credit loan are available throughout the life of the commitment, although the amount of
the commitment reduces by $900,000 semi-annually beginning upon the earlier of: (i) July 1, 2012,
or (ii) the first day of the month that is six months after the first day of the month following
the repayment of our term loan. Because we expect to pay off the term loan in full in December
2010, we anticipate that our revolving credit loan commitment will be reduced by $900,000 every six
months beginning July 1, 2011. As discussed above, the revolving credit loan commitment may also
be reduced in the amount of any free cash flow payment we would otherwise be required to make on
our term loan through 2012. Any outstanding balance on our revolving credit loan is due and
payable in full on July 1, 2016. At September 30, 2010, we had $4,485,000 of available borrowings
under the revolving credit loan.
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The term loan and the revolving credit loan each bear interest at one of three rates, to be
determined by us in our discretion: (1) at a rate equal to the rate of interest established by the
agent as its agent base rate; (2) at a fixed rate per annum to be quoted by the agent in its sole
discretion; or (3) at a fixed rate per annum equal to LIBOR. Each of the rates is subject to
certain performance pricing adjustments. Additionally, our loan agreements with Farm Credit
contain various covenants pertaining to minimum working capital and minimum net worth requirements.
As of September 30, 2010, we are in compliance with these covenants. Our notes with Farm Credit
are secured by substantially all of our assets.
On July 13, 2006, we entered into a Rural Development Loan Agreement with the Glidden REC for
a $740,000 no-interest loan to fund operating expenses for the plant. Pursuant to the terms of the
agreement and an associated Promissory Note, the loan is to be repaid in monthly installments of
$6,851 beginning on July 31, 2007, and continuing on the last day of each month thereafter until
the principal sum has been paid in full or before the final maturity date of the promissory note
which shall be on the tenth anniversary of the first advance of funds. The outstanding balance of
the loan as of September 30, 2010 was $472,777.
We have obtained subordinated debt financing of approximately $400,000 from the Iowa
Department of Economic Development (IDED). The subordinated debt financing included a $300,000
zero-interest deferred loan and a $100,000 forgivable loan. On April 30, 2009, IDED notified us
that we had satisfied all conditions of the forgivable loan and that IDED had forgiven the balance
outstanding under the forgivable loan. The zero-interest deferred loan requires monthly
installments of $2,500 beginning January 2008 with the remaining unpaid principal due in December
2012. The balance outstanding on the zero-interest deferred loan at September 30, 2010 is
$185,000.
Subsequent Events
We previously agreed with Farm Credit to reduce the amount available under our revolving
credit loan, inclusive of our irrevocable letter of credit in favor of Glidden Rural Electric
Cooperative, from $8,000,000 to $6,000,000 through October 31, 2010. We also agreed to amend the
covenant in our loan agreement with Farm Credit pertaining to minimum working capital so that the
reduction of the amount available for advancement under the revolving credit loan does not cause us
to fall out of compliance with the minimum working capital covenant in our loan agreement with Farm
Credit. Our prior minimum working capital requirement was $6,000,000 and our amended minimum
working capital requirement is $4,000,000. On October 25, 2010, we finalized an extension of the
term of this agreement through January 31, 2011 and therefore expect the reduction in the amount
available under our revolving credit loan to last through that date at a minimum, unless Farm
Credit otherwise agrees to increase the available amount under the loan prior to that date.
Critical Accounting Estimates
Management uses estimates and assumptions in preparing our financial statements in accordance
with generally accepted accounting principles. These estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. The following is a discussion of what we believe to be the most
critical of these policies and methods.
Inventories. Inventories are stated at the lower of cost or market value. Costs are
determined using the first-in, first-out method.
Long-Lived Assets. Depreciation and amortization of our property, plant, and equipment is
provided on the straight-line method by charges to operations at rates based upon the expected
useful lives of individual or groups of assets. Economic circumstances or other factors may cause
managements estimates of expected useful lives to differ from actual useful lives.
Long-lived assets, including property, plant and equipment, and investments are evaluated for
impairment on the basis of undiscounted cash flows whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written
down to our estimated fair market value
based on the best information available. Considerable management judgment is necessary to estimate
discounted future cash flows and may differ from actual cash flows.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
We are exposed to the impact of market fluctuations associated with interest rates and
commodity prices as discussed below. We have no exposure to foreign currency risk as we conduct
all of our business in U.S. Dollars. We use derivative financial instruments as part of an overall
strategy to manage market risk. We consider market risk to be the potential loss arising from
adverse changes in market rates and prices. We do not enter into these contracts as hedges for
accounting purposes pursuant to the requirements of the FASB Accounting Standards Codification
(ASC) Topic 815, Derivatives and Hedging.
Our risk management committee oversees our risk management practices and provides open
communication among management and the board of directors regarding market risk. The risk
management committee takes an active role in the risk management process and has developed policies
and procedures that require specific administrative and business functions to assist in the
identification, assessment, and control of various risks.
Interest Rate Risk
We are exposed to market risk from changes in interest rates. Exposure to interest rate risk
results primarily from our credit facilities with Farm Credit. Specifically, we have $1,300,000
outstanding in variable rate debt as of September 30, 2010. The specifics of our credit facilities
are discussed in detail in Item 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS Liquidity and Capital Resources, Indebtedness.
Below is a sensitivity analysis we prepared regarding our income exposure to changes in
interest rates. The sensitivity analysis below shows the anticipated effect on our income from a
10% adverse change in interest rates for a one-year period.
Outstanding Variable | Interest Rate at | Interest Rate Following | Annual Adverse Change | ||||||||||
Rate Debt at 9/30/10 | September 30, 2010 | 10% Adverse Change | to Income | ||||||||||
$ | 275,000 |
3.25 | % | 3.58 | % | $ | 908 | ||||||
$ | 1,025,000 |
3.25 | % | 3.58 | % | $ | 3,383 |
Commodity Price Risk
We are also exposed to market risk from commodity prices. Exposure to commodity price risk
results from our dependence on animal fats, soybean oil, and natural gas in the biodiesel
production process. We are also exposed to biodiesel and co-products price risks as our revenues
consist primarily of biodiesel sales and co-products sales. Currently, we seek to minimize the
risks from fluctuations in the price of biodiesel by using derivative instruments such as cash,
futures, and option contracts for home heating oil. There is currently no futures market for
biodiesel. Instead, we use home heating oil derivatives. Home heating oil is high sulfur diesel,
which is the closest commodity to biodiesel for which there is a futures market. Currently, we are
unable to manage our price risk for animal fats as there are no futures contracts available for
animal fats, and animal fats suppliers are, to date, unwilling to enter into long-term contracts
for animal fats.
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In practice, as markets move, we actively manage our risk and adjust hedging strategies as
appropriate. The extent to which we enter into cash, futures, or option contracts varies
substantially from time to time based on a number of factors, including supply and demand factors
affecting the needs of customers or suppliers to purchase biodiesel or co-products or to sell us
raw materials on a fixed basis, our views as to future market trends, seasonal factors and the
costs of futures contracts.
Although we believe our hedge positions accomplish an economic hedge against our future sales,
they are not designated as such for hedge accounting purposes, which would match the gain or loss
on our hedge positions to the specific commodity being hedged. As the current market price of our
hedge positions changes, the gains and losses are immediately recognized in our cost of sales. The
immediate recognition of hedging gains and losses can cause net income to be volatile from quarter
to quarter due to the timing of the change in value of the derivative instruments relative to the
cost and use of the commodity being hedged. At September 30, 2010 and December 31, 2009, we
recorded a net liability for derivative instruments of $29,657 and $2,587, respectively. During
the nine months ended September 30, 2010, we recognized a net gain in earnings on derivative
activities of $147,344, which is included in our cost of sales in our statements of operations.
Several variables could affect the extent to which biodiesel price fluctuations impact our
derivative instruments. However, it is likely that commodity cash prices will have the greatest
impact on the derivative instruments with delivery dates nearest the current cash price. As we
move forward, additional protection may be necessary. As the prices of hedged commodities move in
reaction to market trends and information, our statement of operations will be affected depending
on the impact such market movements have on the value of our derivative instruments. Depending on
market movements, these price protection positions may cause immediate adverse effects, but are
expected to produce long-term growth for us.
A sensitivity analysis has been prepared to estimate our exposure to commodity price risk.
The table presents the net fair value of our derivative instruments as of September 30, 2010 and
September 30, 2009, and the potential loss in fair value resulting from a hypothetical 10% adverse
change in such prices. The fair value of the positions is a summation of the fair values
calculated by valuing each net position at quoted market prices as of the applicable date. The
results of this analysis, which may differ from actual results, are as follows:
Effect of | ||||||||
Hypothetical | ||||||||
Adverse Change - | ||||||||
Fair Value | Market Risk | |||||||
September 30, 2010 |
$ | 285,743 | $ | 28,574 | ||||
September 30, 2009 |
$ | 4,092,754 | $ | 409,275 |
Item 4. | Controls and Procedures. |
Disclosure Controls and Procedures
Our management, including our Principal Executive Officer, William J. Horan, and our Principal
Financial and Accounting Officer, Joe Neppl, have reviewed and evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the
Securities Exchange Act of 1934, as amended) as of September 30, 2010. Based on this review and
evaluation, these officers have concluded that our disclosure controls and procedures are effective
to ensure that information required to be disclosed in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the forms and rules of the Securities and Exchange Commission; and to ensure that the information
required to be disclosed by an issuer in the reports that it files or submits under the Exchange
Act is accumulated and communicated to our management, including our principal executive and
principal financial officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Controls
Our management, including our Principal Executive Officer, William J. Horan, and our Principal
Financial and Accounting Officer, Joe Neppl, have reviewed and evaluated any changes in our
internal control over financial reporting that occurred during the fiscal quarter ended September
30, 2010 and there has been no change that has materially affected or is reasonably likely to
materially affect our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. | Legal Proceedings. |
From time to time in the ordinary course of business, WIE may be named as a defendant in legal
proceedings related to various issues, including without limitation, workers compensation claims,
tort claims, or contractual disputes. Other than the arbitration matter described below, we are not
currently involved in any material legal proceedings, directly or indirectly, and we are not aware
of any claims pending or threatened against us or any of the directors that could result in the
commencement of legal proceedings.
In 2008, a customer allegedly defaulted on its contract with our biodiesel marketer for the
purchase of biodiesel due to revocation of the customers letter of credit after our marketer
shipped the biodiesel for exporting. As a result, our marketer sold the biodiesel to another
purchaser for a lower price. Our former marketer, on behalf of WIE and other biodiesel producers
who sold biodiesel to the allegedly defaulting customer, is now in continued arbitration to resolve
this dispute. The arbitration is being conducted in London, UK under the system of arbitration and
appeals of the Federation of Oils, Seeds, and Fats Associations (FOSFA). The parties to the
arbitration proceeding are an affiliate of our former marketer, REG Marketing and Logistics Group
LLC, and Avista Trade Oy, a Finnish entity. On September 28, 2010, the arbitrators issued an award
to our former marketer in an amount of approximately $3.25 million, plus interest dating from
November 1, 2008, plus certain fees, costs and legal expenses. However, Avista Trade Oy has
appealed this award to the FOFSA Board of Appeal. Because WIE produced and marketed approximately
one-third (1/3) of the total quantity of biodiesel for which payment default is alleged in this
arbitration proceeding, we estimate that WIE will be entitled to approximately one-third (1/3) of
any award, judgment, settlement, or other monies collected by our former marketer arising from this
dispute.
Item 1A. | Risk Factors. |
Risk Factors are discussed in our annual report on Form 10-K. The risks described in our
annual report on Form 10-K are not the only risks facing us. The following Risk Factors are
provided to supplement and update the Risk Factors previously disclosed in our annual report on
Form 10-K. The Risk Factors set forth below should be read in conjunction with the considerations
set forth above in MANAGEMENTS DISCUSSION AND ANALYSIS and the risk factors set forth in our
annual report on Form 10-K.
The expiration of the biodiesel blenders federal tax credit could hinder our ability to
operate at a profit and reduce the value of our units. On December 31, 2009 the biodiesel
blenders tax credit for biodiesel mixtures expired. The blenders credit provided a tax credit of
$1.00 per gallon of biodiesel. Congress has so far failed to enact an extension of this incentive
for biodiesel production, which has led to decreased demand for biodiesel. The lack of the
blenders credit contributed to our limited sales and reduced sales forecasts, which led to our
decision to warm-idle our plant in mid-April 2010. Until the federal tax credit is extended, we
believe biodiesel markets will remain depressed and negatively impact our financial performance.
If our biodiesel plant is warm-idled for a sustained period of time, we might not be able to
meet our current liabilities and may experience losses. In mid-April 2010, we began warm-idling our
biodiesel plant due to limited sales and reduced sales forecasts. Management does not expect
market conditions to improve until Congress extends the blenders tax credit for biodiesel
mixtures, which expired on December 31, 2009. The blenders credit provided a tax credit to
biodiesel blenders of $1.00 per gallon of biodiesel blended. Without this credit, it may be
uneconomical for blenders of petroleum-based diesel to blend biodiesel with petroleum-based diesel
fuel due to the higher cost of biodiesel. Unless the federal tax credit is extended, we believe
that biodiesel will continue to suffer from decreased demand, resulting in depressed biodiesel
markets. So long as our plant is warm-idled, we expect to generate only limited revenues, and we
might not be able to pay our debts as they become due, including payments required under our loan
agreements with our lender. Failure to make the payments required under our loan agreements would
constitute an event of default, entitling our lender to exercise any number of remedies, including
foreclosure on its security interest in all of our assets. If the plant ceases to operate for
enough time, we might not be able to re-start operations at the plant and our members could lose
some or all of their investment.
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If our biodiesel plant resumes production, we may have difficulty in finding customers to
purchase our biodiesel. We began warm-idling our biodiesel plant in mid-April 2010 due to limited
sales and reduced sales
forecasts. If and when market conditions improve and we restart operations at the plant, our
former customers may no longer desire to purchase biodiesel from us or our biodiesel marketer.
Since the expiration of the tax credit, blenders of petroleum-based diesel have not blended as much
biodiesel with petroleum-based diesel fuel due to the higher cost of biodiesel. Even if the
blenders credit is extended, certain blenders may no longer have an interest in blending biodiesel
with petroleum-based diesel fuel. It is also possible that since the time we ceased producing
biodiesel, our former customers may have found other biodiesel producers from which to procure
biodiesel. This may have a material adverse effect on our ability and the ability of our biodiesel
marketer to sell our biodiesel and our members could lose some or all of their investment.
Further reductions in the amounts available under our credit facilities with Farm Credit may
cause us to be unable to meet our capital needs. The expiration of the blenders tax credit on
December 31, 2009 and our subsequent decision to warm-idle our plant led to discussions with
CoBank, as administrative agent of Farm Credit, regarding certain changes to our credit facilities.
In particular, we agreed with Farm Credit to reduce the amount available under our revolving
credit loan from $8,000,000 to $6,000,000 (inclusive of our $490,000 irrevocable letter of credit
in favor of Glidden Rural Electric Cooperative) and reduce the amount of minimum working capital
required pursuant to our loan covenants. On October 25, 2010, we finalized an extension of the
term of this agreement through January 31, 2011 and therefore expect the reduction in the amount
available under our revolving credit loan to last through that date at a minimum. If Farm Credit
further reduces the amounts available under our credit facilities or deems itself insecure and
demands immediate payment of the amounts owed to it pursuant to our credit facilities, we may be
unable to meet our capital needs. This may have a material adverse effect on our ability to
operate the plant and may cause our members to lose some or all of their investment.
The Renewable Fuels Standard may not be implemented as anticipated. As currently implemented,
the Renewable Fuels Standard (RFS2) requires obligated parties such as refiners and fuel
importers to utilize 1.15 billion gallons of biodiesel during 2009 and 2010 combined, and 800
million gallons during 2011. Some estimates have provided that, given total biodiesel production
from January 2009 through July 2010, obligated parties will be required to purchase an additional
approximate 350 million gallons of biodiesel from August 2010 through December 2010. However,
because the rule implementing RFS2 became effective on July 1, 2010 but is applicable to periods
before that date, certain interested parties have taken legal action to block the Environmental
Protection Agencys implementation of RFS2 based on the alleged retroactive applicability of the
standard. If these parties are successful in their legal actions, or if the Environmental
Protection Agency otherwise waives or modifies the requirements of RFS2, demand for biodiesel could
be adversely impacted. If the RFS2 biodiesel consumption requirements are not ultimately enforced
as presently required, demand for and the value of our biodiesel may be less than we project, and
our members could lose some or all of their investment.
We are in competition with ADM, our current product marketer, which could place us at a
competitive disadvantage and cause a conflict of interest for ADM. We have contracted with ADM for
feedstock procurement and marketing services for our plant. If and when we recommence producing
biodiesel, we will be highly dependent upon ADM to procure our inputs and market our products. ADM
owns, wholly or jointly, biodiesel production facilities in Missouri, North Dakota, and other
places around the world. This means that ADM is in competition with us in many aspects of our
business, including feedstock procurement (to the extent that we utilize soybean oil as a
feedstock) and biodiesel production and marketing. Because ADM operates its own biodiesel
production facilities and competes with us in many aspects of our business, ADM may have a conflict
of interest in marketing our products. Although we have entered into marketing and feedstock
procurement agreements with ADM, there is no assurance that ADMs performance of these services
will not be compromised by its own biodiesel production operations.
Our reliance on ADM to procure our inputs and market our products could damage our
profitability if ADM fails to perform its obligations pursuant to our agreements with ADM. We are
highly dependent upon ADM to procure our inputs and market our products pursuant to our agreements
with ADM. We do not have a soy crushing facility to supply our own raw soybean oil and we do not
have any arrangements with other suppliers of feedstock. Rather, we will depend upon ADM to
acquire our feedstock from third parties. If and when we recommence producing biodiesel, if ADM is
unable to provide us with adequate feedstock, we may have to decrease or halt operations which
would adversely affect our ability to generate profits and adversely affect our financial
obligations.
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In addition, we do not have a sales force of our own to market our biodiesel and glycerin and
will be highly dependent upon ADM to market our products. If ADM breaches the terms of our
agreement or does not have the ability to market all of the biodiesel and glycerin we produce, we
will not have any readily available means to sell our biodiesel and glycerin. Our lack of a sales
force and reliance on ADM to sell and market our products may place us at a competitive
disadvantage. If and when we recommence producing biodiesel, our failure to sell our biodiesel and
glycerin products may result in less income from sales, reducing our revenue, which could adversely
affect our financial position.
If ADM does not perform its obligations as agreed, we may be unable to specifically enforce
our agreement. Additionally, ADMs right to terminate its agreements with us upon thirty days
notice could place us at a competitive disadvantage. Any loss of our relationship with ADM may
result in the failure of our business. Significant costs and delays would likely result from the
need to find other feedstock suppliers, consultants or product marketers. In addition, any failure
by ADM to perform under our agreements may reduce our ability to generate revenue and may
significantly damage our competitive position in the biodiesel industry such that our members could
lose all or substantially all of their investment in us.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | (Removed and Reserved). |
Item 5. | Other Information. |
None.
Item 6. | Exhibits. The following exhibits are included herein: |
Exhibit No. | Exhibit | |||
10.1 | Product Marketing Agreement between Western Iowa
Energy, LLC and Archer-Daniels-Midland Company,
dated September 21, 2010. + |
|||
10.2 | Feedstock Agreement between Western Iowa Energy,
LLC and Archer-Daniels-Midland Company, dated
September 21, 2010. + |
|||
10.3 | Services Agreement between Western Iowa Energy,
LLC and Archer-Daniels-Midland Company, dated
September 21, 2010. + |
|||
31.1 | Certificate Pursuant to 17 CFR 240.15d-14(a). |
|||
31.2 | Certificate Pursuant to 17 CFR 240.15d-14(a). |
|||
32.1 | Certificate Pursuant to 18 U.S.C. § 1350. |
|||
32.2 | Certificate Pursuant to 18 U.S.C. § 1350. |
(+) | Confidential Treatment Requested. |
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SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WESTERN IOWA ENERGY, LLC | ||||
Date: November 15, 2010
|
/s/ William J. Horan
|
|||
Chairman, President and Director | ||||
(Principal Executive Officer) | ||||
Date: November 15, 2010
|
/s/ Joe Neppl
|
|||
Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) |
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