Attached files
file | filename |
---|---|
EX-32 - EX-32 - Advanced BioEnergy, LLC | c62966exv32.htm |
EX-31 - EX-31 - Advanced BioEnergy, LLC | c62966exv31.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One) | ||
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended December 31, 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:
000-52421
ADVANCED BIOENERGY,
LLC
(Exact name of Registrant as Specified in its Charter)
Delaware | 20-2281511 | |
(State or Other Jurisdiction of
|
(I.R.S. Employer | |
Incorporation or Organization)
|
Identification No.) |
8000
Norman Center Drive, Suite 610
Bloomington,
Minnesota 55437
(763) 226-2701
(Address, including zip code, and telephone number,
including area code, of Registrants Principal Executive Offices)
(763) 226-2701
(Address, including zip code, and telephone number,
including area code, of Registrants Principal Executive Offices)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files.)
Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o |
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes o No þ
As of February 10, 2011, the number of outstanding units
was 24,714,180.
1
ADVANCED
BIOENERGY, LLC
FORM 10-Q
Index
FORM 10-Q
Index
Page | ||||||||
3 | ||||||||
3 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
15 | ||||||||
27 | ||||||||
28 | ||||||||
29 | ||||||||
29 | ||||||||
29 | ||||||||
29 | ||||||||
29 | ||||||||
29 | ||||||||
29 | ||||||||
29 | ||||||||
30 | ||||||||
30 | ||||||||
EX-31
|
||||||||
EX-32
|
||||||||
EX-31 | ||||||||
EX-32 |
2
Table of Contents
PART I.
FINANCIAL INFORMATION
Item 1. | Financial Statements |
ADVANCED
BIOENERGY, LLC & SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
Consolidated Balance Sheets
(Dollars in thousands)
December 31, |
September 30, |
|||||||
2010 | 2010 | |||||||
(unaudited) | ||||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 21,341 | $ | 22,772 | ||||
Accounts receivable:
|
||||||||
Trade accounts receivable, net of allowance for doubtful
accounts of $255 at December 31, 2010 and
September 30, 2010, respectively
|
9,786 | 13,519 | ||||||
Other receivables
|
1,492 | 1,543 | ||||||
Due from broker
|
657 | 252 | ||||||
Derivative financial instruments
|
- | 314 | ||||||
Inventories
|
21,574 | 14,102 | ||||||
Prepaid expenses
|
2,177 | 2,666 | ||||||
Current portion of restricted cash
|
3,276 | 4,169 | ||||||
Total current assets
|
60,303 | 59,337 | ||||||
Property and equipment, net
|
177,028 | 181,701 | ||||||
Other assets:
|
||||||||
Restricted cash
|
2,735 | 3,145 | ||||||
Other assets
|
2,014 | 2,014 | ||||||
Total assets
|
$ | 242,080 | $ | 246,197 | ||||
LIABILITIES AND MEMBERS EQUITY | ||||||||
Current liabilities:
|
||||||||
Accounts payable
|
$ | 7,058 | $ | 4,337 | ||||
Accrued expenses
|
5,763 | 5,818 | ||||||
Current portion of long-term debt (stated principal amount of
$14,215 and $19,199 at December 31, 2010 and
September 30, 2010, respectively)
|
15,060 | 20,045 | ||||||
Total current liabilities
|
27,881 | 30,200 | ||||||
Other liabilities
|
499 | 628 | ||||||
Deferred income
|
4,712 | 4,881 | ||||||
Long-term debt (stated principal amount of $132,738 and $137,203
at December 31, 2010 and September 30, 2010,
respectively)
|
141,992 | 146,670 | ||||||
Total liabilities
|
$ | 175,084 | $ | 182,379 | ||||
Members equity
|
||||||||
Members capital, no par value, 24,714,180 units
issued and outstanding
|
171,211 | 171,200 | ||||||
Accumulated deficit
|
(104,215 | ) | (107,382 | ) | ||||
Total members equity
|
66,996 | 63,818 | ||||||
Total liabilities and members equity
|
$ | 242,080 | $ | 246,197 | ||||
See notes to consolidated financial statements.
3
Table of Contents
ADVANCED
BIOENERGY, LLC & SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per unit data)
(Unaudited)
Consolidated Statements of Operations
(Dollars in thousands, except per unit data)
(Unaudited)
Quarter Ended | ||||||||
December 31, |
December 31, |
|||||||
2010 | 2009 | |||||||
Net sales
|
||||||||
Ethanol and related products
|
$ | 116,266 | $ | 96,006 | ||||
Other
|
250 | 250 | ||||||
Total net sales
|
116,516 | 96,256 | ||||||
Cost of goods sold
|
110,414 | 84,128 | ||||||
Gross profit
|
6,102 | 12,128 | ||||||
Selling, general and administrative
|
2,063 | 2,097 | ||||||
Operating income
|
4,039 | 10,031 | ||||||
Other income (expense)
|
100 | (9 | ) | |||||
Interest income
|
24 | 41 | ||||||
Interest expense
|
(996 | ) | (3,909 | ) | ||||
Net income
|
$ | 3,167 | $ | 6,154 | ||||
Basic & diluted weighted average units outstanding
|
24,714,180 | 17,673,982 | ||||||
Income per unit - basic and diluted
|
$ | 0.13 | $ | 0.35 |
See notes to consolidated financial statements.
4
Table of Contents
ADVANCED
BIOENERGY, LLC & SUBSIDIARIES
Consolidated Statements of Changes in Members Equity
For the Quarter Ended December 31, 2010
(Dollars in thousands)
(Unaudited)
Consolidated Statements of Changes in Members Equity
For the Quarter Ended December 31, 2010
(Dollars in thousands)
(Unaudited)
Member |
Member |
Accumulated |
||||||||||||||
Units | Capital | Deficit | Total | |||||||||||||
MEMBERS EQUITY - September 30, 2010
|
24,714,180 | $ | 171,200 | $ | (107,382 | ) | $ | 63,818 | ||||||||
Unit compensation expense
|
- | 11 | - | 11 | ||||||||||||
Net income
|
- | - | 3,167 | 3,167 | ||||||||||||
MEMBERS EQUITY - December 31, 2010
|
24,714,180 | $ | 171,211 | $ | (104,215 | ) | $ | 66,996 | ||||||||
See notes to consolidated financial statements.
5
Table of Contents
ADVANCED
BIOENERGY, LLC & SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Quarter Ended | ||||||||
December 31, |
December 31, |
|||||||
2010 | 2009 | |||||||
Cash flows from operating activities:
|
||||||||
Net income
|
$ | 3,167 | $ | 6,154 | ||||
Adjustments to reconcile net income to operating activities cash
flows:
|
||||||||
Depreciation
|
5,609 | 5,338 | ||||||
Amortization of deferred financing costs
|
- | 33 | ||||||
Amortization of deferred revenue
|
(169 | ) | (168 | ) | ||||
Idle lease liability reduction
|
(95 | ) | (95 | ) | ||||
Amortization of debt discount
|
- | 263 | ||||||
Amortization of additional carrying value
|
(214 | ) | - | |||||
Unit compensation expense
|
11 | 11 | ||||||
Loss on disposal of assets
|
5 | - | ||||||
Unrealized (gain) on derivative financial instruments
|
(34 | ) | - | |||||
Change in risk management activities
|
314 | (614 | ) | |||||
Change in working capital components:
|
||||||||
Receivables
|
3,379 | (3,507 | ) | |||||
Inventories
|
(7,472 | ) | (2,980 | ) | ||||
Prepaid expenses
|
489 | (711 | ) | |||||
Accounts payable
|
2,721 | (714 | ) | |||||
Accrued expenses
|
(55 | ) | 2,057 | |||||
Net cash provided by operating activities
|
7,656 | 5,067 | ||||||
Cash flows from investing activities:
|
||||||||
Purchase of property and equipment
|
(941 | ) | (372 | ) | ||||
Decrease in restricted cash
|
1,303 | 5,743 | ||||||
Net cash provided by investing activities
|
362 | 5,371 | ||||||
Cash flows from financing activities:
|
||||||||
Payments on debt
|
(9,449 | ) | (8,648 | ) | ||||
Proceeds from issuance of membership units and subscribed units
|
- | 1,254 | ||||||
Repurchase of units
|
- | (3 | ) | |||||
Net cash (used in) financing activities
|
(9,449 | ) | (7,397 | ) | ||||
Net (decrease) increase in cash and cash equivalents
|
(1,431 | ) | 3,041 | |||||
Beginning cash and cash equivalents
|
22,772 | 26,367 | ||||||
Ending cash and cash equivalents
|
$ | 21,341 | $ | 29,408 | ||||
Supplemental disclosure of non cash transactions
|
||||||||
Warrant obligation recognized as a liability
|
$ | - | $ | 489 | ||||
Other receivable offset against equipment
|
- | 1,100 | ||||||
Accrued interest at HGF transferred to debt
|
- | 2,516 | ||||||
Supplemental disclosure of cash flow information:
|
||||||||
Cash paid for interest
|
$ | 1,162 | $ | 1,256 |
See notes to consolidated financial statements.
6
Table of Contents
ADVANCED
BIOENERGY, LLC & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
(Unaudited)
1. | Organization and Significant Accounting Policies |
The consolidated financial statements include the accounts of
Advanced BioEnergy, LLC (the Company) and its wholly
owned subsidiaries, ABE Fairmont, LLC (ABE Fairmont)
and ABE South Dakota, LLC (ABE South Dakota). All
intercompany balances and transactions have been eliminated in
consolidation. The interim financial statements should be read
in conjunction with the audited financial statements and notes
thereto, contained in the Companys Annual Report on
Form 10-K
for the year ended September 30, 2010. The financial
information as of December 31, 2010 and the results of
operations for the quarter ended December 31, 2010 are not
necessarily indicative of the results for the fiscal year ending
September 30, 2011.
The Company currently operates three ethanol production
facilities in the U.S. with a combined production capacity
of 195 million gallons per year. The Company commenced
operations at the 110 million gallon facility in Fairmont,
Nebraska in October 2007. The Company acquired existing
facilities in Aberdeen and Huron, South Dakota in November
2006 and commenced operations at the 44 million gallon
Aberdeen expansion facility in January 2008.
Cash,
Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with
original maturities of three months or less to be cash
equivalents. The Companys cash balances are maintained in
bank depositories and periodically exceed federally insured
limits. The Company has not experienced losses in these
accounts. The Companys restricted cash includes cash held
for debt service under the terms of its debt agreements.
Fair
Value Measurements
In determining fair value of its derivative financial
instruments and warrant liabilities, the Company uses various
methods including market, income and cost approaches. Based on
these approaches, the Company often utilizes certain assumptions
that market participants would use in pricing the asset or
liability, including assumptions about risk
and/or the
risks inherent in the inputs to the valuation technique. These
inputs can be readily observable, market-corroborated, or
generally unobservable inputs. Financial assets and liabilities
carried at fair value will be classified and disclosed in one of
the following three fair value hierarchy categories.
Level 1: Valuations for assets and liabilities traded in
active markets from readily available pricing sources for market
transactions involving identical assets or liabilities.
Level 2: Valuations for assets and liabilities traded in
less active dealer or broker markets. Valuations are obtained
from third-party pricing services for identical or similar
assets or liabilities.
Level 3: Valuations incorporate certain assumptions and
projections in determining the fair value assigned to such
assets or liabilities.
Commodity futures and exchange-traded commodity options
contracts are reported at fair value utilizing Level 1
inputs. For these contracts, the Company obtains fair value
measurements from an independent pricing service. The fair value
measurements consider observable data that may include dealer
quotes and live trading levels from the CBOT and NYMEX markets.
7
Table of Contents
The following table summarizes financial assets and financial
liabilities measured at the approximate fair value utilized to
measure fair value (amounts in thousands):
At December 31, 2010 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Liabilities - Warrant Derivative
|
$ | 440 | $ | - | $ | - | $ | 440 | ||||||||
At September 30,
2010
|
||||||||||||||||
Assets - Derivative Financial Instruments
|
$ | 314 | $ | 314 | $ | - | $ | - | ||||||||
Liabilities - Warrant Derivative
|
474 | - | - | 474 |
The stock warrants issued contain a strike price adjustment
feature. The Company calculated the fair value of the warrants
using the Black-Scholes valuation model. During the three months
ended December 31, 2010 and 2009, the Company recognized an
unrealized gain of $34,000 and $1,000, respectively, related to
the change in the fair value of the warrant derivative liability.
The assumptions used in the Black-Scholes valuation model were
as follows:
December 31, |
September 30, |
|||||||
2010 | 2010 | |||||||
Market value(1)
|
$ | 1.50 | $ | 1.50 | ||||
Exercise price
|
$ | 1.50 | $ | 1.50 | ||||
Expected volatility
|
109.86 | % | 117.08 | % | ||||
Expected life (years)
|
1.88 | 2.00 | ||||||
Risk-free interest rate
|
0.625 | % | 0.375 | % | ||||
Forfeiture rate
|
- | - | ||||||
Dividend rate
|
- | - |
(1) | Market value based on recent unit transactions. |
The following table reflects the activity for liabilities
measured at fair value using Level 3 inputs for the three
months ended December 31, 2010 (amounts in thousands):
Balance of warrant derivative as of October 1, 2010
|
$ | 474 | ||
Unrealized gain related to the change in fair value
|
(34 | ) | ||
Balance as of December 31, 2010
|
$ | 440 | ||
Receivables
Credit sales are made to a few customers with no collateral
required. Trade receivables are carried at original invoice
amount less an estimate made for doubtful receivables based on a
review of all outstanding amounts on a monthly basis. Management
determines the allowance for doubtful accounts by regularly
evaluating individual receivables and considering a
customers financial condition, credit history and current
economic conditions. Receivables are written off if deemed
uncollectible. Recoveries of receivables previously written off
are recorded when received.
Derivative
Instruments/Due From Broker
On occasion, the Company has entered into derivative contracts
to hedge the Companys exposure to price risk related to
forecasted corn purchases and forecasted ethanol sales.
Accounting for derivative contracts requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at
fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or
an unrecognized firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm
commitment, an
available-for-sale
security, or a foreign-currency-denominated forecasted
transaction.
8
Table of Contents
Although the Company believes its derivative positions are
economic hedges, none have been designated as a hedge for
accounting purposes and derivative positions are recorded on the
balance sheet at their fair market value, with changes in fair
value recognized in current period earnings.
Inventories
Corn, chemicals, supplies, work in process, ethanol and
distillers grains inventories are stated at the lower of cost or
market on a weighted cost basis.
Revenue
Recognition
Ethanol revenue is recognized when product title and all risk of
ownership is transferred to the customer as specified in the
contractual agreements with the marketers. At all of the
Companys plants, revenue is recognized upon the release of
the product for shipment. Revenue from the sale of co-products
is recorded when title and all risk of ownership transfers to
customers, which generally occurs at the time of shipment.
Co-products and related products are generally shipped free on
board (FOB) shipping point. Interest income is
recognized as earned. In accordance with the Companys
agreements for the marketing and sale of ethanol and related
products, commissions due to the marketers are deducted from the
gross sale price at the time of payment.
Income
Per Unit
Basic and diluted income per unit is computed using the
weighted-average number of vested units outstanding during the
period. Unvested units are considered unit equivalents and are
considered in the diluted income per unit computation, but have
not been included in the computations of diluted income per unit
as their effect would be anti-dilutive. Basic earnings and
diluted per unit data were computed as follows (in thousands
except per unit data):
Three Months Ended |
||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Numerator:
|
||||||||
Net income for basic earnings per share
|
$ | 3,167 | $ | 6,154 | ||||
Gain in fair value of warrant derivative liability
|
(34 | ) | (1 | ) | ||||
Net income for diluted earnings per share
|
3,133 | 6,153 | ||||||
Denominator:
|
||||||||
Basic and diluted common shares outstanding
|
24,714 | 17,674 | ||||||
Earnings per share basic
|
$ | 0.13 | $ | 0.35 | ||||
Earnings per share diluted
|
$ | 0.13 | $ | 0.35 | ||||
Accounting
Estimates
Management uses estimates and assumptions in preparing these
financial statements in accordance with generally accepted
accounting principles. Those estimates and assumptions affect
the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could differ from those estimates.
Risks
and Uncertainties
The ethanol industry is currently receiving an indirect benefit
of the Volumetric Ethanol Excise Tax Credit (VEETC)
provided to gasoline blenders which is set to expire on
December 31, 2011, after a one year extension was signed
into law on December 17, 2010. This credit provides for a
45-cent a gallon tax credit for gasoline blenders and a 54-cent
a gallon tariff on ethanol imports. Although the Renewable Fuels
Standard still exists to maintain the demand for ethanol in the
United States, the Company is uncertain of the potential impact
that the elimination or reduction in the VEETC credit would have
on the Company and the overall ethanol industry.
9
Table of Contents
Contingencies
In June 2009, the Companys former director and chairman of
the board and former chief executive officer, filed a demand for
arbitration with the American Arbitration Association alleging
that the Company breached its employment agreement with him and
defamed him when it terminated his employment in January 2009.
This individual is seeking additional compensation, including
but not limited to two years of compensation and benefits. As of
December 31, 2010 the Company has not recorded a liability
for payment of a potential settlement that could result from
these proceedings.
2. | Inventories |
A summary of inventories is as follows (in thousands):
December 31, |
September 30, |
|||||||
2010 | 2010 | |||||||
Corn
|
$ | 4,002 | $ | 3,127 | ||||
Chemicals
|
1,168 | 1,107 | ||||||
Work in process
|
2,705 | 2,104 | ||||||
Ethanol
|
11,115 | 5,427 | ||||||
Distillers grain
|
553 | 419 | ||||||
Supplies and parts
|
2,031 | 1,918 | ||||||
Total
|
$ | 21,574 | $ | 14,102 | ||||
3. | Property and Equipment |
A summary of property and equipment is as follows (in thousands):
December 31, |
September 30, |
|||||||
2010 | 2010 | |||||||
Land
|
$ | 3,999 | $ | 3,962 | ||||
Buildings
|
21,341 | 21,341 | ||||||
Process equipment
|
216,319 | 215,962 | ||||||
Office equipment
|
1,401 | 1,356 | ||||||
Construction in process
|
708 | 234 | ||||||
243,768 | 242,855 | |||||||
Accumulated depreciation
|
$ | (66,740 | ) | $ | (61,154 | ) | ||
Property and equipment, net
|
$ | 177,028 | $ | 181,701 | ||||
10
Table of Contents
4. | Debt |
A summary of debt is as follows (in thousands, except
percentages):
December 31, |
||||||||||
2010 |
December 31, |
September 30, |
||||||||
Interest Rate | 2010 | 2010 | ||||||||
ABE Fairmont:
|
||||||||||
Senior credit facility - variable
|
3.67% | $ | 37,466 | $ | 45,050 | |||||
Senior credit facility - fixed
|
7.53% | 20,000 | 20,000 | |||||||
Seasonal line
|
3.35% | - | - | |||||||
Subordinate exempt facilities bonds - fixed
|
6.75% | 6,185 | 7,000 | |||||||
63,651 | 72,050 | |||||||||
ABE South Dakota:
|
||||||||||
Senior debt principal - variable
|
1.80% | 80,302 | 81,352 | |||||||
Restructuring fee
|
N/A | 3,000 | 3,000 | |||||||
Additional carrying value of restructured debt
|
N/A | 10,099 | 10,313 | |||||||
93,401 | 94,665 | |||||||||
Total outstanding
|
$ | 157,052 | $ | 166,715 | ||||||
Additional carrying value of restructured debt
|
N/A | (10,099 | ) | (10,313 | ) | |||||
Stated principal
|
$ | 146,953 | $ | 156,402 | ||||||
The estimated maturities of debt at December 31, is as
follows (in thousands):
Amortization of |
||||||||||||
Additional Carrying |
||||||||||||
Stated |
Value of |
|||||||||||
Principal | Restructured Debt | Total | ||||||||||
2011
|
$ | 14,215 | $ | 845 | $ | 15,060 | ||||||
2012
|
14,215 | 1,421 | 15,636 | |||||||||
2013
|
14,215 | 2,277 | 16,492 | |||||||||
2014
|
10,081 | 2,528 | 12,609 | |||||||||
2015
|
13,815 | 2,435 | 16,250 | |||||||||
Thereafter
|
80,412 | 593 | 81,005 | |||||||||
Total debt
|
$ | 146,953 | $ | 10,099 | $ | 157,052 | ||||||
Senior
Credit Facility for the Fairmont Plant
ABE Fairmont has a senior credit facility with Farm Credit
consisting of a term loan (term loan A), and a
revolving term loan, known as term loan B. Farm Credit also
extended a $6.0 million revolving seasonal line for
financing eligible grain inventory, which expires on
April 1, 2011. The Company plans to review the need for
this seasonal line prior to its expiration to determine whether
it should be extended. ABE Fairmont also has a $2.0 million
revolving credit facility for financing third-party letters of
credit, which expires in February 2012. ABE Fairmont issued a
letter of credit in connection with a rail car lease, reducing
the financing available from the $2.0 million revolving
credit facility by $911,000 as of December 31, 2010.
At December 31, 2010, ABE Fairmont had $32.5 million
outstanding on term loan A. ABE Fairmont must make quarterly
principal installments of $2.6 million through November
2013, followed by a final installment in an amount equal to the
remaining unpaid term loan A principal balance in February 2014.
For each fiscal year ending through September 30, 2012, ABE
Fairmont is required to pay an additional amount equal to the
lesser of
11
Table of Contents
$8.0 million or 75% of its free cash flow, which was
approximately $5.0 million for the fiscal year ending
September 30, 2010. This cash sweep payment was made in
December 2010.
At December 31, 2010, ABE Fairmont had $25.0 million
outstanding on the revolving term loan B (term loan
B). On the earlier of December 1, 2014 or six months
following complete repayment of term loan A, ABE Fairmont will
begin repayment of revolving term loan B in $5.0 million
semi-annual principal payments.
ABE Fairmont pays interest monthly at an annualized interest
rate of 7.53% on $20.0 million and a variable rate
comprised of the
30-day LIBOR
plus a fixed rate of 3.40% on the remaining outstanding debt.
ABE Fairmonts senior credit facility is secured by a first
mortgage on all of ABE Fairmonts real estate and a lien on
all of ABE Fairmonts personal property. The agreement
contains financial and restrictive covenants, including
limitations on additional indebtedness, restricted payments, and
the incurrence of liens and transactions with affiliates and
sales of assets. In addition, the senior secured credit facility
requires ABE Fairmont to comply with certain financial
covenants, including maintaining monthly minimum working
capital, monthly minimum net worth, annual debt service coverage
ratios and capital expenditure limitations.
Fillmore
County Subordinate Exempt Facilities Revenue Bonds for the
Fairmont plant
ABE Fairmont has $6.2 million of subordinate exempt
facilities revenue bonds outstanding under a subordinated loan
and trust agreement with the County of Fillmore, Nebraska and
Wells Fargo, N.A. The loan agreement is collateralized by the
Fairmont plant assets. ABE Fairmonts repayment of the loan
and the security for the loan are subordinate to its senior
credit facility. The loan requires semi-annual interest
payments. The Company made its first principal payment of
$815,000 in December 2010, and will continue to make this
payment annually through December 2016, with the remainder due
in December 2017.
Senior
Credit Agreement for the South Dakota Plants
ABE South Dakota entered into an Amended and Restated Senior
Credit Agreement (the Senior Credit Agreement)
effective as of June 18, 2010, which was accounted for
under troubled debt restructuring rules. The Senior Credit
Agreement was executed among ABE South Dakota, the lenders from
time to time party thereto, and WestLB AG, New York Branch, as
Administrative Agent and Collateral Agent. The Senior Credit
Agreement converted the outstanding principal amount of the
loans and certain other amounts under interest rate protection
agreements to a senior term loan in an aggregate principal
amount equal to $84.4 million. The interest accrued on
outstanding term and working capital loans under the existing
credit agreement was reduced to zero. ABE South Dakota has
agreed to pay a $3.0 million restructuring fee to the
lenders due at the earlier of March 31, 2016 or the date on
which the loans are repaid in full. ABE South Dakota recorded
the restructuring fee as a long-term, non-interest bearing debt
on its consolidated balance sheets. See Effect of Restructuring
below.
The principal amount of the term loan facility is payable in
equal quarterly payments of $750,000, with the remaining
principal amount fully due and payable on March 31, 2016.
ABE South Dakota has the option to select the interest rate on
the senior term loan between base rate and euro-dollar loans.
Base rate loans bear interest at the administrative agents
base rate plus an applicable margin of 0.50% increasing to 3.0%
on June 16, 2013. Euro-dollar loans bear interest at LIBOR
plus the applicable margin of 1.5% increasing to 3.0% on
June 16, 2012, and 4.0% beginning on June 16, 2013 and
thereafter. Each loan can be entered for one, two, three or six
month maturities.
Since the future maximum undiscounted cash payments on the
Senior Credit Agreement (including principal, interest and the
restructuring fee) exceed the adjusted carrying value, no gain
for the forgiven interest was recorded, the carrying value was
not adjusted and the modification of terms will be accounted for
on a prospective basis, via a new effective interest
calculation, amortized over the life of the note, offsetting
interest expense. Based on the treatment of the troubled debt
restructuring which will result in the additional carrying value
being amortized as a reduction in interest expense over the term
of the loan, the Companys effective interest rate over the
term of the restructuring note agreement is approximately 0.37%
over the Three-Month LIBOR (0.67% at December 31, 2010).
12
Table of Contents
ABE South Dakotas obligations under the Senior Credit
Agreement are secured by a first-priority security interest in
all of the equity of and assets of ABE South Dakota.
ABE South Dakota is allowed to make equity distributions (other
than certain tax distributions) to ABE only upon ABE South
Dakota meeting certain financial conditions and if there is no
more than $25 million of principal outstanding on the
senior term loan. Loans outstanding under the Senior Credit
Agreement are subject to mandatory prepayment in certain
circumstances, including, but not limited to, mandatory
prepayments based upon receipt of certain proceeds of asset
sales, casualty proceeds, termination payments, and cash flows.
The Senior Credit Agreement and the related loan documentation
include, among other terms and conditions, limitations (subject
to specified exclusions) on ABE South Dakotas ability to
make asset dispositions; merge or consolidate with or into
another person or entity; create, incur, assume or be liable for
indebtedness; create, incur or allow liens on any property or
assets; make investments; declare or make specified restricted
payments or dividends; enter into new material agreements;
modify or terminate material agreements; enter into transactions
with affiliates; change its line of business; and establish bank
accounts. Substantially all cash of ABE South Dakota is required
to be deposited into special, segregated project accounts
subject to security interests to secure obligations in
connection with the Senior Credit Agreement. The Senior Credit
Agreement contains customary events of default and also includes
an event of default for defaults on other indebtedness by ABE
South Dakota and certain changes of control.
5. | Major Customers |
The Company has entered into Exclusive Ethanol Marketing
Agreements with Hawkeye Gold, LLC to sell substantially all of
its ethanol. Prior to January 2011, Hawkeye Gold was an
affiliate of Hawkeye Energy Holdings, LLC, a 34% owner of the
Companys membership units. ABE Fairmont executed an
Exclusive Ethanol Marketing Agreement dated as of
August 28, 2009 with Hawkeye Gold (the ABE Fairmont
Ethanol Agreement), which became effective on
January 1, 2010. Prior to that time, ABE Fairmonts
ethanol was marketed by Gavilon. ABE South Dakota executed
Exclusive Ethanol Marketing Agreements dated as of April 7,
2010 with Hawkeye Gold (the ABE South Dakota Ethanol
Agreements, and together with the ABE Fairmont Ethanol
Agreement, the Ethanol Agreements), which became
effective October 1, 2010. Prior to October 1, 2010,
ABE South Dakotas ethanol was marketed by Gavilon. The
Ethanol Agreements require, among other things, that
(1) Hawkeye Gold must use commercially reasonable efforts
to submit purchase orders for, and ABE Fairmont and ABE South
Dakota must sell, substantially all of the denatured fuel grade
ethanol produced by ABE Fairmont and ABE South Dakota,
(2) a purchase and sale of ethanol under the Ethanol
Agreements must be in the form of either a direct fixed price
purchase order, a direct index price purchase order, a terminal
storage purchase order, a transportation swap or similar
transaction that is mutually acceptable to the parties,
(3) ABE Fairmont or ABE South Dakota will pay any
replacement or other costs incurred by Hawkeye Gold as a result
of any failure to deliver by ABE Fairmont or ABE South Dakota,
respectively, and (4) with certain exceptions, ABE Fairmont
and ABE South Dakota will sell substantially all of the ethanol
they produce to Hawkeye Gold. The initial term of the ABE
Fairmont Agreement is for two years, and provides for automatic
renewal for successive 18 month terms unless either party
provides written notice of nonrenewal at least 180 days
prior to the end of any term. The initial terms of the ABE South
Dakota Ethanol Agreements are for three years and provide for
automatic renewal for successive one-year terms unless either
party provides written notice of nonrenewal at least
180 days prior to the end of any term.
ABE Fairmont is currently self-marketing the distillers grains
it produces. ABE South Dakota is party to a
co-product
marketing agreement with Dakotaland Feeds, LLC (Dakotaland
Feeds), whereby Dakotaland Feeds markets the local sale of
distillers grains produced at the ABE South Dakota Huron plant
to third parties for an agreed upon commission. We currently
have an agreement with Hawkeye Gold to market the distillers
grains produced at the ABE South Dakota Aberdeen plants. The
initial term of this agreement is for three years and provides
for automatic renewal for successive one-year terms unless
either party provides written notice of nonrenewal at least
180 days prior to the end of any term.
13
Table of Contents
Sales and receivables from the Companys major customers
were as follows (in thousands):
December 31, |
December 31, |
|||||||
2010 | 2009 | |||||||
Hawkeye Gold - Ethanol and Distiller Grains
|
||||||||
Three month revenues
|
$ | 97,913 | $ | - | ||||
Receivable balance
|
6,806 | - | ||||||
Gavilon - Ethanol
|
||||||||
Three month revenues
|
$ | - | $ | 81,188 | ||||
Receivable balance
|
- | 10,158 | ||||||
Dakotaland - ABESouth Dakota Distillers Grains
|
||||||||
Three month revenues
|
$ | 2,838 | $ | 6,079 | ||||
Receivable balance
|
519 | 586 |
6. | Risk Management |
The Company is exposed to a variety of market risks, including
the effects of changes in commodity prices and interest rates.
These financial exposures are monitored and managed by the
Company as an integral part of its overall risk management
program. The Companys risk management program seeks to
reduce the potentially adverse effects that the volatility of
these markets may have on its current and future operating
results. To reduce these effects, the Company generally attempts
to fix corn purchase prices and related sale prices of ethanol
and distillers grains, with forward purchase and sales contracts
to reduce volatility in future operating margins. In addition to
entering into contracts to purchase 14.8 million bushels of
corn and sell 11.1 million gallons of ethanol in which the
futures price was not locked, the Company had entered into the
following fixed price forward contracts at December 31,
2010 (in thousands):
Quantity | Amount | Period Covered | ||||||||
Corn
|
Purchase Contracts | 2,026 bushels | $ | 10,463 | September 2011 | |||||
Ethanol
|
Sale Contracts | 13,810 gallons | 30,701 | January 2011 | ||||||
Distillers grains
|
Sale Contracts | 94 tons | 14,326 | March 2011 |
Unrealized gains and losses on forward contracts, in which
delivery has not occurred, are deemed normal purchases and
normal sales, and, therefore are not marked to market in
the financial statements.
When forward contracts are not available at competitive rates,
the Company may engage in hedging activities using exchange
traded futures contracts, OTC futures options or OTC swap
agreements. Changes in market price of ethanol related hedging
activities are reflected in revenues and changes in market price
of corn related items are reflected in cost of goods sold. The
following table represents the approximate amount of realized
and unrealized gains and changes in fair value recognized in
earnings on commodity contracts for the quarters ended
December 31, 2010 and 2009, and the fair value of futures
contracts as of December 31, 2010 and September 30,
2010 (in thousands):
Income Statement |
Realized |
Unrealized |
Total |
|||||||||||||
Classification | Gain | Gain | Gain | |||||||||||||
Three months ending December 31, 2010
|
Cost of Goods Sold | $ | 90 | $ | - | $ | 90 | |||||||||
Three months ending December 31, 2009
|
Cost of Goods Sold | 56 | 614 | 670 |
Balance Sheet |
December 31, |
September 30, |
||||||||||
Classification | 2010 | 2010 | ||||||||||
Derivative financial instrument - futures contract
|
Current Assets | $ | - | $ | 314 |
14
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Information
Regarding Forward-Looking Statements
This Quarterly Report on
Form 10-Q
contains forward-looking statements regarding our business,
financial condition, results of operations, performance and
prospects. All statements that are not historical or current
facts are forward-looking statements and are made pursuant to
the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve known and
unknown risks, uncertainties and other factors, many of which
may be beyond our control that may cause our actual results,
performance or achievements to be materially different from any
future results, performances or achievements expressed or
implied by the forward-looking statements. Certain of these
risks and uncertainties are described in the Risk
Factors section of our Annual Report on
Form 10-K
for the year ended September 30, 2010. These risks and
uncertainties include, but are not limited to, the following:
| our operational results are subject to fluctuations in the prices of grain, utilities and ethanol, which are affected by various factors including weather, production levels, supply, demand, changes in technology and government support and regulations; | |
| margins can be volatile and can evaporate, which may impact our liability to meet current obligations and debt service requirements at our operating entities; | |
| our hedging transactions and mitigation strategies could materially harm our results; | |
| cash distributions depend upon our future financial and operational performance and will be affected by debt covenants, reserves and operating expenditures; | |
| current governmental mandated tariffs, credits and standards may be reduced or eliminated and legislative acts taken by state governments such as California, related to low carbon fuels that include the effects caused by indirect land use, may have an adverse effect on our business; | |
| alternative fuel additives may be developed that are superior to or cheaper than ethanol; | |
| transportation, storage and blending infrastructure may become impaired, preventing ethanol from reaching markets; | |
| our facilities may experience technical difficulties and not produce the gallons of ethanol as expected and insurance proceeds may not be adequate to cover production disruptions; and | |
| our units are subject to a number of transfer restrictions and no public market exists for our units and none is expected to develop. |
You can identify forward-looking statements by terms such as
anticipates, believes,
could, estimates, expects,
intends, may, plans,
potential, predicts,
projects, should, will,
would, and similar expressions intended to identify
forward-looking statements. Forward-looking statements reflect
our current views with respect to future events, are based on
assumptions, and are subject to risks and uncertainties. Given
these uncertainties, you should not place undue reliance on
these forward-looking statements. Also, forward-looking
statements represent our estimates and assumptions only as of
the date of this report. Except as required by law, we assume no
obligation to update any forward-looking statements publicly, or
to update the reasons actual results could differ materially
from those anticipated in any forward-looking statements, even
if new information becomes available in the future. Readers are
urged to carefully review and consider the various disclosures
made by us in this report and in our other reports filed from
time to time with the Securities and Exchange Commission that
advise interested parties of the risks and factors that may
affect our business.
General
The following discussion and analysis provides information which
management believes is relevant to an assessment and
understanding of our consolidated financial condition and
results of operations. This discussion should be read in
conjunction with the consolidated financial statements included
herewith and notes to the consolidated financial statements
thereto.
15
Table of Contents
Overview
Advanced BioEnergy, LLC (Company, we,
our, Advanced BioEnergy or
ABE) was formed in 2005 as a Delaware limited
liability company. Our business consists of producing ethanol
and co-products, including wet, modified and dried distillers
grains. Ethanol is a renewable, environmentally clean fuel
source that is produced at numerous facilities in the United
States, mostly in the Midwest. In the U.S., ethanol is produced
primarily from corn and then blended with unleaded gasoline in
varying percentages. Ethanol is most commonly sold as E10.
Increasingly, ethanol is also available as E85, which is a
higher percentage ethanol blend for use in flexible-fuel
vehicles.
To execute our business plan, we entered into financial
arrangements to build and operate ethanol production facilities
in Fairmont, Nebraska. Separately, we acquired ABE South Dakota
in November 2006, which owned existing ethanol production
facilities in Aberdeen and Huron, South Dakota. Construction of
our Fairmont, Nebraska plant began in June 2006, and operations
commenced at the plant in November 2007. Construction of our new
facility in Aberdeen, South Dakota began in April 2007, and
operations commenced in January 2008. Our production operations
are carried out primarily through our operating subsidiaries,
ABE Fairmont, which owns and operates the Fairmont, Nebraska
plant and ABE South Dakota, which owns and operates plants in
Aberdeen and Huron, South Dakota.
Operating segments are defined as components of an enterprise
for which separate financial information is available that is
evaluated regularly by the chief operating decision maker in
deciding how to allocate resources in assessing performance.
Based on the related business nature and expected financial
results, the Companys plants are aggregated into one
operating segment.
DRY MILL
PROCESS
Dry mill ethanol plants produce ethanol by predominantly
processing corn. Other possible feeds are sorghum, milo, or
other cellulosic materials. The corn is received by truck, then
weighed and unloaded in a receiving building. It is then
transported to storage silos. Thereafter, it is transferred to a
scalper to remove rocks, cobs, and other debris before it is fed
to a hammer mill where it is ground into flour and conveyed into
a slurry tank. Water, heat and enzymes are added to the flour in
the slurry tank to start the process of converting starch from
the corn into sugar. The slurry is pumped to a liquefaction tank
where additional enzymes are added. These enzymes continue the
starch-to-sugar
conversion. The grain slurry is pumped into fermenters, where
yeast is added, to begin the batch-fermentation process.
Fermentation is the process of the yeast converting the sugar
into alcohol and carbon dioxide. After the fermentation is
complete, a vacuum distillation system removes the alcohol from
the grain mash. The 95% (190-proof) alcohol from the
distillation process is then transported to a molecular sieve
system, where it is dehydrated to 100% alcohol (200 proof). The
200-proof alcohol is then pumped to storage tanks and blended
with a denaturant, usually gasoline. The 200-proof alcohol and
2.0-2.5% denaturant constitute denatured fuel ethanol.
Corn mash left over from distillation is pumped into a
centrifuge for dewatering. The liquid from the centrifuge, known
as thin stillage, is then pumped from the centrifuges to an
evaporator, where it is dried into thick syrup. The solids that
exit the centrifuge, known as the wet cake, are conveyed to the
dryer system. Syrup is added to the wet cake as it enters the
dryer, where moisture is removed. The process produces
distillers grains with solubles, which is used as a
high-protein/fat animal-feed supplement. Dry-mill ethanol
processing creates three forms of distillers grains: wet
distillers grains with solubles, known as wet distillers grains;
modified wet distillers grains with solubles, known as modified
distillers grains; and dry distillers grains with solubles,
known as dry distillers grains. Wet and modified distillers
grains have been dried to approximately 67% and 50% moisture
levels, respectively, and are predominately sold to nearby
markets. Dried distillers grains have been dried to 11%
moisture, have an almost indefinite shelf life and may be sold
and shipped to any market regardless of its proximity to an
ethanol plant.
16
Table of Contents
FACILITIES
The table below provides a summary of our ethanol plants in
operation as of December 31, 2010:
Estimated |
||||||||||||||||||
Estimated |
Annual |
Estimated |
||||||||||||||||
Annual |
Distillers |
Annual |
||||||||||||||||
Ethanol |
Grains |
Corn |
Primary |
|||||||||||||||
Location
|
Production | Production(1) | Processed | Energy Source | Builder | |||||||||||||
(Million gallons) | (Tons) | (Million bushels) | ||||||||||||||||
Fairmont, NE
|
110 | 334,000 | 39.3 | Natural Gas | Fagen | |||||||||||||
Aberdeen, SD(2)
|
9 | 27,000 | 3.2 | Natural Gas | Broin | |||||||||||||
Aberdeen, SD(2)
|
44 | 134,000 | 15.7 | Natural Gas | ICM | |||||||||||||
Huron, SD
|
32 | 97,000 | 11.4 | Natural Gas | ICM | |||||||||||||
Consolidated
|
195 | 592,000 | 69.6 | |||||||||||||||
(1) | Our plants produce and sell wet, modified wet and dried distillers grains. The stated quantities are on a fully dried basis operating at nameplate capacity. | |
(2) | Our plant at Aberdeen consists of two separate production facilities which operate on a separate basis. Accordingly, we report and track production from our Aberdeen facilities separately. |
We believe that each of the operating facilities is in adequate
condition to meet our current and future production goals. We
also believe that these plants are adequately insured for
replacement cost plus related disruption expenditures.
The senior credit facility of the ABE Fairmont plant is secured
by a first mortgage on the plant real estate and a security
interest lien on the sites personal property. We also
granted a subordinate lien and security interest to the trustee
of the subordinated exempt facilities revenue bonds used to
finance the ABE Fairmont plant. We pledged a first-priority
security interest in and first lien on substantially all of the
assets of the ABE South Dakota plants to the collateral agent
for the senior creditor of these plants.
ABE Fairmont entered into a new marketing agreement with Hawkeye
Gold, which became effective on January 1, 2010. Prior to
January 2011, Hawkeye Gold was an affiliate of Hawkeye Energy
Holdings, LLC, a 34% owner of the Companys membership
units. The marketing agreement with Hawkeye Gold requires, among
other things, that Hawkeye Gold must use commercially reasonable
efforts to submit purchase orders for, and ABE Fairmont must
sell, substantially all of the denatured fuel-grade ethanol
produced by ABE Fairmont. The initial term of the agreement is
for two years and provides for automatic renewal for successive
18-month
terms unless either party provides written notice of nonrenewal
at least 180 days prior to the end of any term.
ABE South Dakota executed new marketing agreements with Hawkeye
Gold which became effective October 1, 2010. The agreements
provide that Hawkeye Gold will use commercially reasonable
efforts to submit purchase orders for, and ABE South Dakota will
sell to Hawkeye Gold, substantially all of the denatured
fuel-grade ethanol produced at the South Dakota plants. The
initial term of the agreement is for three years and provides
for automatic renewal for successive one-year terms unless
either party provides written notice of nonrenewal at least
180 days prior to the end of any term. Prior to
October 1, 2010, ABE South Dakotas ethanol was
marketed by Gavilon, LLC (Gavilon).
Sales of distillers grains have represented 16.0% and 14.3% of
our revenues for the quarters ended December 31, 2010 and
2009, respectively. When the plants are operating at capacity
they produce approximately 592,000 tons of dried distillers
grains equivalents per year, approximately 17 pounds per bushel
of corn. Distillers grains are a high-protein, high-energy
animal feed supplement primarily marketed to the dairy and beef
industry, as well as the poultry and swine markets. Dry mill
ethanol processing creates three forms of distillers grains: wet
distillers grains with solubles, known as wet distillers grains,
modified wet distillers grains with solubles, known as modified
distillers grains, and dry distillers grains with solubles.
Modified distillers grains have been dried to approximately 50%
moisture, have a slightly longer shelf life than wet of
approximately 10 days, and are often sold
17
Table of Contents
to nearby markets. Dried distillers grains have been dried to
11% moisture, have an almost indefinite shelf life and may be
sold and shipped to any market regardless of its proximity to an
ethanol plant.
Plan
of Operations Through December 31, 2011
Over the next year we will continue our focus on operational
improvements at each of our operating facilities. These
operational improvements include exploring methods to improve
ethanol yield per bushel and maximizing production output at
each of our plants. We will also have a continued emphasis on
safety and environmental regulation, reducing our operating
costs, and optimizing our margin opportunities through prudent
risk-management policies. We are also improving the rail
facilities at the Huron plant location, and evaluating adding
corn oil extraction technology to one or more of our facilities.
RESULTS
OF OPERATIONS
Quarter
Ended December 31, 2010 Compared to Quarter Ended
December 31, 2009
The following table reflects quantities of our products sold at
average net prices as well as bushels of corn ground and therms
of gas burned at average costs for the three months ended
December 31, 2010 and 2009:
Three Months Ended |
Three Months Ended |
|||||||||||||||
December 31, 2010 | December 31, 2009 | |||||||||||||||
Sold/Consumed | Average | Sold/Consumed | Average | |||||||||||||
(In thousands) | Net Price/Cost | (In thousands) | Net Price/Cost | |||||||||||||
Ethanol (gallons)
|
48,723 | $ | 1.99 | 49,651 | $ | 1.66 | ||||||||||
Dried distillers grains (tons)
|
121 | 121.57 | 115 | 92.72 | ||||||||||||
Wet/modified distillers grains (tons)
|
79 | 49.17 | 88 | 35.67 | ||||||||||||
Corn (bushels)
|
18,311 | $ | 4.62 | 17,998 | $ | 3.47 | ||||||||||
Gas (mmbtus)
|
1,406 | 4.12 | 1,377 | 4.48 |
Net
Sales
Net sales for quarter ended December 31, 2010 were
$116.5 million compared to $96.3 million for the
quarter ended December 31, 2009, an increase of
$20.2 million or 21.0%. The increase in revenues was due to
an increase in average prices of ethanol and distillers grains
of 19.9% and 31.1%, respectively. Ethanol prices rose due to an
increased demand and general overall motor fuel price increases
and commodity inflation. During the fiscal quarters ending
December 31, 2010 and 2009, 84.0% and 85.4%, respectively,
of our net sales were derived from the sale of ethanol and our
remaining net sales were derived from the sale of distillers
grains.
Cost
of Goods Sold
Costs of goods sold for the quarter ending December 31,
2010 were $110.4 million, compared to $84.1 million
for the quarter ending December 31, 2009, an increase of
$26.3 million or 31.3%. Costs of goods sold included a corn
related hedging gain of $0.1 million in the quarter ended
December 31, 2010 and a hedging gain of $0.7 million
in the quarter ended December 31, 2009. Corn costs
represented 73.5% and 74.2% of cost of sales for the fiscal
quarters ending December 31, 2010 and 2009. Physically
delivered corn costs increased 33.1% to $4.62 per bushel in the
quarter ending December 31, 2010 from $3.47 per bushel for
the quarter ending December 31, 2009. The increase in corn
cost per bushel was due primarily to the corn crop not being as
favorable as the prior year, commodity inflation world-wide, and
generally less corn available. Natural gas costs represented
5.3% and 7.3% of cost of sales for the fiscal quarters ending
December 31, 2010 and 2009. Our average gas prices
decreased to $4.12 per mmbtu in the quarter ending
December 31, 2010 from $4.48 per mmbtu in the quarter
ending December 31, 2009.
18
Table of Contents
Gross
Profit
Our gross profit for the quarter ending December 31, 2010
was $6.1 million, compared to gross profit of
$12.1 million for the quarter ending December 31,
2009. The decrease in gross profit was primarily due to a
reduction in the crush margin. We define the crush margin as the
price of ethanol per gallon less the costs of corn and natural
gas on a per gallon basis. Compared to the quarter ending
December 31, 2009, crush margins for the quarter ending
December 31, 2010 decreased, as corn prices increased more
than ethanol prices on a per gallon basis.
Selling,
General, and Administrative Expenses
As a percentage of sales, selling, general and administrative
expenses have declined to 1.8% for the quarter ended
December 31, 2010 compared to 2.2% for the quarter ended
December 31, 2009. Selling, general, and administrative
expenses are comprised of recurring administrative personnel
compensation, legal, technology, consulting, insurance and
accounting fees as well as certain non-recurring charges. For
the quarter ending December 31, 2010, selling, general and
administrative expenses were $2.06 million, of which
$0.49 million was non-recurring legal expense related to
the arbitration proceedings. Selling, general and administrative
expenses were $2.10 million for the quarter ending
December 31, 2009, of which $0.45 million was
non-recurring expense related to the South Dakota debt
restructuring and $0.02 million was non-recurring legal
expense related to the arbitration proceedings. Excluding
non-recurring items, selling, general, and administrative
expenses were $1.57 million, or 1.3% of sales, for the
quarter ending December 31, 2010, and $1.63 million,
or 1.7% of sales, for the quarter ending December 31, 2009.
Interest
Expense
Interest expense for the quarter ending December 31, 2010
was $1.0 million, compared to $3.9 million for the
quarter ended December 31, 2009, a decrease of
$2.9 million. The decrease in interest expense is a result
of the overall reduction in principal and a reduction in
interest rates on ABE South Dakotas debt. For the quarter
ended December 31, 2009, the total principal outstanding
was $204.9 million, decreasing to $147.0 million of
stated principal for the quarter ended December 31, 2010.
The reduction in principal was a result of the debt
restructuring that occurred in June 2010, repayment of a note
issued to PJC Capital, LLC, and scheduled principal payments.
The interest rates on the senior credit facility for ABE South
Dakota decreased from a default rate of 8.50% at
December 31, 2009 to a variable rate of 1.80% at
December 31, 2010. The interest expense at
December 31, 2010 also reflects a reduction in interest
expense resulting from the amortization of additional carrying
amount which resulted from the debt restructuring.
TRENDS
AND UNCERTAINTIES IMPACTING THE ETHANOL INDUSTRY AND OUR FUTURE
OPERATIONS
Overview
Ethanol is currently blended with gasoline to meet regulatory
standards, as a clean air additive, an octane enhancer, a fuel
extender and a gasoline alternative. According to the Renewable
Fuels Association, as of January, 2011 the estimated ethanol
production capacity in the United States is 13.5 million
gallons per year with an additional 0.6 million gallons
under construction or expansion. The demand for ethanol is
impacted by what is commonly referred to as the blend
wall, which is a regulatory cap on the amount of ethanol
that can be blended into gasoline. The blend wall impacts the
demand for ethanol, and as industry production capacity reaches
the blend wall, the supply of ethanol in the market may surpass
the demand. Assuming current gasoline usage in the U.S. at
140 billion gallons per year and a blend rate of 10%
ethanol and 90% gasoline, the current blend wall can be assumed
at approximately 14 billion gallons of ethanol per year.
In an attempt to increase the blend wall, Growth Energy, an
ethanol industry trade organization, requested a waiver from the
U.S. Environmental Protection Agency (EPA) to allow
blending of ethanol at a 15 percent blend rate. In October
of 2010, the EPA made a decision to allow the use of E15 blends
in 2007 and newer vehicles. On January 21, 2011, the EPA
announced E15 blends to be safe for use in all cars and pickups
built in 2001 and later. However, we do not yet know what the
impact of this decision will be on ethanol demand, as there are
still labeling
19
Table of Contents
issues, additional testing, and some regulatory issues that must
be addressed prior to widespread market use of the E15 blend.
Our operations are highly dependent on commodity prices,
especially prices for corn, ethanol, distillers grains and
natural gas. As a result of price volatility for these
commodities, our operating results may fluctuate substantially.
The price and availability of corn are subject to significant
fluctuations depending upon a number of factors that affect
commodity prices in general, including crop conditions, weather,
federal policy and foreign trade. Because the market price of
ethanol is not always directly related to corn prices, at times
ethanol prices may lag movements in corn prices and compress the
overall margin structure at the plants. As a result, operating
margins may become negative and we may be forced to shut down
the plants.
We focus on managing margins based on margin projections that
monitor market prices of corn, natural gas and other input costs
against prices for ethanol and distillers grains at each of our
production facilities. We create offsetting positions by using a
combination of derivative instruments, fixed-price purchases and
sales, or a combination of strategies in order to manage risk
associated with commodity price fluctuations. Our primary focus
is to lock in positive margins whenever possible relative to
current market conditions as opposed to reacting to movements in
underlying commodity prices.
Federal policy has a significant impact on ethanol market
demand. Ethanol blenders benefit from incentives that encourage
usage and a tariff on imported ethanol that supports the
domestic industry. Additionally, the renewable fuels standard
(RFS) mandates increased level of usage of both
corn-based and cellulosic ethanol. Any adverse ruling on, or
legislation affecting, RFS mandates in the future could have an
adverse impact on short-term ethanol prices and our financial
performance in the future.
The ethanol industry and our business depend upon continuation
of the federal and state ethanol supports such as the RFS, the
Volumetric Ethanol Excise Tax Credit (VEETC) and
import tariffs. We believe the ethanol industry expanded due to
these federal mandates, policies, and incentives. These
government mandates and incentives have supported a market for
ethanol that might disappear without these programs.
Alternatively, the government mandates and incentives may be
continued at lower levels than those at which they currently
exist. The elimination or reduction of the federal ethanol
supports would make it more costly for us to sell our ethanol
and would likely reduce our net income. In addition, state
regulatory activity may also negatively impact the consumption
of corn-based ethanol in certain domestic markets, such as
California, due to low carbon fuel standards that take into
consideration the effects caused by indirect land use.
The
Renewable Fuels Standard
The RFS is a national program that imposes requirements with
respect to the amount of renewable fuel produced and used. The
RFS was revised by the EPA in July 2010 (RFS2) and
applies to refineries, blenders, distributors and importers. In
2011, the RFS2 requires that refiners and importers blend
renewable fuels totaling at least 8.01% of total fuel volume, or
approximately 13.95 billion gallons, of which
12.60 million gallons can be derived from corn-based
ethanol. The RFS2 requirement will increase incrementally over
the next several years to a renewable fuel requirement of
36.0 billion gallons, or approximately 11% of the
anticipated gasoline and diesel
20
Table of Contents
consumption, by 2022. The following chart illustrates the
potential United States ethanol demand based on the schedule of
minimum usage established by the program through the year 2022
(in billions of gallons).
Cellulosic |
RFS Requirement |
|||||||||||||||||||
Total Renewable |
Ethanol |
Biodiesel |
That Can Be Met |
|||||||||||||||||
Fuel |
Minimum |
Minimum |
Advanced |
With Corn-Based |
||||||||||||||||
Year
|
Requirement | Requirement | Requirement | Biofuel | Ethanol | |||||||||||||||
2011
|
13.95 | 0.25 | 0.80 | 1.35 | 12.60 | |||||||||||||||
2012
|
15.20 | 0.50 | 1.00 | 2.00 | 13.20 | |||||||||||||||
2013
|
16.55 | 1.00 | - | 2.75 | 13.80 | |||||||||||||||
2014
|
18.15 | 1.75 | - | 3.75 | 14.40 | |||||||||||||||
2015
|
20.50 | 3.00 | - | 5.50 | 15.00 | |||||||||||||||
2016
|
22.25 | 4.25 | - | 7.25 | 15.00 | |||||||||||||||
2017
|
24.00 | 5.50 | - | 9.00 | 15.00 | |||||||||||||||
2018
|
26.00 | 7.00 | - | 11.00 | 15.00 | |||||||||||||||
2019
|
28.00 | 8.50 | - | 13.00 | 15.00 | |||||||||||||||
2020
|
30.00 | 10.50 | - | 15.00 | 15.00 | |||||||||||||||
2021
|
33.00 | 13.50 | - | 18.00 | 15.00 | |||||||||||||||
2022
|
36.00 | 16.00 | - | 21.00 | 15.00 |
The RFS2 went into effect on July 1, 2010 and requires
certain gas emission reductions for the entire lifecycle,
including production of fuels. The greenhouse gas reduction
requirement generally doesnt apply to facilities that
commenced construction prior to December 2007. If this changes
and our plants must meet the standard for emissions reduction,
it may impact the way we procure feed stock and modify the way
we market and transport our products.
Blending
Incentives
The VEETC, often commonly referred to as the
blenders credit, was created by the American
Jobs Creation Act of 2004. This credit allows gasoline
distributors who blend ethanol with gasoline to receive a
federal excise tax credit of $0.45 per gallon of pure ethanol
used, or $0.045 per gallon for E10 and $0.3825 per gallon for
E85. To ensure the blenders credit spurs growth in
domestic production, federal policy has insulated the domestic
ethanol industry from foreign competition by levying a $0.54 per
gallon tariff on all imported ethanol. Both the VEETC and the
tariff were set to expire on December 31, 2010, but were
extended for one year as part of the Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of
2010 signed into law by President Obama on
December 17, 2010.
California
Low Carbon Fuel Standard
In April 2009, the California air regulators approved the
Low-Carbon Fuel Standard aimed at achieving a 10% reduction in
motor vehicle emissions of greenhouse gases by 2020. Other
states may adopt similar legislation, which may lead to a
national standard. The regulation requires that providers,
refiners, importers and blenders ensure that the fuels they
provide in the California market meet a declining standard of
carbon intensity. This rule calls for a reduction of greenhouse
gas emissions associated with the production, transportation and
consumption of a fuel. The emissions score also includes
indirect land-use change pollution created from converting a
forest to cultivated land for corn feedstock. The final
regulation contains a provision to review the measurement of the
indirect land-use effects and further analysis of the land use
values and modeling inputs.
This standard and others to follow may impact the way ethanol
producers procure feedstocks, produce dry distillers grains and
market and transport ethanol and distillers grains. Ethanol
produced through low carbon methods, including imported ethanol
made from sugarcane, may be redirected to certain markets and
U.S. producers may be required to market their ethanol in
other regions.
21
Table of Contents
Imported
Ethanol Tariffs
There is a $0.54 per gallon tariff on imported ethanol, which
expires on December 31, 2011, after a one year extension
was signed into law on December 17, 2010. Ethanol imports
from 24 countries in Central America and the Caribbean region
are exempted from the tariff under the Caribbean Basin
Initiative or CBI, which provides that specified nations may
export an aggregate of 7% of U.S. ethanol production per
year into the U.S., with additional exemptions from ethanol
produced from feedstock in the Caribbean region over the 7%
limit. Ethanol imported from Caribbean basin countries may be a
less expensive alternative to domestically produced ethanol.
Expiration of this tariff could lead to the importation of
ethanol from other countries, which may be a less expensive
alternative to ethanol produced domestically. This could impact
our ability to sell our ethanol at the price we need to operate
profitably.
Chinese
Anti-Dumping Investigation
On December 28, 2010, the Chinese government announced a
one year investigation into the potential violation of
anti-dumping laws regarding imported dried distillers grains
originating in the United States. The allegation is that the
recent surge in imports of U.S. dried distillers grains is
undercutting sales of domestically produced dried distillers
grains and that U.S. dried distillers grains are being sold
at a price lower than the fair market value. If the Chinese
Government finds evidence of dumping upon conclusion of the
investigation on December. 28, 2011, a final determination
may include the imposition of punitive tariffs on
U.S. imports of DDGS to China. Punitive tariffs, if
applied, will be significantly higher, as much as
50 percent, for non-cooperating parties. Although the
Company does not sell distillers grains directly into China,
some of our distillers grains are sold into China through third
parties. The Company has chosen to cooperate with the Chinese
governments investigation, but at this time we are
uncertain as to the impact this may have on our business.
COMPETITION
Ethanol
The ethanol we produce is similar to ethanol produced by other
plants. The RFA reports that as of December 2010, current
U.S. ethanol production capacity is approximately
13.8 billion gallons per year. On a national level there
are numerous other production facilities with which we are in
direct competition, many of whom have greater resources than we
do. As of December 2010, Nebraska had 27 ethanol plants
producing an aggregate of 1.8 billion gallons of ethanol
per year, and South Dakota had 15 ethanol plants producing an
aggregate of 1.0 billion gallons of ethanol per year,
including our plants.
The largest ethanol producers include: Abengoa Bioenergy Corp.,
Archer Daniels Midland Company, Cargill, Inc., Green Plains
Renewable Energy, Inc., POET, LLC and Valero Renewable Fuels.
Producers of this size may have an advantage over us from
economies of scale and negotiating position with purchasers. We
market our ethanol primarily on a regional and national basis.
Our plants compete with other ethanol producers on the basis of
price, and, to a lesser extent, delivery service. We believe
that we can compete favorably with other ethanol producers due
to our proximity to ample grain, natural gas, electricity and
water supplies at favorable prices.
Distillers
Grains
We compete with other ethanol producers in the sales of
distillers grains, as well as a number of large and smaller
suppliers of competing animal feed. We believe the principal
competitive factors are price, proximity to purchasers and
product quality. Currently 78.7% of our distillers grain
revenues are derived from the sale of dried distillers grains,
which has an indefinite shelf life and can be transported by
truck or rail, 5.4% as modified and 15.9% as wet, which have a
shorter shelf life and are typically sold in local markets.
22
Table of Contents
LIQUIDITY
AND CAPITAL RESOURCES
Financing
and Existing Debt Obligations
Our business activities and plant operations are conducted
through Advanced BioEnergy, ABE Fairmont and ABE South Dakota.
The liquidity and capital resources for each entity are based on
the entitys existing financing arrangements and capital
structure. ABE Fairmont has traditional project financing in
place, including senior secured financing, working capital
facilities and subordinate exempt-facilities revenue bonds. In
June 2010, ABE South Dakota entered into the Senior Credit
Agreement (as defined below), which eliminated the subordinated
debt. There are provisions contained in the various financing
agreements at each operating entity preventing cross-default or
collateralization between operating entities. Advanced BioEnergy
is highly restricted in its ability to utilize the cash and
other financial resources of each subsidiary for the benefit of
Advanced BioEnergy, with the exception of allowable
distributions as defined in the separate financing agreements.
Advanced
BioEnergy, LLC
ABE had cash and cash equivalents of $0.6 million on hand
at December 31, 2010. ABE does not have any debt
outstanding as of December 31, 2010. ABE does not expect to
make any distributions to its unit holders in the next
12 months. ABEs primary source of operating cash
comes from charging a monthly management fee to ABE Fairmont and
ABE South Dakota for services provided in connection with
operating the ethanol plants. The primary management services
provided include risk management, accounting and finance, human
resources and other general management related responsibilities.
From time to time ABE may also receive certain allowable
distributions from ABE Fairmont and ABE South Dakota based on
the terms and conditions in their respective senior credit
agreements. In January 2011, ABE received a distribution from
ABE Fairmont of $4.7 million based on the fiscal 2010
financial results of ABE Fairmont. This distribution was subject
to ABE Fairmont remaining in compliance with all loan covenants
and terms and conditions of its senior secured credit agreement.
ABE is not expecting any distribution from ABE South Dakota.
We believe ABE has sufficient financial resources available to
fund current operations and capital expenditure requirements for
at least the next 12 months.
ABE
Fairmont
ABE Fairmont had cash and cash equivalents of $13.4 million
and restricted cash of $1.4 million on hand at
December 31, 2010. The restricted cash is held in escrow
for future debt service payments. As of December 31, 2010,
ABE Fairmont had total debt outstanding of $63.7 million
consisting of $57.5 million in senior secured credit and
$6.2 million of subordinate exempt-facilities revenue
bonds. ABE Fairmont is required to make monthly interest
payments on its senior secured credit and semi-annual interest
payments on its outstanding subordinate exempt revenue bonds.
ABE Fairmont is required to make quarterly principal payments of
$2.6 million on its senior secured credit. The first
principal payment of $815,000 on the subordinate exempt
facilities revenue bonds was made in December 2010.
ABE Fairmont is allowed to make cash distributions to ABE if ABE
Fairmont meets all conditions required in its senior secured
credit agreement at the end of a fiscal year. This annual
distribution is limited to 40% of net income calculated in
accordance with generally accepted accounting principles and
other terms contained in its senior secured credit agreement.
The distribution is subject to the completion of ABE
Fairmonts annual financial statement audit and ABE
Fairmont remaining in compliance with all loan covenants and
terms and conditions of the senior secured credit agreement. The
annual distribution based on ABE Fairmont fiscal 2010 financial
results, which had not been made to ABE as of December 31,
2010, is $4.7 million. The distribution was made at the end
of January 2011.
ABE Fairmonts senior secured credit agreement also
requires an annual cash sweep subject to a free cash flow
calculation, as defined in its senior secured credit agreement.
The cash sweep requires that, for each fiscal year ending in
2010 through 2012, ABE Fairmont must make a payment equal to the
lesser of $8.0 million or 75% of its free cash flow after
distributions, not to exceed $16.0 million in the aggregate
for all of the free cash flow payments. Based on fiscal 2010
financial results, ABE Fairmont made a cash sweep payment of
$5.0 million in December
23
Table of Contents
2010. Cash sweep payments are subject to compliance with all
loan covenants and terms and conditions of the senior secured
credit agreement.
We believe ABE Fairmont has sufficient financial resources
available to fund current operations and capital expenditure
requirements for at least the next 12 months. In addition
to the cash on hand, ABE Fairmont has a $6.0 million
revolving credit facility for financing eligible grain inventory
and equity in Chicago Board of Trade futures positions, which
expires on April 1, 2011. The Company plans to review the
need for this seasonal line prior to its expiration to determine
whether it should be extended. ABE Fairmont had
$6.0 million available on the revolving credit facility as
of December 31, 2010. ABE Fairmont also has a
$2.0 million revolving credit facility for financing
third-party letters of credit, which expires in February 2012.
ABE Fairmont issued a letter of credit in connection with a rail
car lease, reducing the financing available from the
$2.0 million revolving credit facility by $911,000 as of
December 31, 2010.
ABE Fairmonts senior secured credit facility agreement
contains financial and restrictive covenants, including
limitations on additional indebtedness, restricted payments, and
the incurrence of liens and transactions with affiliates and
sales of assets. In addition, the senior secured credit facility
requires ABE Fairmont to comply with certain financial
covenants, including maintaining monthly minimum working
capital, monthly minimum net worth, annual debt service coverage
ratios and capital expenditure limitations. ABE Fairmont was in
compliance with all covenants at December 31, 2010.
ABE South
Dakota
ABE South Dakota had cash and cash equivalents of
$7.4 million and $4.7 million of restricted cash on
hand at December 31, 2010. The restricted cash consists of
$3.0 million for a debt service payment reserve,
$1.6 million for the construction of certain rail
infrastructure at its Huron, South Dakota ethanol facility, and
$0.1 million in an account for maintenance capital
expenditures. As of December 31, 2010, ABE South Dakota had
interest bearing term debt outstanding of $80.3 million.
In June 2010, ABE South Dakota entered into an Amended and
Restated Senior Credit Agreement dated as of June 16, 2010
(the Senior Credit Agreement) among ABE South
Dakota, the lenders from time to time party thereto, and WestLB
AG, New York Branch, as administrative agent and collateral
agent. The Senior Credit Agreement converted the outstanding
principal amount of the loans and certain other amounts under
interest rate protection agreements under the existing senior
credit agreement to a senior term loan in an aggregate principal
amount equal to $84.3 million. Interest accrued on
outstanding term and working capital loans under the existing
credit agreement was reduced to zero on June 18, 2010. The
principal amount of the term loan facility is payable in equal
quarterly payments of $750,000, with the remaining principal
amount fully due and payable on March 31, 2016. ABE South
Dakota has agreed to pay a $3.0 million restructuring fee
to the lender due at the earlier of March 31, 2016 and the
date on which the loans are repaid in full. The Company recorded
the restructuring fee as long-term, non-interest bearing debt.
ABE South Dakotas obligations under the Senior Credit
Agreement are secured by a first-priority security interest in
all of the equity in and assets of ABE South Dakota.
ABE South Dakota is allowed to make equity distributions (other
than certain tax distributions) to ABE only upon ABE South
Dakota meeting certain financial conditions and if there is no
more than $25 million of principal outstanding on the
senior term loan. Loans outstanding under the Senior Credit
Agreement are subject to mandatory prepayment in certain
circumstances, including, but not limited to, mandatory
prepayments based upon receipt of certain proceeds of asset
sales, casualty proceeds, termination payments, and cash flows.
The Senior Credit Agreement and the related loan documentation
include, among other terms and conditions, limitations (subject
to specified exclusions) on ABE South Dakotas ability to
make asset dispositions; merge or consolidate with or into
another person or entity; create, incur, assume or be liable for
indebtedness; create, incur or allow liens on any property or
assets; make investments; declare or make specified restricted
payments or dividends; enter into new material agreements;
modify or terminate material agreements; enter into transactions
with affiliates; change its line of business; and establish bank
accounts. Substantially all cash of ABE South Dakota is required
to be deposited into special, segregated project accounts
subject to security interests to secure obligations
24
Table of Contents
in connection with the Senior Credit Agreement. The Senior
Credit Agreement contains customary events of default and also
includes an event of default for defaults on other indebtedness
by ABE South Dakota and certain changes of control. ABE South
Dakota was in compliance with all covenants at December 31,
2010.
We believe ABE South Dakota has sufficient financial resources
available to fund current operations, make debt service payments
and fund capital expenditure requirements, including the
$1.6 million remaining for the rail infrastructure project
at Huron, over the next 12 months.
CREDIT
ARRANGEMENTS
Long-term debt consists of the following (in thousands, except
percentages):
December 31, |
||||||||||
2010 |
December 31, |
September 30, |
||||||||
Interest Rate | 2010 | 2010 | ||||||||
ABEFairmont:
|
||||||||||
Senior credit facility - variable
|
3.67% | $ | 37,466 | $ | 45,050 | |||||
Senior credit facility - fixed
|
7.53% | 20,000 | 20,000 | |||||||
Seasonal line
|
3.35% | - | - | |||||||
Subordinate exempt facilities bonds - fixed
|
6.75% | 6,185 | 7,000 | |||||||
63,651 | 72,050 | |||||||||
ABESouth Dakota:
|
||||||||||
Senior debt principal - variable
|
1.80% | 80,302 | 81,352 | |||||||
Restructuring fee
|
N/A | 3,000 | 3,000 | |||||||
Additional carrying value of restructured debt
|
N/A | 10,099 | 10,313 | |||||||
93,401 | 94,665 | |||||||||
Total outstanding
|
$ | 157,052 | $ | 166,715 | ||||||
Additional carrying value of restructured debt
|
N/A | (10,099 | ) | (10,313 | ) | |||||
Stated principal
|
$ | 146,953 | $ | 156,402 | ||||||
The estimated maturities of debt at December 31, is as
follows (in thousands):
Amortization of |
||||||||||||
Additional Carrying |
||||||||||||
Stated |
Value of |
|||||||||||
Principal | Restructured Debt | Total | ||||||||||
2011
|
$ | 14,215 | $ | 845 | $ | 15,060 | ||||||
2012
|
14,215 | 1,421 | 15,636 | |||||||||
2013
|
14,215 | 2,277 | 16,492 | |||||||||
2014
|
10,081 | 2,528 | 12,609 | |||||||||
2015
|
13,815 | 2,435 | 16,250 | |||||||||
Thereafter
|
80,412 | 593 | 81,005 | |||||||||
Total debt
|
$ | 146,953 | $ | 10,099 | $ | 157,052 | ||||||
SUMMARY
OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Note 1 to our consolidated financial statements contains a
summary of our significant accounting policies, many of which
require the use of estimates and assumptions. Accounting
estimates are an integral part of the preparation of financial
statements and are based upon managements current
judgment. We used our knowledge and experience about past events
and certain future assumptions to make estimates and judgments
involving matters
25
Table of Contents
that are inherently uncertain and that affect the carrying value
of our assets and liabilities. We believe that of our
significant accounting policies, the following are noteworthy
because changes in these estimates or assumptions could
materially affect our financial position and results of
operations:
Fair
Value of Financial Instruments
Financial instruments include cash, cash equivalents and
restricted cash, interest rate swaps, derivative financial
instruments, accounts receivable, accounts payable, accrued
expenses and long-term debt. The fair value of the long-term
debt is estimated based on anticipated interest rates which
management believes would currently be available to the Company
for similar issues of debt, taking into account the current
credit risk of the Company and other market factors. The Company
believes the carrying value of the debt instruments at ABE
Fairmont and ABE South Dakota approximate fair value. The fair
value of all other financial instruments is estimated to
approximate carrying value due to the short-term nature of these
instruments.
Derivative
Instruments/Due From Broker
On occasion, the Company has entered into derivative contracts
to hedge the Companys exposure to price risk related to
future corn purchases and future ethanol sales. Accounting for
derivative contracts requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable
cash flows of a forecasted transaction, or (c) a hedge of
the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an
available-for-sale
security, or a foreign-currency-denominated forecasted
transaction.
Although the Company believes its derivative positions are
economic hedges, none have been designated as a hedge for
accounting purposes and derivative positions are recorded on the
balance sheet at their fair market value, with changes in fair
value recognized in current period earnings.
Inventories
Corn, chemicals, supplies, work in process, ethanol and
distillers grains inventories are stated at the lower of cost or
market on a weighted cost basis.
Property
and Equipment
Property and equipment is carried at cost less accumulated
depreciation computed using the straight-line method over the
estimated useful lives:
Office equipment
|
5-7 Years | |||
Process equipment
|
10 Years | |||
Buildings
|
40 Years |
Maintenance and repairs are charged to expense as incurred;
major improvements and betterments are capitalized. Long-lived
assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount on the asset may
not be recoverable. An impairment loss is recognized when
estimated undiscounted future cash flows from operations are
less than the carrying value of the asset group. An impairment
loss is measured by the amount by which the carrying value of
the asset exceeds the estimated fair value on that date.
Revenue
Recognition
Ethanol revenue is recognized when product title and all risk of
ownership is transferred to the customer as specified in the
contractual agreements with the marketers. At all of the
Companys plants, revenue is recognized upon the release of
the product for shipment. Revenue from the sale of co-products
is recorded when title and all risk of ownership transfers to
customers, which generally occurs at the time of shipment.
Co-products and related products are generally shipped free on
board (FOB) shipping point. Interest income is
recognized as earned. In
26
Table of Contents
accordance with the Companys agreements for the marketing
and sale of ethanol and related products, commissions due to the
marketers are deducted from the gross sale price at the time of
payment.
OFF-BALANCE
SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
GOVERNMENT
PROGRAMS, TAX CREDITS AND TAX INCREMENT FINANCING
We have applied for income and sales tax incentives available
under a Nebraska Advantage Act Project Agreement. As of
December 31, 2010, we have received approximately
$3.2 million in refunds under the Nebraska Advantage Act.
We anticipate additional recovery of certain sales taxes paid on
construction costs, and up to 10% of the cost of the Fairmont
plant construction pursuant to reductions in income taxes over
the next 12 years. Under the Nebraska Advantage Act, we
also anticipate recovery of 5% of the annual costs of the newly
created employment positions, pursuant to offsets to future
payroll taxes. Although we may apply under several programs
simultaneously and may be awarded grants or other benefits from
more than one program, some combinations of programs are
mutually exclusive. Under some state and federal programs,
awards are not made to applicants in cases where construction on
the project has started prior to the award date. There is no
guarantee that applications will result in awards of grants or
credits or deductions.
In December 2006, we received net proceeds of $6.7 million
from tax incremental financing from the Village of Fairmont,
Nebraska. We anticipate paying off the outstanding obligation
with future property tax payments assessed on the Fairmont plant.
The State of South Dakota pays an incentive to operators of
ethanol plants to encourage the growth of the ethanol industry.
The Huron plant is eligible to receive an aggregate of
$10 million, payable up to $1 million per year. The
amounts are dependent on annual allocations by the State of
South Dakota and the number of eligible plants. ABE South Dakota
has historically received a payment between $700,000 and
$800,000 for the Huron plant per year and expects this incentive
to terminate for the plant in 2011.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
COMMODITY
PRICE RISK
We consider commodity price risk to be the impact of adverse
changes in commodity prices on our results of operations. We are
subject to significant market risk with respect to the price of
ethanol and corn. For the quarter ended December 31, 2010,
sales of ethanol represented 84.0% of our total revenues and
corn costs represented 73.5% of total cost of goods sold. In
general, ethanol prices are affected by the supply and demand
for ethanol, the cost of ethanol production, the availability of
other fuel oxygenates, the regulatory climate and the cost of
alternative fuels such as gasoline. The price of corn is
affected by weather conditions and other factors affecting crop
yields, farmer planting decisions and general economic, market
and regulatory factors. At December 31, 2010, the price per
gallon of ethanol and the cost per bushel of corn on the Chicago
Board of Trade, or CBOT, were $2.38 and $6.29, respectively.
We are also subject to market risk on the selling prices of our
distillers grains, which represent 16.0% of our total revenues.
These prices fluctuate seasonally when the price of corn or
other cattle feed alternatives fluctuate in price. The dried
distiller grains spot price for Nebraska and South Dakota local
customers were $174 and $168 per ton, respectively, at
December 31, 2010.
We are also subject to market risk with respect to our supply of
natural gas that is consumed in the ethanol production process.
Natural gas costs represented 5.3% of total cost of goods sold
for the quarter ended December 31, 2010. The price of
natural gas is affected by weather conditions and general
economic, market and regulatory factors. At December 31,
2010, the price of natural gas on the NYMEX was $4.41 per mmbtu.
To reduce price risk caused by market fluctuations in the cost
and selling prices of related commodities, we have entered into
forward purchase/sale contracts and derivative transactions. At
December 31, 2010 we guaranteed prices for our ethanol
representing 27.6% of our ethanol gallons sold through March
2011 by entering into flat
27
Table of Contents
priced contracts. At December 31, 2010 we had entered into
forward sale contracts representing 57.7% of our expected
distillers grains production and we had entered into forward
purchase contracts representing 10.6% of our current corn
requirements through March 2011. At December 31, 2010, our
January gas usage prices were fixed with our natural gas
providers.
The following represents a sensitivity analysis that estimates
our annual exposure to market risk with respect to our current
corn and natural gas requirements and ethanol sales. Market risk
is estimated as the potential impact on operating income
resulting from a hypothetical 10% change in the current ethanol,
distiller grains, corn, and natural gas prices. The results of
this analysis, which may differ from actual results, are as
follows:
Change in |
||||||||||||||||||
Estimated at |
Hypothetical |
Annual |
||||||||||||||||
Risk |
Change in |
Spot |
Operating |
|||||||||||||||
Volume(1) | Units | Price | Price(2) | Income | ||||||||||||||
(In millions) | (In millions) | |||||||||||||||||
Ethanol
|
141.2 | gallons | 10.0 | % | $ | 2.38 | $ | 33.6 | ||||||||||
Distillers grains
|
0.25 | tons | 10.0 | % | 172.00 | 4.3 | ||||||||||||
Corn
|
62.2 | bushels | 10.0 | % | 6.29 | 39.1 | ||||||||||||
Natural gas
|
4.8 | mmbtus | 10.0 | % | 4.41 | 2.1 |
(1) | The volume of ethanol at risk is based on the assumption that we will enter into contracts for 27.6% of our expected annual gallons capacity of 195 million gallons. The volume of distillers grains at risk is based on the assumption that we will enter into contracts for 57.7% of our expected annual distillers grains production of 592,000 tons. The volume of corn is based on the assumption that we will enter into forward contracts for 10.6% of our estimated current 69.6 million bushel annual requirement. The volume of natural gas at risk is based on the assumption that we will continue to lock in 13.8% gas usage. | |
(2) | Current spot prices include the CBOT price per gallon of ethanol and the price per bushel of corn, the NYMEX price per mmbtu of natural gas and our listed local advertised dried distillers grains price per ton as of December 31, 2010. |
INTEREST
RATE/FOREIGN EXCHANGE RISK
Our future earnings may be affected by changes in interest rates
due to the impact those changes have on our interest expense on
borrowings under our credit facilities. As of December 31,
2010, we had $117.8 million of outstanding borrowings with
variable interest rates. With each 1% change in interest rates
our annual interest would change by $1.18 million.
We have no international sales. Historically all of our
purchases have been denominated in U.S. dollars. Therefore
we do not consider future earnings subject to foreign exchange
risk.
Item 4. | Controls and Procedures |
Evaluation
of Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted
an evaluation, under the supervision and with the participation
of our chief executive officer, who is also our chief financial
officer, of our disclosure controls and procedures (as defined
in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934). Based on this
evaluation, our chief executive officer, who is also our chief
financial officer, concluded that our disclosure controls and
procedures are effective to ensure that information required to
be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms and to ensure
that information required to be disclosed by the Company in the
reports the Company files or submits under the Exchange Act is
accumulated and communicated to the Companys management,
including its principal executive and principal financial
officer, to allow timely decisions regarding required
disclosures.
28
Table of Contents
Changes
in Internal Controls
There were no changes in our internal controls over financial
reporting during our most recently completed fiscal quarter that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II.
OTHER INFORMATION
Item 1. | Legal Proceedings |
In June 2009, Revis Stephenson, the Companys former
director and chairman of the board and former chief executive
officer, filed a demand for arbitration with the American
Arbitration Association (AAA) alleging that the Company breached
its employment agreement with Mr. Stephenson and defamed
him when it terminated his employment in January 2009.
Mr. Stephenson is seeking additional compensation and
damages, including but not limited to two years of compensation
and benefits. On January 26, 2011, the arbitration record
was closed. As it relates to this matter, the AAA requires a
written decision to be rendered within 30 days of the
record closing. Therefore, we expect a final decision on or
before February 25, 2011.
Item 1A. | Risk Factors |
There have been no material change in our risk factors
subsequent to the filing of our
Form 10-K
for the fiscal year ended September 30, 2010.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | [Removed and Reserved] |
Not applicable.
Item 5. | Other Information |
None.
Item 6. | Exhibits |
The exhibits filed herewith are set forth on the
Exhibit Index filed as a part of this report beginning
immediately following the signatures.
29
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ADVANCED BIOENERGY, LLC | ||||
Date: February 11, 2011
|
By: | /s/ Richard R. Peterson | ||
Richard R. Peterson | ||||
Chief Executive Officer and President, Chief Financial Officer (Duly authorized signatory and principal financial officer) |
EXHIBIT INDEX
Exhibit |
||||||
No.
|
Description | Method of Filing | ||||
3.1 | Certificate of Formation | Incorporated by reference to Exhibit 2.1 to the Registrants Current Report on Form 8-K, filed on November 8, 2006 | ||||
3.2 | Fourth Amended and Restated Operating Agreement of the Registrant, effective as of May 11, 2010 | Incorporated by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K, filed on May 13, 2010 | ||||
31 | Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer, Financial and Accounting Officer | Filed Electronically | ||||
32 | Section 1350 Certifications | Filed Electronically |
30