Attached files
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EX-31.2 - EXHIBIT 31.2 - FIRST UNITED ETHANOL LLC | c17787exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - FIRST UNITED ETHANOL LLC | c17787exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - FIRST UNITED ETHANOL LLC | c17787exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - FIRST UNITED ETHANOL LLC | c17787exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2011
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 000-53039
FIRST UNITED ETHANOL, LLC
(Name of registrant as specified in its charter)
Georgia | 20-2497196 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
4433 Lewis B. Collins Road, Pelham, Georgia | 31779 | |
(Address of principal executive offices) | (Zip Code) |
(229) 522-2822
(Registrants telephone number)
(Registrants telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
o Yes þ No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: As of May 23, 2011 there were 81,984 membership units outstanding.
INDEX
Page
3 | ||||||||
3 | ||||||||
17 | ||||||||
29 | ||||||||
30 | ||||||||
30 | ||||||||
30 | ||||||||
30 | ||||||||
33 | ||||||||
33 | ||||||||
33 | ||||||||
33 | ||||||||
33 | ||||||||
34 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements. |
FIRST UNITED ETHANOL, LLC AND DEBTOR-IN-POSSESSION SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
March 31, 2011 | September 30, 2010 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 3,168,875 | $ | 586,466 | ||||
Trade receivables, net of allowance for doubtful
accounts of approximately $67,000 and $30,000, respectively |
6,843,872 | 5,088,073 | ||||||
Due from broker |
457 | 457 | ||||||
Inventory |
14,215,718 | 9,859,841 | ||||||
Other assets |
2,728,598 | 1,100,281 | ||||||
Total current assets |
26,957,520 | 16,635,118 | ||||||
PROPERTY AND EQUIPMENT |
||||||||
Office building, furniture and equipment |
1,103,781 | 1,103,781 | ||||||
Land and improvements |
2,508,148 | 2,508,148 | ||||||
Plant buildings and equipment |
161,556,201 | 161,476,853 | ||||||
165,168,130 | 165,088,782 | |||||||
Less accumulated depreciation |
(21,915,009 | ) | (17,528,484 | ) | ||||
143,253,121 | 147,560,298 | |||||||
RESTRICTED CASH AND CERTIFICATES OF DEPOSIT |
443,860 | 2,779,643 | ||||||
FINANCING COSTS, net of amortization of $- and $2,894,432 |
| 3,723,703 | ||||||
TOTAL ASSETS |
$ | 170,654,501 | $ | 170,698,762 | ||||
LIABILITIES AND MEMBERS EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Liabilities not subject to compromise debtor-in-possession
financing |
$ | 8,850,000 | $ | | ||||
Liabilities not subject to compromise accounts payable and other |
4,096,508 | | ||||||
Revolving line of credit |
| 13,634,129 | ||||||
Current portion of long-term debt |
| 11,081,911 | ||||||
Current portion of capital lease obligations |
| 1,706,620 | ||||||
Current portion of interest rate swap liability |
| 525,658 | ||||||
Accounts payable and accrued expenses |
| 11,979,176 | ||||||
Accrued interest |
| 847,363 | ||||||
Deferred revenue |
| 411,423 | ||||||
Total current liabilities |
12,946,508 | 40,186,280 | ||||||
INTEREST RATE SWAP LIABILITY |
| 131,414 | ||||||
CAPITAL LEASE OBLIGATIONS |
| 2,007,748 | ||||||
ACCRUED INTEREST |
| 1,374,686 | ||||||
LONG-TERM DEBT |
| 94,481,878 | ||||||
LIABILITIES SUBJECT TO COMPROMISE |
134,780,900 | | ||||||
TOTAL LIABILITIES |
147,727,408 | 138,182,006 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
MEMBERS EQUITY |
||||||||
Membership contributions, 81,984 units issued and outstanding |
77,520,849 | 77,422,691 | ||||||
Accumulated deficit |
(54,593,756 | ) | (44,905,935 | ) | ||||
Total members equity |
22,927,093 | 32,516,756 | ||||||
TOTAL LIABILITIES AND MEMBERS EQUITY |
$ | 170,654,501 | $ | 170,698,762 | ||||
See Notes to Unaudited Consolidated Financial Statements.
3
Table of Contents
FIRST UNITED ETHANOL, LLC AND DEBTOR-IN-POSSESSION SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months | Three months | Six months | Six months | |||||||||||||
ending March 31, | ending March 31, | ending March 31, | ending March 31, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Revenues |
$ | 73,108,140 | $ | 51,017,401 | $ | 144,980,641 | $ | 108,451,918 | ||||||||
Cost of goods sold |
73,929,949 | 49,810,521 | 143,179,793 | 97,300,934 | ||||||||||||
Gross profit |
(821,809 | ) | 1,206,880 | 1,800,848 | 11,150,984 | |||||||||||
General and administrative expenses |
715,491 | 1,062,210 | 1,739,250 | 2,252,375 | ||||||||||||
Operating income (loss) |
(1,537,300 | ) | 144,670 | 61,598 | 8,898,609 | |||||||||||
Other income (expense) |
||||||||||||||||
Unrealized gain (loss) on interest rate swap |
(4,533 | ) | 250,653 | 231,572 | 592,055 | |||||||||||
Interest expense (contractual interest
expense was approximately $3,558,00 and
$10,470,000 for the three and six months ended
March 31, 2011, respectively |
(2,183,095 | ) | (2,067,790 | ) | (9,095,114 | ) | (4,201,566 | ) | ||||||||
Interest income |
11 | 4,194 | 351 | 4,428 | ||||||||||||
(2,187,617 | ) | (1,812,943 | ) | (8,863,191 | ) | (3,605,083 | ) | |||||||||
Income(loss) before reorganization items |
(3,724,917 | ) | (1,668,273 | ) | (8,801,593 | ) | 5,293,526 | |||||||||
Reorganization items |
||||||||||||||||
Professional fees |
886,228 | | 886,228 | | ||||||||||||
Net income (loss) |
$ | (4,611,145 | ) | $ | (1,668,273 | ) | $ | (9,687,821 | ) | $ | 5,293,526 | |||||
Net income (loss) per unit (Basic and Diluted) |
$ | (56.24 | ) | $ | (20.35 | ) | $ | (118.17 | ) | $ | 64.57 | |||||
Weighted average units outstanding |
81,984 | 81,984 | 81,984 | 81,984 | ||||||||||||
See Notes to Unaudited Consolidated Financial Statements.
4
Table of Contents
FIRST UNITED ETHANOL, LLC AND DEBTOR-IN-POSSESSION SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ending | Six months ending | |||||||
March 31, 2011 | March 31, 2010 | |||||||
(Unaudited) | (Unaudited) | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income (loss) |
$ | (9,687,821 | ) | $ | 5,293,526 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Pre-petition accounts payable |
7,158,584 | | ||||||
Pre-petition accrued interest |
4,948,732 | | ||||||
Depreciation |
4,386,526 | 4,368,742 | ||||||
Amortization of deferred financing costs |
3,873,702 | 533,768 | ||||||
Non-cash compensation expense |
98,158 | 98,165 | ||||||
Unrealized (gain) on interest rate swap |
(231,572 | ) | (592,055 | ) | ||||
Provision (recovery) of doubtful receivables |
37,000 | (8,500 | ) | |||||
Changes in assets and liabilities: |
||||||||
(Increase) decrease in trade receivables |
(1,792,799 | ) | 203,630 | |||||
Increase in due from broker |
| (213,893 | ) | |||||
Increase in inventory |
(4,355,877 | ) | (10,977 | ) | ||||
Increase in other assets |
(1,628,317 | ) | (387,227 | ) | ||||
Decrease in accounts payable and accrued expenses |
(7,882,668 | ) | (4,537,369 | ) | ||||
Increase in accrued interest payable |
(1,528,215 | ) | 511,159 | |||||
Decrease in deferred revenue |
(411,423 | ) | | |||||
Decrease in derivative financial instruments |
| (41,190 | ) | |||||
Net cash provided by (used in) operating activities |
(7,015,990 | ) | 5,217,779 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchase of certificates of deposit |
| (50,000 | ) | |||||
Purchase of property and equipment, net of returns |
(79,348 | ) | (102,136 | ) | ||||
Net cash (used in) investing activities |
(79,348 | ) | (152,136 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Repayment of long-term debt and capital lease obligations |
(2,460,328 | ) | (3,319,281 | ) | ||||
Payment of financing costs |
(300,000 | ) | (258,000 | ) | ||||
Proceeds from debtor-in-possesion financing |
9,000,000 | | ||||||
Proceeds from revolving line of credit |
1,065,862 | | ||||||
Release (funding) of restricted cash balance |
2,372,213 | (4,203 | ) | |||||
Excess of outstanding checks over bank balance |
| (81,555 | ) | |||||
Net cash provided by (used in) financing activities |
9,677,747 | (3,663,039 | ) | |||||
Increase in cash and cash equivalents |
2,582,409 | 1,402,604 | ||||||
Cash and cash equivalents, beginning of period |
586,466 | | ||||||
Cash and cash equivalents, end of period |
$ | 3,168,875 | $ | 1,402,604 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
||||||||
Cash paid for interest |
$ | 2,494,729 | $ | 3,895,389 | ||||
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES |
||||||||
Repayment of notes and interest payable paid by Bond Trustee |
$ | 1,365,264 | $ | 1,338,750 |
See Notes to Unaudited Consolidated Financial Statements.
5
Table of Contents
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
First United Ethanol, LLC and its subsidiary (sometimes the Company) is located near Camilla,
Georgia. The Company operates a 100 million gallon name plate capacity ethanol plant with
distribution within the United States. The Company formally began ethanol operations in October
2008.
The Company was formally organized as a limited liability company on March 9, 2005 under the name
Mitchell County Research Group, LLC. In September 2005, the Company formally changed its name to
First United Ethanol, LLC. In November 2007, the Companys wholly owned subsidiary, Southwest
Georgia Ethanol, LLC (SWGE or the Debtor) was formed in conjunction with the debt financing
agreement with West LB. First United Ethanol, LLC transferred substantially all of its assets and
liabilities to Southwest Georgia Ethanol, LLC.
Petition for Relief Under Chapter 11
During the first quarter of the fiscal year ending September 30, 2011, the Company continued to
suffer losses from operations thus continuing liquidity restraints due to limits on its working
capital line which was up for renewal in February 2011. Faced with these constraints, on February
1, 2011, SWGE, the wholly owned subsidiary, filed a voluntary petition for relief (the Bankruptcy
Filing) under Chapter 11 (Chapter 11) of the United States Bankruptcy Code (the Bankruptcy
Code) with the United States Bankruptcy Court for the Middle District of Georgia Albany Division
(the Bankruptcy Court). Under Chapter 11, certain claims against the Debtor in existence before
the Bankruptcy Filing are stayed while the Debtor continues business operations a
debtor-in-possession. These claims are reflected in the March 31, 2011 balance sheet as
liabilities subject to compromise. Additional claims (liabilities subject to compromise) may arise
after the filing date resulting from rejection of executory contracts, including leases, and from
the determination by the court (or agreed to by parties in interest) of allowed claims for
contingencies and other disputed amounts. Claims secured against the Debtors assets (secured
claims) also are stayed, although the holders of such claims have the right to move the court for
relief from the stay. Secured claims are secured primarily by liens on the Debtors real property,
plant and equipment. The Debtor received approval from the Bankruptcy Court to pay or otherwise
honor certain of its prepetition obligations, including employee wages and certain trade accounts
payable. Reorganization items include professional fees directly related to the Chapter 11
proceedings. Debt issuance costs are considered valuation accounts of the related debt.
The accompanying unaudited condensed consolidated financial statements have been prepared
assuming we will continue as a going concern, which assumes continuity of operations and
realization of assets and satisfaction of liabilities in the ordinary course of business. Our
ability to continue as a going concern is dependent upon, among other things, (i) our ability to
secure the remainder debtor-in-possession financing; (ii) our ability to comply with the terms and
conditions of any debtor-in-possession financing entered by the Bankruptcy Court in connection with
the Chapter 11 cases; (iii) our ability to maintain adequate cash on hand; (iv) our ability to
generate cash from operations; (v) our ability to obtain confirmation of and to consummate a plan
of reorganization under the Bankruptcy Code; (vi) the cost, duration and outcome of the
reorganization process; and (vii) our ability to achieve profitability. Uncertainty as to the
outcome of these factors raises substantial doubt about the Companys ability to continue as a
going concern. We are currently evaluating various courses of action to address the operational
and liquidity issues the Company is facing and there can be no assurance that any of these efforts
will be successful. The accompanying consolidated financial statements do not include any
adjustments that might result should we be unable to continue as a going concern.
Basis of Presentation
The consolidated financial statements and related notes have been prepared in accordance with
accounting principles generally accepted in the United States of America.
The accompanying financial information of the Company is unaudited; however, such information
reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and results of operations.
The results of operations for the three and six months ended March 31, 2011 are not necessarily
indicative of the results that may be expected for the full year. These statements should be read
in conjunction with the financial statements and related notes included in the Companys Annual
Report on Form 10-K for the year ended September 30, 2010.
6
Table of Contents
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its 100% owned
subsidiary. All material inter-company accounts and transactions are eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements, in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the disclosures of
contingent assets and liabilities and other items, as well as the reported revenues and expenses.
Actual results could differ from those estimates.
Cash and Cash Equivalents and Restricted Cash and Certificates of Deposit
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 Company segregates cash held in escrow, cash restricted and certificates of deposit
restricted for use by debt agreements as non-current.
Trade Accounts Receivable
Trade accounts receivable are recorded at original invoice amounts 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 customer
receivables and considering customers financial condition, credit history and current economic
conditions. Receivables are written off when deemed uncollectible. Recoveries of receivables
written off are recorded when received.
Inventories
Ethanol and related products, raw materials and work-in-process are valued using methods which
approximate the lower of cost (first-in, first-out) or market. In the valuation of inventories and
purchase and sale commitments, market is based on current replacement values except that it does
not exceed net realizable values and is not less than net realizable values reduced by allowances
for approximate normal profit margin.
Financing Costs
Financing costs associated with the loans discussed in Note 6 have been recorded at cost and
include expenditures directly related to securing debt financing. On February 1, 2011, the
Debtors Bankruptcy Filing provided relief (see Note 1) from the loans which gave rise to the
deferred financing costs. In conjunction with this filing, the Company expensed the existing net
book value of its deferred financing costs as of December 31, 2010, which was recorded as
additional interest expense of approximately $3,724,000 for the six months ended March 31, 2011.
During the three months ended March 31, 2011, the Company paid approximately $300,000 of financing
costs associated with its debtor in possession financing. These costs have been netted against the
face amount of that financing arrangement. The financing costs associated with the debtor in
possession financing are being amortized over the estimated term of the debtor in possession
financing.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the straight-line method
over the following estimated useful lives:
Buildings |
20 Years | |||
Plant and Process Equipment |
5-20 Years | |||
Office Furniture and Equipment |
3-10 Years |
7
Table of Contents
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Maintenance and repairs are charged to expense as incurred; major improvements and betterments are
capitalized. The present value of capital lease obligations are classified as long-term debt and
the related assets are included in property and equipment. Amortization of assets under capital
lease is included in depreciation expense.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. An impairment loss would be
recognized when estimated undiscounted future cash flows from operations are less than the carrying
value of the asset group. An impairment loss would be measured by the amount by which the carrying
value of the asset exceeds the fair value of the asset. In accordance with Company policies,
management has evaluated the plant for possible impairment based on projected undiscounted future
cash flows from operations. Management has determined that its projected undiscounted future cash
flows from operations exceed the carrying value of the plant and that no impairment exists at March
31, 2011. However, due to the Debtors recent Bankruptcy Filings, there can be no assurances that
the value of the plant will be recovered through future cash flows.
Investment in Commodities Contracts, Derivative Instruments and Hedging Activities
The Company is exposed to certain risks related to its ongoing business operations. The primary
risks that the Company manages by using forward or derivative instruments are price risk on
anticipated purchases of corn and natural gas.
The Company is subject to market risk with respect to the price and availability of corn, the
principal raw material used to produce ethanol and ethanol by-products. In general, rising corn
prices result in lower profit margins and, therefore, represent unfavorable market conditions. This
is especially true when market conditions do not allow the Company to pass along increased corn
costs to our customers. The availability and price of corn is subject to wide fluctuations due to
unpredictable factors such as weather conditions, farmer planting decisions, governmental policies
with respect to agriculture and international trade and global demand and supply.
Certain contracts that literally meet the definition of a derivative may be exempted from
derivative accounting as normal purchases or normal sales. Normal purchases and normal sales are
contracts that provide for the purchase or sale of something other than a financial instrument or
derivative instrument that will be delivered in quantities expected to be used or sold over a
reasonable period in the normal course of business. Contracts that meet the requirements of normal
purchases or sales are documented as such and exempted from the accounting and reporting
requirements of derivative accounting.
The Company enters into firm-price purchase commitments every month with its natural gas suppliers
under which they agree to buy natural gas at a price set in advance of the actual delivery of that
natural gas to us. Under these arrangements, the Company assumes the risk of a price decrease in
the market price of natural gas between the time this price is fixed and the time the natural gas
is delivered. The Company accounts for these transactions as normal purchases and, accordingly,
does not mark these transactions to market nor does the Company record the commitment on the
balance sheet.
The Company enters into short-term cash, options and futures contracts as a means of securing corn
pricing for the ethanol plant and managing exposure to changes in commodity prices. The Company
maintains a risk management strategy that uses derivative instruments to minimize significant,
unanticipated earnings fluctuations caused by market fluctuations. The Companys specific goal is
to protect the Company from large moves in commodity costs. All derivatives will be designated as
non-hedge derivatives for accounting purposes and the contracts will be accounted for at fair
value. Although the contracts will be effective economic hedges of specified risks, they are not
designated as and accounted for as hedging instruments.
As part of its trading activity, the Company uses futures and option contracts offered through
regulated commodity exchanges to reduce risk and is exposed to risk of loss in the market value of
inventories. To reduce that risk, the Company generally takes positions using cash and futures
contracts and options.
8
Table of Contents
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
To ensure an adequate supply of corn to operate the plant, the Company enters into contracts to
purchase corn from local farmers and its major suppliers. At March 31, 2011, the Company had fixed
price contracts totaling approximately $9,824,000 based upon the average per bushel price.
The Company has also managed a portion of its floating interest rate exposure through the use of
interest rate derivative contracts. The Companys forward LIBOR-based contract reduces risk from
interest rate movements as gains and losses on the contract offset portions of the interest rate
variability of our variable-rate debt. The notional amount of the swap at December 31, 2010 and
September 30, 2010 was $19,788,737 and $25,182,610, respectively. The effect of the swap was to
limit the interest rate exposure on the LIBOR component to a fixed rate of 4.04% compared to a
variable interest rate. The swap is designated as a non-hedge derivative and is accounted for as
mark to market. The estimated fair value of this agreement at September 30, 2010, was a liability
of approximately $657,000. The swaps notional amount decreased to $13,974,750 at February 2, 2011,
at which time the counterparty exercised an early termination clause triggered by the Companys
Chapter 11 filing. Under the early termination clause, the interest rate swap was terminated and a
fixed penalty of $425,500 is owed. The Company has included this amount in liabilities subject to
compromise on its consolidated balance sheet.
Derivatives not designated as hedging instruments at September 30, 2010 were as follows:
Balance Sheet | September 30, | |||||
Classification | 2010 | |||||
Interest rate swap |
(Current Liabilities) | $ | (525,658 | ) | ||
Interest rate swap |
(Non-Current Liabilities) | $ | (131,414 | ) |
Six | Six | Three | Three | |||||||||||||||
Months | Months | Months | Months | |||||||||||||||
Statement of | Ended | Ended | Ended | Ended | ||||||||||||||
Operations | March 31, | March 31, | March 31, | March 31, | ||||||||||||||
Classification | 2011 | 2010 | 2011 | 2010 | ||||||||||||||
Net realized and
unrealized gains
(losses) |
Revenues | $ | | $ | (52,272 | ) | $ | | $ | (52,272 | ) | |||||||
Related to futures
and options
contracts |
Cost of goods sold | | 38,696 | | 151,146 | |||||||||||||
Net realized and
unrealized gains
(losses) related
to the interest
rate swap |
Other non-operating (expense) | 231,572 | (262,141 | ) | (4,533 | ) | (147,339 | ) |
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and earned. The Company considers
revenue realized or realizable and earned when it has persuasive evidence of an arrangement,
delivery has occurred, the sales price is fixed or determinable, and collection is reasonably
assured.
Revenue from the production of ethanol and related products is recorded at the time title and all
risks of ownership transfer to customers, which is typically upon loading and shipping of the
product from the facility. Commissions are included in cost of goods sold. In addition, shipping
and handling costs incurred by the Company for the sale of ethanol and related products are
included in cost of goods sold.
9
Table of Contents
FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Revenue by product is as follows for the six and three months ended March 31, 2011 and 2010:
Six | Six | Three | Three | |||||||||||||
Months | Months | Months | Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
March 31, | March 31, | March 31, | March 31, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Ethanol |
$ | 115,500,327 | $ | 90,850,163 | $ | 58,030,553 | $ | 42,285,797 | ||||||||
Distillers grain |
28,839,845 | 17,588,735 | 14,785,337 | 8,723,011 | ||||||||||||
Other |
640,469 | 13,020 | 292,250 | 8,593 | ||||||||||||
Total |
$ | 144,980,641 | $ | 108,451,918 | $ | 73,108,140 | $ | 51,017,401 | ||||||||
Interest income is recognized as earned.
Net Income (Loss) per Membership Unit
For purposes of calculating basic and diluted net income (loss) per member unit, units subscribed
and issued by the Company are considered outstanding on the effective date of issue and are
weighted by days outstanding.
Income Taxes
The Company is organized as a partnership for federal and state income tax purposes and generally
does not incur income taxes. Instead, the Companys earnings and losses are included in the income
tax returns of the members. Therefore, no provision or liability for federal or state income taxes
has been included in these financial statements.
Management has evaluated the Companys tax positions under the Financial Accounting Standards Board
issued guidance on accounting for uncertainty in income taxes and concluded that the Company has
taken no uncertain tax positions that require adjustment to the financial statements to comply with
the provisions of this guidance. With few exceptions, the Company is no longer subject to income
tax examinations by the U.S. Federal, state or local authorities for the years before 2007.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, derivative instruments, trade receivables,
accounts payable and accrued expenses. Management believes the fair value of each of these
financial instruments approximates their carrying value on the balance sheet as of the balance
sheet date. The fair value of current financial instruments is estimated to approximate carrying
value due to the short-term nature of these instruments. The Company believes it is not practical
to estimate the fair value of the long-term debt.
Risks and Uncertainties
The Company has certain risks and uncertainties that it will experience during volatile market
conditions, which can have a severe impact on operations. The Companys revenues are derived from
the sale and distribution of ethanol and distiller grains to customers primarily located in the
United States. Corn for the production process is supplied to the plant primarily from local
agricultural producers and from purchases on the open market.
The Companys operating and financial performance is largely driven by the prices at which we
sell ethanol and the net expense of corn. The price of ethanol is influenced by factors such as
supply and demand, weather, government policies and programs, and unleaded gasoline and the
petroleum markets, although since 2005 the prices of ethanol and gasoline began a divergence with
ethanol selling for less than gasoline at the wholesale level. Excess ethanol supply in the
market, in particular, puts downward pressure on the price of ethanol. Our largest cost of
production is corn. The cost of corn is generally impacted by factors such as supply and demand,
weather, government policies and programs, and our risk management program used to protect against
the price volatility of these commodities.
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The current U.S. economic condition has reduced the nations demand for energy. In addition, the
VEETC credit of $0.45 is set to expire in December 2011, creating additional uncertainty to the
future of ethanol production. The ethanol boom of recent years has spurred overcapacity in the
industry and production capacity is currently exceeding the RFS mandates. As such, the Company may
need to evaluate whether crush margins will be sufficient to operate the plant and generate enough
debt service. In the event crush margins become negative for an extended period of time, the
Company may be required to reduce capacity or shut down the plant. The Company will continue to
evaluate crush margins on a regular basis.
NOTE 2. INVENTORIES
A summary of inventories at March 31, 2011 and September 30, 2010 is as follows:
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
Corn |
$ | 6,418,977 | $ | 4,943,188 | ||||
Denaturant and chemical supplies |
570,752 | 432,434 | ||||||
Work in process |
2,255,329 | 1,902,712 | ||||||
Ethanol |
3,730,880 | 1,618,807 | ||||||
Distiller grains |
1,239,780 | 962,700 | ||||||
Total |
$ | 14,215,718 | $ | 9,859,841 | ||||
NOTE 3. MEMBERS EQUITY AND SUBSEQUENT EVENTS
On May 2, 2011 the Company received approval from the Securities and Exchange Commission to proceed
with the filing of its definitive proxy statement regarding the proposed reclassification and
reorganization of the Companys membership units. The Company will be giving notice to the unit
holders of a special meeting to be held on June 22, 2011 at which time they will be asked to
approve a proposed Third Amended and Restated Operating Agreement. If approved by the members, the
result of such amendment and restatement will be the reclassification of the Companys units into
newly authorized Class A, Class B and Class C Units. If the transaction is completed, the units of
the Companys unit holders of record who hold 100 or more of common equity units will be renamed as
Class A Units. Unit holders of record who hold at least 99 units but no more than 21 units will
receive one Class B Unit for each common equity unit held by such unit holders immediately prior to
the effective time of the reclassification. Unit holders of record who hold 20 or fewer units will
receive one Class C Unit for each common equity unit held by such unit holders immediately prior to
the effective time of the reclassification. The effect of the reclassification will be to reduce
the recorded number of unit holders of the Companys common equity units to less than 300. This
would enable the Company to voluntarily terminate the registration of its units under the
Securities and Exchange Act of 1934 and remove its public reporting obligations.
NOTE 4. RELATED PARTIES
An entity which has common ownership with Fagen, Inc., the Companys principal vendor in the
construction of the ethanol facility, is also a Member of the Company and holds approximately 1.2%
of the outstanding units. In addition, the Company has a subordinated promissory note due Fagen,
Inc. in the amount of $3,977,545 as of March 31, 2011 and September 30, 2010.
The Company purchased corn at market prices in the amount of $772,455 and $770,974 for the three
months and $1,691,512 and $1,502,394 for the six months ending March 31, 2011 and 2010,
respectively, from certain Directors in the normal course of business.
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5. LEASES
The Company leases operating machinery under a lease agreement with De Lage Landen which is
accounted for as a capital lease. The lease will expire in 2013. The assets have a capitalized
cost of $157,664 included in property and equipment as of March 31, 2011 and September 30, 2010.
Accumulated depreciation totaled $39,416 and $31,532 as of March 31, 2011 and September 30, 2010,
respectively.
The Company entered into an Excess Facilities Charge Agreement with Georgia Power Company in which
Georgia Power installed a power substation to augment the Companys power system. The cost of the
substation is charged to the Company over a three year period requiring annual payments of
principal and interest totaling $686,309 beginning June 30, 2009. The Company has accounted for
this agreement as a capital lease. The present value of future payments due under the lease of
$1,834,512 is included in property and equipment as of March 31, 2011 and September 30, 2010.
Accumulated depreciation totaled $229,313 and $183,451 as of March 31, 2011 and September 30, 2010,
respectively.
The Company also entered into a Natural Gas Facilities Agreement with the City of Camilla for a
high pressure gas main to serve the plant and purchase natural gas from the City of Camilla. The
City of Camilla owns and operates the gas main and leases its usage to the Company. The agreement
calls for a monthly facilities charge, in addition to the normal consumption charges, equal to the
cost of the installation of the gas main over an 80 month period beginning June 2009 and requiring
principal and interest payments of approximately $43,000 each month. The Company has accounted for
the facilities lease charges as a capital lease. The present value of future payments under the
lease of $2,777,960 is included in as an asset in property and equipment as of March 31, 2011 and
September 30, 2010. Accumulated depreciation totaled $347,244 and $277,796 as of March 31, 2011
and September 30, 2010, respectively.
A summary of capital leases as of March 31, 2011 and September 30, 2010 is as follows:
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
De Lage Landen Financial Services, 60 months,
interest rate of 7.5% |
$ | 81,155 | $ | 96,778 | ||||
Georgia Power Substation lease, 36 months,
interest rate of 5.85% |
661,417 | 1,299,364 | ||||||
Natural Gas Facilities lease, 80 months, interest rate
of 6.59% |
2,134,185 | 2,318,226 | ||||||
2,876,757 | 3,714,368 | |||||||
Less amounts included in liabilities subject
to compromise |
(2,876,767 | ) | ||||||
Less current portion |
| (1,706,620 | ) | |||||
$ | | $ | 2,007,748 | |||||
The Company also entered into operating leases with Trinity Industries Leasing Company for the use
of rail cars and tanker cars. The tanker car lease expires November 2017 and the rail car lease
expires February 2012.
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6. DEBT FINANCING ARRANGEMENTS
The Companys prepetition long-term debt outstanding as of March 31, 2011 and September 30, 2010 is
summarized as follows:
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
West LB Term Loan, variable interest rates
from 4.00% 4.28% |
$ | 90,600,000 | $ | 92,200,000 | ||||
Subordinated Fagen note, 4% through June 30,
2010 and 8% thereafter |
3,977,545 | 3,977,545 | ||||||
Subordinated debt facility, interest rate of 7.5%,
described below |
8,615,000 | 9,250,000 | ||||||
Subordinated payable to Regions Bank, Trustee of
the 2008 Mitchell County Development Authority Bonds,
as described below |
1,365,264 | | ||||||
Notes payable John Deere Credit, interest rate
of 5.3%, described below |
113,528 | 136,244 | ||||||
104,671,337 | 105,563,789 | |||||||
Less amounts included in liabilities subject
to compromise |
(104,671,337 | ) | ||||||
Less current portion |
| (11,081,911 | ) | |||||
$ | | $ | 94,481,878 | |||||
West LB Credit Arrangement Senior Debt
SWGE entered into a senior credit agreement that provided for (1) a construction loan facility in
an aggregate amount of up to $100,000,000, which converted to a term loan on February 20, 2009
(Conversion Date) that matures on February 20, 2015 (the Final Maturity Date); and (2) a
working capital loan in an aggregate amount of up to $15,000,000 which matured on February 20,
2011. The primary purpose of the credit facility was to finance the construction and operation of
the Companys ethanol plant.
The principal amount of the term loan facility is payable in quarterly payments of $1,600,000,
which began September 30, 2009, and the remaining principal amounts are fully due and payable on
February 20, 2015. Interest is payable quarterly. SWGE has the option to select between two
floating interest rate loans under the terms of the senior credit agreement: Base Rate Loans bear
interest at the Administrative Agents base rate (which is the higher of the federal funds
effective rate plus 0.50% and the Administrative Agents prime rate) plus 2.75% per annum.
Eurodollar Loans bear interest at LIBOR plus 3.75%. The Company entered into an interest rate swap
with WestLB to effectively convert a portion of the variable rate interest into a fixed rate, with
the LIBOR component fixed at 4.04% (See Note 1), however, this interest rate swap agreement was
terminated on February 2, 2011 in conjunction with the Chapter 11 filing.
Under the terms of the senior credit agreement, SWGE has agreed to pay a quarterly commitment fee
equal to .20% per annum on the unused portion of the working capital loan. SWGEs obligations under
the senior credit agreement are secured by a first-priority security interest in all of the
Companys assets, including its equity interest in SWGE.
The senior credit agreement also required SWGE to enter into an accounts agreement among SWGE,
Amarillo National Bank, as the Accounts Bank and Securities Intermediary, and WestLB as the
collateral agent and administrative agent. Among other things, the accounts agreement establishes
certain special, segregated project accounts and establishes procedures for the deposits and
withdrawals of funds into these accounts. Substantially all cash of SWGE is required to be
deposited into the project accounts subject to security interests to secure obligations in
connection with the senior credit. Funds are released from the project accounts in accordance with
the terms of the accounts agreement.
As of March 31, 2011 and September 30, 2010, the Company had drawn $14,699,991 on the $13,784,129
working capital loan.
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
On June 7, 2010, the Company executed the Sixth amendment to its Senior Credit Agreement and
its Fourth amendment to its Accounts Agreement with WestLB. Pursuant to the amended agreements, the
Company was required to maintain a certain level of working capital. Pursuant to the amended loan
agreements, the Company was required to have a working capital deficit of ($9,000,000) or less as
of September 30, 2010, and ($7,000,000) or less subsequently for the term of the loan.
In the event the Company is unable to meet the level of working capital required under the amended
loan agreements the Company will be assessed a five percent (5%) interest fee on the outstanding
loans for any quarter for which it is not in compliance. This fee payment is in addition to the
interest the Company is required to pay on its outstanding debt pursuant to the original loan
agreements. This additional interest fee is accrued and due February 2015, the final maturity date
for the Companys outstanding term loan with West LB. Furthermore, and regardless of whether the
Company has maintained the required level of working capital, the Company was required to make an
additional quarterly principal payment of $150,000 toward its outstanding working capital loan
balance for each quarter beginning September 30, 2010. This arrangement is distinct from the
borrowing base formula and borrowing base certificates previously utilized to monitor compliance
with the Companys working capital loan. This amendment also removes the borrowing base financial
covenant from the terms of the loan, thereby removing the requirement for waivers.
The Company did not meet the working capital deficits of ($7,000,000) and ($9,000,000) required as
of December 31, 2010 and September 30, 2010, respectively. The resulting penalty fees of
approximately $1,375,000 per quarter were charged to interest expense as of December 31, 2010 and
as of September 30, 2010 and are included as current liabilities. No such penalty was assessed for
the quarter ending March 31, 2011 due to the Companys Chapter 11 filing in February 2011.
On February 1, 2011, SWGE filed a voluntary petition for relief (Bankruptcy Filing) under chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle
District of Georgia. The Bankruptcy Filing is a result of the Companys ongoing liquidity
constraints and the willingness of the Companys lending group to provide SWGE with
debtor-in-possession financing and to cooperate in the restructuring of SWGEs financing facility.
SWGEs Bankruptcy Filing constituted an event of default under the Companys loan agreement and
related documents. Under the terms of the loan agreement, the Bankruptcy Filing caused the
Lenders term loan commitments and working capital loan commitments to be terminated automatically,
and the principal amount of the loans and all other obligations then outstanding together with
accrued interest thereon and any unpaid accrued fees owed to Lenders as of the Bankruptcy Filing
automatically became immediately due and payable. However, pursuant to the Bankruptcy Code, this
default provision and the acceleration provisions applicable to the debt obligations described
above are generally unenforceable, and any remedies that may exist related to such default are
stayed under section 362 of the Bankruptcy Code. This senior debt facility has been classified at
its prepetition amount within Liabilities subject to compromise on the consolidated balance sheet.
Subordinated Debt Facility
The Company has a subordinated payable to which the Mitchell County Development Authority issued
$10,000,000 of revenue bonds that were placed with Wachovia Bank. The Company is required to
maintain a debt service reserve with the Bond Trustee of at least $1,180,000. The balance at March
31, 2011 was $443,860. The Bond Trustee made the annual interest and principal payment to the bond
holders of approximately $1,339,000 in December 2009 from the debt service reserve. The annual
principal and interest payment due to the bond holders for December 2010 was funded by the Mitchell
County Development Authority to the extent funds were not available in the debt service reserve
account. The subordinated payable is due December 1, 2021 and bears interest at 7.5%. Any
remaining funds held in the Bond Trustee account are classified as non-current restricted cash and
cash equivalents in the Companys consolidated balance sheet. This subordinated payable has been
classified at its prepetition amount within Liabilities subject to compromise on the consolidated
balance sheet as of March 31, 2011.
Subordinated Fagen Note
On June 30, 2009, SWGE entered into a subordinated promissory note agreement in the amount of
$3,977,545 due Fagen, Inc., a related party, for the remaining design-build contract balance. The
note bears interest at 4% through June 30, 2010 and 8% thereafter through maturity on June 30,
2011. Interest is payable quarterly. This subordinated note has been classified at its
prepetition amount within Liabilities subject to compromise on the consolidated balance sheet as of
March 31, 2011.
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Other Notes Payable
The Company financed the acquisition of certain equipment through two identical notes payable to
John Deere Credit. The notes amortize over four years (maturity in August 2012) with monthly
principal and interest payments and are secured by the equipment. The interest rate is 5.3%. The
combined outstanding balance on these two notes payable is $113,525 and $136,244 as of March 31,
2011 and September 30, 2010, respectively. These notes payable have been classified at its
prepetition amount within Liabilities subject to compromise on the consolidated balance sheet as of
March 31, 2011.
Debtor in Possession Financing
In conjunction with the Chapter 11 filing, a group of SWGEs secured bank lenders have agreed to
support the Companys on-going restructuring efforts with a $10 million debtor-in-possession
financing facility. The facility bears interest at 13% and is intended to provide financing for an
initial period of six months but a two month extension has been requested so that the facility will
be in place until a plan of reorganization is confirmed. The Company has drawn $9 million as of
March 31, 2011. The face amount of the debt is reduced by the $150,000 of unamortized financing
costs paid to the lenders. This financing is presented within Liabilities not subject to
compromise on the consolidated balance sheet.
NOTE 7. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise as of March 31, 2011, consist of the following:
Senior credit agreement, term loan and revolver |
$ | 105,299,991 | ||
Subordinated debt facility |
9,980,264 | |||
Subordinated Fagen note |
3,977,545 | |||
Other notes payable |
113,526 | |||
Capital lease obligations |
2,876,757 | |||
Trade accounts payable, accrued interest and
other miscellaneous claims |
12,532,817 | |||
$ | 134,780,900 | |||
NOTE 8. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. In determining fair
value, the Company uses various methods including market, income and cost approaches. Based on
these approaches, the Company often utilized certain assumptions that 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. The Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs. Based on the observable inputs used
in the valuation techniques, the Company is required to provide the following information according
to the fair value hierarchy.
The fair value hierarchy ranks the quality and reliability of the information used to determine
fair values. Financial assets and liabilities carried at fair value will be classified and
disclosed in one of the following three categories:
Level 1 Observable inputs
|
unadjusted quoted prices in active markets for identical assets and liabilities; | |
Level 2 Observable inputs
|
other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data; and | |
Level 3 Unobservable inputs
|
includes amounts derived from valuation models where one or more significant inputs are unobservable. |
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FIRST UNITED ETHANOL, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company has no financial instruments that require fair value disclosures as of March 31, 2011.
As of September 30, 2010, the Company classified its investments in marketable securities and
derivative instruments into these levels depending on the inputs used to determine their fair
values. The Companys investments in marketable securities consist of money market funds restricted
by the bond holders which are based on quoted prices and are designated as Level 1. The Companys
derivative instruments consist of commodity positions. The fair value of the commodity positions
are based on quoted prices on the commodity exchanges and are designated as Level 1 and the fair
value of the interest rate swap is based on quoted prices on similar assets or liabilities in
active markets and discounts to reflect potential credit risk to lenders and are designated as
Level 2.
The following table summarizes fair value measurements by level at September 30, 2010:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
||||||||||||||||
Investments in marketable
securities, included in
restricted cash |
$ | 258,476 | $ | | $ | | $ | 258,476 | ||||||||
Total assets |
$ | 258,476 | $ | | $ | | $ | 258,476 | ||||||||
Liabilities: |
||||||||||||||||
Derivative instruments: |
||||||||||||||||
Interest rate swap |
$ | | $ | 657,072 | $ | | $ | 657,072 | ||||||||
Total liabilities |
$ | | $ | 657,072 | $ | | $ | 657,072 | ||||||||
Certain financial assets and liabilities are measured at fair value on a non-recurring basis; that
is the instruments are not measured at fair value on an ongoing basis but are subject to fair value
adjustments in certain circumstances, for example, when there is evidence of impairment.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
We prepared the following discussion and analysis to help you better understand our financial
condition, changes in our financial condition, and results of operations for the three and six
month periods ended March 31, 2011, compared to the same period of the prior fiscal year. This
discussion should be read in conjunction with the consolidated financial statements and the
Managements Discussion and Analysis section for the fiscal year ended September 30, 2010, included
in the Companys Annual Report on Form 10-K.
Cautionary Statements Regarding Forward-Looking Statements
This report contains forward-looking statements that involve future events, our future
performance and our future operations and actions. In some cases you can identify forward-looking
statements by the use of words such as may, should, anticipate, believe, expect, plan,
future, intend, could, estimate, predict, hope, potential, continue, or the
negative of these terms or other similar expressions. These forward-looking statements are only
our predictions and involve numerous assumptions, risks and uncertainties. Our actual results or
actions may differ materially from these forward-looking statements for many reasons, including the
following factors:
| Our ability to continue as a going concern; |
| Our ability to operate pursuant to the terms and conditions of any
debtor-in-possession (DIP) financing order entered by the Bankruptcy Court in
connection with the Bankruptcy Cases; |
| Our ability to obtain Court approval with respect to motions in the Chapter 11
proceedings prosecuted by us from time to time, including approval of motions relating
to the priority of the lenders security interest under any DIP financing; |
| Our ability to obtain and maintain normal terms with vendors and service providers; |
| Our ability to maintain contracts that are critical to our operations; |
| Changes in our business strategy, capital improvements or development plans; |
| Volatility of corn, natural gas, ethanol, unleaded gasoline, distillers grains and
other commodities prices; |
| Limitations and restrictions contained in the instruments and agreements governing
our indebtedness; |
| Our ability to generate sufficient liquidity to fund our debt service requirements
and capital expenditures; |
| Our ability to comply with our loan covenants and to obtain waivers from our lender
for any non-compliance with those covenants; |
| Our ability to maintain liquidity and operate our business; |
| The results of our hedging transactions and other risk management strategies; |
| Our inelastic demand for corn, as it is the only available feedstock for our plant; |
| Changes in the environmental regulations or in our ability to comply with the
environmental regulations that apply to our plant site and our operations; |
| The effects of mergers or consolidations in the ethanol industry; |
| Changes in general economic conditions or the occurrence of certain events causing
an economic impact in the agriculture, oil or automobile industries; |
| Changes in the availability of credit to support the level of liquidity necessary to
implement our risk management activities; |
| Changes in or elimination of federal and/or state laws (including the elimination of
any federal and/or state ethanol tax incentives); |
| Overcapacity within the ethanol industry; |
| Changes and advances in ethanol production technology that may make it more
difficult for us to compete with other ethanol plants utilizing such technology; |
| Our reliance on key management personnel; |
| The development of infrastructure related to the sale and distribution of ethanol;
and |
| Competition in the ethanol industry and from other alternative fuel additives. |
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Our actual results or actions could and likely will differ materially from those anticipated
in the forward-looking statements for many reasons, including the reasons described in this report.
We are not under any duty to update the forward-looking statements contained in this report. We
cannot guarantee future results, levels of activity, performance or achievements. We caution you
not to put undue reliance on any forward-looking statements, which speak only as of the date of
this report. You should read this report and the documents that we reference in this report and
have filed as exhibits completely and with the understanding that our actual future results may be
materially different from what we currently expect. We qualify all of our forward-looking
statements by these cautionary statements.
Available Information
Information about us is also available at our website at www.firstunitedethanol.com, under
Investor Relations, which includes links to reports we have filed with the Securities and
Exchange Commission. The contents of our website are not incorporated by reference in this
Quarterly Report on Form 10-Q.
Business Overview
First United Ethanol, LLC (we, us, FUEL, First United, or the Company) was formed as
a Georgia limited liability company on March 9, 2005, for the purpose of raising capital to
develop, construct, own and operate a 100 million gallon per year ethanol plant near Camilla,
Georgia. In November 2007, the Companys wholly owned subsidiary, Southwest Georgia Ethanol, LLC
(SWGE) was formed in conjunction with the debt financing agreement with West LB. First United
Ethanol, LLC transferred substantially all of its assets and liabilities to Southwest Georgia
Ethanol, LLC. We completed construction of our ethanol plant in October 2008 and plant operations
commenced on October 10, 2008.
Our revenues are derived from the sale and distribution of our ethanol and distillers grains
primarily in the southeastern United States. Our ethanol plant currently operates at or near its
nameplate capacity. A significant percentage of our corn is supplied to us by train and is
originated primarily from the eastern Corn Belt; however, we are able to originate an increasing
percentage of our corn from local producers. Currently, approximately 99% of our ethanol is being
shipped out of our facility by truck to local and regional blending terminals.
Additionally, as of the date of this report, approximately 100% of our dried distillers grains
are being shipped out of our facility by truck to local livestock and poultry operations.
Recent Events
Chapter 11 Bankruptcy
On February 1, 2011, SWGE, a wholly owned subsidiary of the Company, filed a voluntary
petition for relief (the Bankruptcy Filing) under chapter 11 of the United States Bankruptcy Code
(the Bankruptcy Code) in the United States Bankruptcy Court for the Middle District of Georgia
Albany Division (the Bankruptcy Court). SWGEs chapter 11 case (the Case) is being
administered by the Bankruptcy Court as Case No. 11-10145. SWGE is continuing to operate its
business and manage its assets as a debtor-in-possession under the jurisdiction of the Bankruptcy
Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the
Bankruptcy Court.
The Bankruptcy Filing is a result of the Companys ongoing liquidity constraints and the
willingness of the Companys lending group to provide SWGE with debtor-in-possession financing and
to cooperate in the restructuring of SWGEs financing facility. SWGEs Bankruptcy Filing
constituted an event of default under SWGEs loan agreement and related documents with WestLB AG,
New York Branch, AgCountry Farm Credit Services, FCLA, AgFirst Farm Credit Bank, Bank of Camilla,
CoBank, ACB, Farm Credit Bank of Texas, Northwest Farm Credit Services, PCA, and Planters and
Citizens Bank (collectively referred to herein as Lenders). WestLB AG, New York Branch (WestLB)
is the servicing agent for the loans evidenced by SWGEs loan agreement and related documents with
its Lenders. The primary loan agreement is the Senior Credit Agreement (the Loan Agreement) dated
November 20, 2007. The Loan Agreement initially provided SWGE with a construction loan of
approximately $100 million, which was subsequently converted to a term loan, and a $15 million
working capital loan (the Loans). The Loan Agreement and its amendments contain various covenants
and
restrictions with which SWGE is obligated to comply. The Loans are secured by a mortgage and
security interest granted by SWGE in favor of the Lenders in all of SWGEs real property and
personal property. Pursuant to a Pledge and Security Agreement also dated November 20, 2007, the
Company pledged its equity interest in SWGE to the Lenders as additional collateral for the Loans
to SWGE. As of February 1, 2011 SWGEs outstanding obligations to the Lenders were approximately
$108 million.
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Under the terms of the Loan Agreement, the Bankruptcy Filing caused the Lenders term loan
commitments and working capital loan commitments to be terminated automatically, and the principal
amount of the loans and all other obligations then outstanding together with accrued interest
thereon and any unpaid accrued fees owed to Lenders automatically became immediately due and
payable. However, pursuant to the Bankruptcy Code, this default provision and the acceleration
provisions applicable to the debt obligations described above are generally unenforceable, and any
remedies that may exist related to such default are stayed under section 362 of the Bankruptcy
Code. The Company and SWGE have been in communication with WestLB, which has agreed to work with
SWGE in support of SWGEs on-going reorganization efforts in the Case.
Debtor-in-Possession Financing
On February 4, 2011, SWGE entered into a Debtor-In-Possession Credit Agreement (the DIP
Credit Agreement) with WestLB, AgFirst Farm Credit Bank and Farm Credit Bank of Texas
(collectively the DIP Lenders) for a debtor-in-possession revolving credit facility. WestLB is
also serving as the administrative agent and collateral agent under the DIP Credit Agreement. On
February 23, 2011 the Bankruptcy Court entered a final order approving the DIP Credit Agreement.
The DIP Credit Agreement provides for commitments to provide debtor-in-possession financing to
SWGE in the maximum amount of $10,000,000 (the DIP Loan), subject to the terms and conditions set
forth in the DIP Credit Agreement and related documents. The DIP Loan may be used to fund, subject
to limitations set forth in the DIP Credit Agreement, the financing of SWGEs post-petition working
capital, general corporate purposes, the administration of the Case and such pre-petition expenses
as are approved by the Bankruptcy Court and paid in accordance with the applicable budget. The
obligations under the terms of the DIP Credit Agreement and related documents constitute
superpriority claims under the Bankruptcy Code and are secured by a lien in favor of the DIP
Lenders on collateral constituting substantially all of SWGEs assets.
The DIP Loan matures six months from the date the DIP Credit Agreement was executed unless it
becomes due earlier by reason of acceleration or pursuant to certain procedural triggers connected
to the Case. SWGEs debt obligations outstanding under the DIP Credit Agreement shall generally
accrue interest at a rate equal to the LIBOR rate plus 9.0 percent per annum. As of the date the
DIP Credit Agreement was executed by the parties, the calculated annualized interest rate was
approximately 13%. SWGE will pay to WestLB, as the administrative agent, and to the DIP Lenders,
for their own account, certain fees, including a facility fee, a structuring fee as well as a
monthly commitment fee.
Under the DIP Credit Agreement, SWGE is subject to certain affirmative and negative covenants,
an obligation to deliver financial statements and operating budgets at specified intervals, and
other terms and conditions. The failure to meet certain covenants or the occurrence of other
specified events could constitute an event of default and may result in the DIP Loan becoming
immediately due and payable.
The foregoing description of the DIP Credit Agreement does not purport to be complete and is
qualified in its entirety by reference to the DIP Credit Agreement and related documents, which
were filed as exhibits to our quarterly report for the period ended December 31, 2010.
Deregistration
On May 2, 2011 we received approval from the Securities and Exchange Commission to proceed
with the filing of our definitive proxy statement regarding our proposed reclassification and
reorganization of the Companys membership units. The proposed transaction will provide for the
reclassification of the Companys membership units into three separate and distinct classes. The
definitive proxy statement was filed with the Securities and Exchange Commission on May 10, 2011
and we have scheduled our special meeting of the members for June 22,
2011. The members of the Company will have an opportunity to vote on the proposed reclassification
and reorganization of the Companys membership units at this special meeting of the members. The
proxy materials will be mailed to each of our members on approximately May 25, 2011.
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If the proposed reclassification is approved by the Companys members, we expect that each
member of record holding 100 or more units will receive one Class A unit for each common equity
unit held by such unit holder prior to the reclassification; each member of record holding 21 to 99
units will receive one Class B unit for each common equity unit held by such unit holder
immediately prior to the reclassification; and each member of record holding 20 or fewer units will
receive one Class C unit for each common equity unit held by such unit holder immediately prior to
the reclassification.
If the Companys members approve the requisite amendment to the Companys operating agreement
and the reclassification is implemented, the Company anticipates having fewer than 300 unit holders
of record of its common equity units and fewer than 500 unit holders of record of each of the
additional classes, which would enable the Company to voluntarily terminate the registration of its
units under the Securities and Exchange Act of 1934.
If the Companys members approve the proposed amendment to the Companys operating agreement
and the reclassification is implemented, we expect that Class A unit holders would be entitled to
vote on all matters for which unit holder approval is required under the Companys operating
agreement or state law; Class B unit holders would be entitled to vote on the election of the
Companys governors and the voluntary dissolution of the Company; and Class C unit holders would be
entitled to vote only on the voluntary dissolution of the Company. With respect to potential future
dividends, each membership unit will receive its equal portion of a declared dividend, regardless
of its class.
Results of Operations for the Three Months Ended March 31, 2011 and 2010
The following table shows the result of our operations and the percentage of revenues, cost of
goods sold, operating expenses and other items to total revenues in our statement of operations for
the three months ended March 31, 2011 and 2010:
Three Months Ended | Three Months Ended | ||||||||||||||||
March 31, 2011 | March 31, 2010 | ||||||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||||||
Statement of Operations Data | Amount | Percent | Amount | Percent | |||||||||||||
Revenues |
$ | 73,108,140 | 100.00 | % | $ | 51,017,401 | 100.00 | % | |||||||||
Cost of Goods Sold |
$ | 73,929,949 | 101.24 | % | $ | 49,810,521 | 97.6 | % | |||||||||
Gross Profit (Loss) |
$ | (821,809 | ) | (1.12 | )% | $ | 1,206,880 | 2.4 | % | ||||||||
General and
Administrative
Expenses |
$ | 715,491 | 0.98 | % | $ | 1,062,210 | 2.1 | % | |||||||||
Operating Income (Loss) |
$ | (1,537,300 | ) | (2.10 | )% | $ | 144,670 | 0.3 | % | ||||||||
Other (Expense) |
$ | (2,187,617 | ) | (2.99 | )% | $ | (1,812,943 | ) | (3.6 | )% | |||||||
Reorganization Expense |
$ | (886,228 | ) | (1.21 | )% | | | ||||||||||
Net Income(Loss) |
$ | (4,611,145 | ) | (6.31 | )% | $ | (1,668,273 | ) | (3.3 | )% | |||||||
The following table shows the sources of our revenue for the three months ended March 31, 2011
and 2010:
|
|||||||||||||||||
Three Months Ended | Three Months Ended | ||||||||||||||||
March 31, 2011 | March 31, 2010 | ||||||||||||||||
(2011 Fiscal Year) | (2010 Fiscal Year) | ||||||||||||||||
Revenue Source | Amount | % of Revenues | Amount | % of Revenues | |||||||||||||
Ethanol Sales |
$ | 58,030,553 | 79.4 | % | $ | 42,285,797 | 82.9 | % | |||||||||
Dried Distillers Grains Sales |
13,529,564 | 18.5 | % | 8,084,113 | 15.8 | % | |||||||||||
Wet Distillers Grains Sales |
1,255,773 | 1.8 | % | 638,898 | 1.3 | % | |||||||||||
Other Revenue |
292,250 | .4 | % | 8,593 | .1 | % | |||||||||||
Total Revenues |
$ | 73,108,140 | 100.00 | % | $ | 51,017,401 | 100.00 | % |
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Revenues
Our revenues from operations come from two primary sources: sales of fuel ethanol and sales of
distillers grains.
During our fiscal quarter March 31, 2011, our total revenue increased significantly compared
to the first fiscal quarter of our 2010 fiscal year. Management attributes this increase in total
revenue primarily with a significant increase in the average price we received per gallon of
ethanol sold during our fiscal quarter ending March 31, 2011. Our total revenue was approximately
$73,108,000 for the fiscal quarter ended March 31, 2011 and $51,017,401 for the fiscal quarter
ended March 31, 2010, an increase of approximately 43%.
Ethanol
The total gallons of ethanol that we sold during our fiscal quarter ended March 31, 2011 was
approximately equal to our ethanol production during our fiscal quarter ended March 31, 2010. We
experienced an increase of approximately 35% in the average price we received per gallon of ethanol
sold during our fiscal quarter ended March 31, 2011 compared to our fiscal quarter ended March 31,
2010. Management attributes this increase in the average price we received per gallon of ethanol
with higher gasoline prices and increased ethanol exports and increases in oil and gasoline prices
during the fiscal quarter ended March 31, 2011 compared to our fiscal quarter ended March 31, 2010.
The ethanol industry relies on the Federal Volumetric Ethanol Excise Tax Credit (VEETC) to
reduce the cost of ethanol to fuel blenders. Accordingly, VEETC causes increased demand for ethanol
related to what is called discretionary blending. Discretionary blending is where fuel blenders use
ethanol to increase octane in the fuels that are produced as well as reduce the price of gasoline
at levels beyond what is mandated by the renewable fuels standard. However, when the price of
ethanol increases relative the price of gasoline, after taking into account the VEETC, the amount
of discretionary blending by fuel blenders decreases thereby decreasing ethanol demand. As a
result, if the VEETC is not renewed past December 31, 2011, management anticipates that the price
of ethanol will decrease. Management anticipates ethanol production will be steady during our 2011
fiscal year provided the ethanol industry can maintain current ethanol prices. However, in the
event ethanol prices decrease significantly, we may be forced to reduce ethanol production during
times when our operating margins are unfavorable. Further, our operating margins also depend on
corn prices which can affect the spread between the price we receive for our ethanol and our raw
material costs. In times when this spread decreases or becomes negative, we may reduce or terminate
ethanol production until these spreads become more favorable.
Distillers Grains
We produce distillers grains for sale primarily in two forms, distillers dried grains with
solubles (DDGS) and wet distillers grains (WDG). During our fiscal quarter ended March 31, 2011, we
experienced a shift in the mix of distillers grains we sold in the form of DDGS versus WDG compared
to our fiscal quarter ended March 31, 2010. During our fiscal quarter ended March 31, 2011, we sold
more of our total distillers grains in the form of DDGS than we did for the same period in 2010.
Conversely, during our fiscal quarter ended March 31, 2011 we sold less of our total distillers
grains in the form of WDG than we did for the same period in 2010. Management attributes this
shift in the mix of our distillers grains sales with an increase in local demand for DDGS during
our fiscal quarter ended March 31, 2011 compared to our fiscal quarter ended March 31, 2010. The
mix of DDGS and WDG sold within our local market is dependent upon the seasonal demands of
livestock producers in our area.
Management anticipates demand for distillers grains will remain steady or increase, especially
if corn prices remain high during our 2011 fiscal year. Management believes that increased revenue
from distillers grains sales during times when corn prices are high helps us to somewhat offset our
increased cost of goods sold from the higher corn prices.
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Cost of Goods Sold
Our cost of goods sold was approximately $73,930,000 or 101% of our revenues for the three
month period ended March 31, 2011. Our two primary costs of producing ethanol and distillers
grains are the cost of corn and natural gas. Approximately 82.3% of our cost of goods sold is
attributable to corn costs and approximately 4.7% is attributable to natural gas costs. Our per
gallon cost of for corn during our fiscal quarter ended March 31, 2011 was approximately 66% higher
than the amount we paid during our fiscal quarter ended March 31, 2010. Our higher per gallon cost
of corn is primarily due to increased corn prices. This dramatic increase in the price of corn has
caused tight or negative operating margins for our Company.
Management attributes this increase in corn prices to decreased 2010 corn production in some
parts of the United States and uncertainty regarding the 2011 corn production. Both of these
factors have been exacerbated by a strong export market and strong domestic demand. These factors
have led to fears regarding an imbalance between corn supply and demand. Management anticipates
that corn prices will continue to be volatile through the 2011 corn planting season and thereafter
will be subject to weather factors that may influence corn prices during the 2011 growing season.
Management anticipates that natural gas prices will remain steady during our 2011 fiscal year
unless demand significantly increases due to improved global economic conditions. Management
anticipates that our natural gas consumption may increase during our 2011 fiscal year due to
increased ethanol and distillers grains production compared to our 2010 fiscal year.
Our other costs of goods sold include denaturant, process chemicals, electricity,
transportation, and direct labor. Together these costs represent approximately 7.9% of our cost of
goods sold. We do not anticipate these costs to be as volatile as our corn and natural gas
expenses. However, our transportation, electrical and denaturant costs are directly tied to the
price of energy generally and, therefore, may fluctuate along with the price of petroleum based
energy products.
General and Administrative Expenses
Our general and administrative expenses as a percentage of revenues were 0.98% for the three
month period ended March 31, 2011, and our general and administrative expenses as a percentage of
revenues were 2.1% for the three month period ended March 31, 2010. Operating expenses consist
primarily of payroll, employee benefits, and professional fees and have been decreasing since
beginning operations due to our ability to make our internal operations more efficient.
Operating Income
Our operating income for the three months ended March 31, 2011 was approximately (2.1)% of our
revenues, compared to an operating income of 0.3% of our revenues for the three months ended March
31, 2010. Our operating income is the result of negative operating margins. Our operating margins
deteriorated from our three months ended March 31, 2010 to our three months ended March 31, 2011 as
corn prices increased more rapidly that ethanol prices.
Other (Expense)
We had total other expense for the fiscal quarter ended March 31, 2011 of approximately
$2,188,000 resulting primarily from our interest expense for the period. Interest expense for the
period was approximately $2,183,000 which was offset by an unrealized gain of approximately $4,500
for the change in fair value of our interest rate swap agreement.
Reorganization Expense
We incurred approximately $886,000 in reorganization expense associated with our bankruptcy
case for the three month period ended March 31, 2011. This expense consists primarily of
professional fees. We expect to incur additional reorganization expense during our period ended
June 30, 2011.
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Net Income (Loss)
Our net loss for the three months ended March 31, 2011 was approximately 6.31% of our
revenues, compared to our net loss of approximately 3.3% of our revenues f or the three months
ended March 31, 2010. Our net loss is primarily the result of our negative operating margins and
our significant interest expense and financing costs relative to our revenues during our three
months ended March 31, 2011.
Additional Information
The following table shows additional data regarding production and price levels for our
primary inputs and products for the three months ended March 31, 2011 and 2010.
Percentage of Increase (Decrease) for | ||||
comparison of Three Months Ended | ||||
March 31, 2011 to March 31, 2010 | ||||
Production: |
||||
Ethanol sold (gallons) |
(0.39 | %) | ||
Dried distillers grains sold (tons) |
11.90 | % | ||
Wet distillers grains sold (tons) |
(42.35 | %) | ||
Revenues: |
||||
Ethanol average price per gallon |
34.91 | % | ||
Dried distillers grains revenue per gallon of ethanol sold |
68.27 | % | ||
Wet distillers grains revenue per gallon of ethanol sold |
96.43 | % | ||
Total revenue per gallon of ethanol sold |
43.90 | % | ||
Costs: |
||||
Corn cost per gallon of ethanol sold (including freight) |
65.91 | % | ||
Overhead and other direct costs per gallon of ethanol sold |
6.17 | % | ||
Total cost per gallon of ethanol sold |
49.01 | % |
During the quarter ended March 31, 2011, our market price of ethanol increased approximately
35% compared to the three month period ended March 31, 2010. If our average price received per
gallon of ethanol had been $0.10 lower, our gross margin for the quarter would have decreased by
approximately $2,280,802, assuming our other revenues and costs remained unchanged.
During the quarter ended March 31, 2011, the market price of dried distillers grains increased
approximately 68% compared to the three month period ended March 31, 2010. If our average price
received per ton of dried distillers grains had been $1.00 lower, our gross margin for the quarter
would have decreased by approximately $66,563, assuming our other revenues and costs remained
unchanged.
During the quarter ended March 31, 2011, the market price of corn on a per gallon basis
increased by approximately 66% compared to the three month period ended March 31, 2010. If our
average price paid per bushel of corn had been $0.25 higher, our gross margin for the quarter would
have decreased by approximately $2,049,550, assuming our other revenues and costs remained
unchanged.
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Table of Contents
Results of Operations for the Six Months Ended March 31, 2011 and 2010
The following table shows the results of our operations and the approximate percentage of
revenues, costs of sales, operating expenses and other items to total revenues in our unaudited
statements of operations for the six months ended March 31, 2011 and 2010:
Six Months Ended | Six Months Ended | |||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Statement of Operations Data | Amount | Percent | Amount | Percent | ||||||||||||
Revenues |
144,980,641 | 100.00 | % | $ | 108,451,918 | 100.0 | % | |||||||||
Cost of Goods Sold |
143,179,793 | 98.76 | % | 97,300,934 | 89.7 | % | ||||||||||
Gross Profit (Loss) |
1,800,848 | 1.24 | % | 11,150,984 | 10.3 | % | ||||||||||
General and
Administrative
Expenses |
1,739,250 | 1.20 | % | 2,252,375 | 2.1 | % | ||||||||||
Operating Income (Loss) |
61,598 | 0.04 | % | 8,898,609 | 8.2 | % | ||||||||||
Other (Expense) |
(8,863,191 | ) | (6.11 | %) | (3,605,083 | ) | (3.3 | %) | ||||||||
Reorganization Expense |
(886,228 | ) | (0.60 | %) | | | ||||||||||
Net Income (Loss) |
(9,687,821 | ) | (6.68 | %) | 5,293,526 | 4.9 | % |
Revenues
In
the six month period ended March 31, 2011, ethanol sales comprised approximately
80% of our revenues and distillers grains sales comprised approximately 18% of our revenues. For
the six month period ended March 31, 2010, ethanol sales comprised approximately 84% of our
revenue, without accounting for ethanol hedging, and distillers grains sales comprised
approximately 16% of our revenue. Our revenues were higher for our first half of fiscal year 2011
compared to the same period of 2010 primarily as a result of our increase in ethanol production and
an increase in the sales price of our ethanol.
The average ethanol sales price we received for the six month period ended March 31, 2011 was
approximately 21% higher than our average ethanol sales price for the comparable 2010 period.
Management attributes this increase in ethanol prices with the increase in commodity prices
generally as a result of the gradually improving economic situation in the United States.
Management anticipates the price of ethanol may increase during the second half of our 2011 fiscal
year as a result of an increase in fuel demand as we move into the summer driving season which,
historically, has positively affected the market prices of crude oil and gasoline.
The price we received for our dried distillers grains increased by approximately 28% during
the six month period ended March 31, 2011 compared to the same period of 2010. Management
attributes this increase in the price of our dried distillers grains to an increase in the demand
for our distillers grains outside of our local market area. The price of dried distillers
grains changes in proportion to the price of corn, which has increased in the six month period
ended March 31, 2011. Accordingly, we anticipate that the market price of distillers grains will
continue to be volatile as a result of changes in the price of corn and competing animal feed
substitutes such as soybean meal.
Cost of Sales
Our costs of goods sold
as a percentage of revenues were approximately 99% for the six
month period ended March 31, 2011 compared to approximately 90% for the same period of 2010. Our
two largest costs of production are corn (82.1% of cost of goods sold for our six months ended
March 31, 2011) and natural gas (5.4% of cost of goods sold for our six months ended March 31,
2011). Our cost of goods sold increased by approximately 43% in the six months ended March 31,
2011, compared to the six months ended March 31, 2010, and our revenue for the same period
increased by approximately 34%. This increase in the cost of goods sold is primarily a result of
higher corn prices.
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Table of Contents
The following table shows additional data regarding production and price levels for our
primary inputs and products for the six months ended March 31, 2011 and 2010:
Percentage of Increase (Decrease) | ||||
For comparison of Six Months | ||||
Ended March 31, 2011 to March 31, 2010 | ||||
Production: |
||||
Ethanol sold (gallons) |
4.7 | % | ||
Dried distillers grains sold (tons) |
16.2 | % | ||
Wet distillers grains sold (tons) |
(28.7 | %) | ||
Revenues: |
||||
Ethanol average price per gallon |
21.4 | % | ||
Dried distillers grains revenue per gallon of ethanol sold |
51.5 | % | ||
Wet distillers grains revenue per gallon of ethanol sold |
136.9 | % | ||
Total revenue per gallon of ethanol sold |
27.5 | % | ||
Costs: |
||||
Corn cost per gallon of ethanol sold (including freight) |
55.3 | % | ||
Overhead and other direct costs per gallon of ethanol sold |
2.6 | % | ||
Total cost per gallon of ethanol sold |
42.1 | % |
General and Administrative Expenses
Our general and administrative expenses as a percentage of revenues were lower for the six
month period ended March 31, 2011 than they were for the same period ended March 31, 2010. These
percentages were approximately 1.2% and approximately 2.1% for the six months ended March 31, 2011
and 2010, respectively. This decrease in general and administrative expenses is primarily due to
the increase in our revenues and to overall reductions in general and administrative expenses. Our
management and staff continue to increase our operating efficiencies in an effort to lower our
general and administrative expenses. We expect that going forward our general and administrative
expenses will remain relatively steady.
Operating Income (Loss)
Our income from operations for the six months ended March 31, 2011 was approximately 0.04% of
our revenues compared to loss of approximately 8.2% of our revenues for the six months ended March
31, 2010. This decrease in our profitability is generally attributable to increases in the price of
corn outpacing increases in the price of ethanol for our six months ended March 31, 2011 compared
to the six months ended March 31, 2010.
Other (Expense)
Other expense for the six months ended March 31, 2011, was approximately 6.11% of our revenue
and totaled approximately $8,863,000. Other expense for the six months ended March 31, 2010 totaled
approximately $3,605,000 and was approximately 3.3% of our revenues. The increase in other
expenses is primarily attributable to more interest expense incurred during the period ended March
31, 2011 and to the write off of deferred financing expenses. Interest expense for the six months
ended March 31, 2011, was approximately $9,095,000. Interest expense for the six months ended March
31, 2010 was approximately $4,202,000. This increase in interest expense is due primarily to
bringing current our derivatives interest.
Reorganization Expense
We incurred approximately $886,000 in reorganization expense associated with our bankruptcy case
for the six month period ended March 31, 2011. This expense consists primarily of professional
fees. We expect to incur additional reorganization expense during our three month period ended
June 30, 2011.
Changes in Financial Condition for the Six Months Ended March 31, 2011
Our current assets at March 31, 2011 increased significantly compared to our fiscal year ended
September 30, 2010. As of March 31, 2011, we had an additional $2,582,000 in cash on hand and
$4,356,000 in additional inventory.
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Table of Contents
Our net property and equipment was approximately $4,307,000 lower at March 31, 2011 compared
to September 30, 2010 as a result of depreciation expense taken for the quarter. We do not expect
any significant additional capital expenditures as our plant is now complete.
We experienced a significant increase in our total liabilities on March 31, 2011 compared to
September 30, 2010, primarily as a result of the debtor-in-possession financing we obtain in
February 2011 in connection with our reorganization proceeding. At March 31, 2011, we had
approximately $147,727,000 outstanding in the form of total liabilities, compared to approximately
$138,182,000 at September 30, 2010.
Liquidity and Capital Resources
The accompanying unaudited condensed consolidated financial statements have been prepared
assuming we will continue as a going concern, which assumes continuity of operations and
realization of assets and satisfaction of liabilities in the ordinary course of business.
During the first quarter of the fiscal year ending September 30, 2011, the Company continued
to suffer losses from operations thus continuing liquidity restraints due to limits on its working
capital line which was up for renewal in February 2011. Faced with these constraints, on February
1, 2011, SWGE, the Companys wholly owned subsidiary, filed a voluntary petition for relief (the
Bankruptcy Filing) under Chapter 11 (Chapter 11) of the United States Bankruptcy Code (the
Bankruptcy Code) with the United States Bankruptcy Court for the Middle District of Georgia
Albany Division (the Bankruptcy Court). SWGE intends to continue to operate its business as
debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
The following table shows cash flows for the six months ended March, 2011 and 2010:
Six Months Ended | ||||||||
March 31 | ||||||||
2011 | 2010 | |||||||
Net cash provided by (used in ) operating activities |
$ | (7,015,990 | ) | $ | 5,217,779 | |||
Net cash (used in) investing activities |
$ | (79,348 | ) | $ | (152,136 | ) | ||
Net cash provided by (used in) financing activities |
$ | 9,677,747 | $ | (3,663,039 | ) | |||
Net increase in cash and cash equivalents |
$ | 2,582,409 | $ | 1,402,604 | ||||
Cash and cash equivalents, end of period |
$ | 3,168,875 | $ | 1,402,604 |
Operating Cash Flows. We experienced a significant decrease in net cash provided by operating
activities and an increase in cash used in operating activities during the six months ended March
31, 2011 compared to the same period of 2010. This decrease in net cash provided by operating
activities was primarily a result of the $9,688,000 net loss we experienced during the six months
ended March 31, 2011. Cash used in operating activities was approximately $7,016,000 for the six
months ended March 31, 2011 compared to cash provided by operating activities of approximately
$5,218,000 for the same period in 2010.
Investing Cash Flows. Cash used in investing activities was approximately $79,000 for the six
months ended March 31, 2011. This amount is similar to the amount of cash used in investing
activities for six months ended March 31, 2010.
Financing Cash Flows. Cash provided by financing activities was approximately $9,828,000 for
the six months ended March 31, 2011. This cash was primarily provided by drawing on our revolving
line of credit, the release of restricted cash and the proceeds from our debtor in possession
financing, each of which were partially offset by the repayment of long term debt and capital lease
obligations. During our six months ended March 31, 2010 we were able to repay approximately
$2,400,000 of our long terms debt and capital lease obligations.
Our liquidity, results of operations and financial performance will be impacted by many
variables, including the market price for commodities such as, but not limited to, corn, ethanol
and other energy commodities,
as well as the market price for any co-products generated by the facility and the cost of
labor and other operating costs.
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Senior Credit Facility
On November 20, 2007, First United and Southwest Georgia Ethanol, LLC (SWGE), our wholly
owned subsidiary, entered into a senior credit agreement with WestLB that provides for (1) a
construction loan facility in an aggregate amount of up to $100,000,000, which converted to a term
loan on February 20, 2009 (Conversion Date) that matures on February 20, 2015 (the Final
Maturity Date); and (2) a working capital loan in an aggregate amount of up to $15,000,000 which
matures February 20, 2011. The primary purpose of the credit facility was to finance the
construction and operation of the Companys ethanol plant.
The principal amount of the term loan facility is payable in quarterly payments ranging from
$1,500,000 to $1,600,000 beginning September 30, 2009, and the remaining principal amounts are
fully due and payable on February 20, 2015. Interest is payable quarterly. SWGE has the option to
select between two floating interest rate loans under the terms of the senior credit agreement:
Base Rate Loans bear interest at the Administrative Agents base rate (which is the higher of the
federal funds effective rate plus 0.50% and the Administrative Agents prime rate) plus 2.75% per
annum. Eurodollar Loans bear interest at LIBOR plus 3.75%.
Under the terms of the senior credit agreement, SWGE has agreed to pay a quarterly commitment
fee equal to 0.50% per annum on the unused portion of the construction loan/term loan and .20% per
annum on the unused portion of the working capital loan. SWGEs obligations under the senior credit
agreement are secured by a first-priority security interest in all of the Companys assets,
including its equity interest in SWGE.
The senior credit agreement also required SWGE to enter into an accounts agreement among SWGE,
Amarillo National Bank, as the Accounts Bank and Securities Intermediary, and WestLB as the
collateral agent and administrative agent. Among other things, the accounts agreement establishes
certain special, segregated project accounts and establishes procedures for the deposits and
withdrawals of funds into these accounts. Substantially all cash of SWGE is required to be
deposited into the project accounts subject to security interests to secure obligations in
connection with the senior credit. Funds are released from the project accounts in accordance with
the terms of the accounts agreement.
As of March 31, 2011 and September 30, 2010, the Company had drawn $14,699,991 on the
$13,784,129 working capital loan.
Subordinated Debt
The
Company has a subordinated payable pursuant to which the Mitchell
County Development Authority issued $10,000,000 of revenue bonds that were placed with Wachovia
Bank. The Company is required to maintain a debt service reserve with the Bond Trustee of at least
$1,180,000. The balance at March 31, 2011 was $443,860. The Bond Trustee made the annual interest and principal payment to the bond holders of
approximately $1,339,000 in December 2009 from the debt service reserve. The annual principal and
interest payment due to the bond holders for December 2010 was funded by the Mitchell County
Development Authority to the extent funds were not available in the debt service reserve account.
The subordinated payable is due December 1, 2021 and bears interest at 7.5%. Any remaining funds
held in the Bond Trustee account are classified as non-current restricted cash and cash equivalents
in the Companys consolidated balance sheet. This subordinated payable has been classified at its
prepetition amount within Liabilities subject to compromise on the consolidated balance sheet as of
March 31, 2011.
On June 30, 2009, SWGE entered into a subordinated promissory note agreement in the amount of
$3,977,545 due Fagen, Inc., a related party, for the remaining design-build contract balance. The
note bears interest at 4% through June 30, 2010 and 8% thereafter through maturity on June 30,
2011. Interest is payable quarterly. The first principal payment of $500,000 was due as of
September 30, 2009 along with an annual principal payment of $1,738,772 that was due June 30, 2010.
The final payment of $1,738,772 is due June 30, 2011. This note is subordinated to the West LB
debt agreement, which currently prohibits the Company from making the principal payments on the
schedule described above. The note of $3,977,545 is included in current maturities of long-term
debt per the agreement. However, the earliest any payment will likely be made is in 2014.
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Other Notes Payable
The Company financed the acquisition of certain equipment through two identical notes payable
to John Deere Credit. The notes amortize over four years (maturity in August 2012) with monthly
principal and interest payments and are secured by the equipment. The interest rate is 5.3%. The
combined outstanding balance on these two notes payable is $136,244 and $202,050 as of September
30, 2010 and 2009, respectively.
The Companys long-term debt outstanding as of March 31, 2011 and September 30, 2010 is
summarized as follows:
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
West LB Term Loan, variable interest rates from 4.00% 4.28% |
$ | 90,600,000 | $ | 92,200,000 | ||||
Subordinated Fagen note, 4% through June 30, 2010 and 8% thereafter |
3,977,545 | 3,977,545 | ||||||
Subordinated debt facility, interest rate of 7.5%, described below |
8,615,000 | 9,250,000 | ||||||
Subordinated note payable to Mitchell County Development Authority |
1,365,264 | | ||||||
Notes payable John Deere Credit, interest rate of 5.3%, described below |
113,528 | 136,244 | ||||||
104,671,337 | 105,563,789 | |||||||
Less amounts included in liabilities subject to compromise |
(104,671,337 | ) | ||||||
Less current portion |
| (11,081,911 | ) | |||||
$ | | $ | 94,481,878 | |||||
Summary of Critical Accounting Policies and Estimates
Management uses estimates and assumptions in preparing our financial statements in accordance
with generally accepted accounting principles. These estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. The fair value of our cash and equivalents approximates their
carrying value.
Derivative Instruments
We occasionally enter into short-term cash grain, option and futures contracts as a means of
securing corn for the ethanol plant and managing exposure to changes in commodity. We may also
enter into short-term forward, option and futures contracts for sales of ethanol to manage exposure
to changes in energy prices. All of our derivatives are designated as non-hedge derivatives, and
accordingly are recorded at fair value with changes in fair value recognized in net income.
Although the contracts are considered economic hedges of specified risks, they are not designated
as and accounted for as hedging instruments.
As part of our trading activity, we use futures and option contracts offered through regulated
commodity exchanges to reduce our risk and we are exposed to risk of loss in the market value of
inventories. To reduce that risk, we generally take positions using cash and futures contracts and
options.
Unrealized gains and losses related to derivative contracts for corn purchases are included as
a component of cost of goods sold and derivative contracts related to ethanol sales are included as
a component of revenues in the
accompanying financial statements. The fair values of derivative contracts are presented on
the accompanying balance sheet as derivative financial instruments.
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Lower of cost or market accounting for inventory and forward purchase contracts
With the significant change in the prices of our main inputs and outputs, the lower of cost or
market analysis of inventories and purchase commitments can have a significant impact on our
financial performance. The impact of market activity related to pricing of corn and ethanol will
require us to continuously evaluate the pricing of our inventory and purchase commitments under a
lower of cost or market analysis.
Impairment Analysis
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 of the asset may not be recoverable. An impairment
loss would be recognized when estimated undiscounted future cash flows from operations are less
than the carrying value of the asset group. An impairment loss would be measured by the amount by
which the carrying value of the asset exceeds the fair value of the asset. In accordance with our
policies, management has evaluated the plant for possible impairment based on projected future cash
flows from operations. Management has determined that its projected future cash flows from
operations exceed the carrying value of the plant and that no impairment exists at March 31, 2011.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. An impairment loss would be
recognized when estimated undiscounted future cash flows from operations are less than the carrying
value of the asset group. An impairment loss would be measured by the amount by which the carrying
value of the asset exceeds the fair value of the asset. In accordance with Company policies,
management has evaluated the plant for possible impairment based on projected undiscounted future
cash flows from operations. Management has determined that its projected undiscounted future cash
flows from operations exceed the carrying value of the plant and that no impairment exists at March
31, 2011. However, due to the Companys recent filing for Bankruptcy protection, there can be no
assurances that the value of the plant will be recovered through future cash flows.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, derivative instruments, other
receivables, accounts payable, accrued expenses and long-term debt. Management believes the fair
value of each of these financial instruments approximates their carrying value in the balance sheet
as of the balance sheet date. The fair value of current financial instruments is estimated to
approximate carrying value due to the short-term nature of these instruments. The fair value of
derivative financial instruments is based on quoted market prices. 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 the other market factors.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. | Quantitative and Qualitative Disclosures about Market Risks |
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of
1934 and are not required to provide information under this item.
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Item 4. | Controls and Procedures. |
Management of FUEL is responsible for maintaining disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the reports that the Company files
or submits under the
Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms. In addition, the disclosure controls and procedures must ensure that such information is
accumulated and communicated to the Companys management, including its Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial and
other required disclosures.
Our management, including our Chief Executive Officer, Murray Campbell, along with our Chief
Financial Officer, Larry Kamp, have reviewed and evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a 15(e) under the Exchange Act of 1934, as
amended) as of March 31, 2011. Based upon this review and evaluation, these officers have
concluded that our disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods required by the forms and rules of the
Securities and Exchange Commission; and to ensure that the information required to be disclosed by
an issuer in the reports that it files or submits under the Exchange Act is accumulated and
communicated to our management including our principal executive and principal financial officers,
or person performing similar functions, as appropriate to allow timely decisions regarding required
disclosure.
There were no changes in our internal control over financial reporting that occurred during
the period covered by this quarterly report 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. |
On February 1, 2011, SWGE, a wholly owned subsidiary of the Company, filed a voluntary
petition for relief under chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the Middle District of Georgia Albany Division. The chapter 11 case is being
administered by the Bankruptcy Court as Case No. 11-10145. SWGE intends to continue to operate its
business as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance
with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As a
result of the filing, attempts to collect, secure, or enforce remedies with respect to pre-petition
claims against SWGE are subject to the automatic stay provisions of section 362 of the Bankruptcy
Code.
Item 1A. | Risk Factors. |
You should carefully read and consider the risks and uncertainties below and the other
information contained in this report. The risks and uncertainties described below are not the only
ones we may face. The following risks, together with additional risks and uncertainties not
currently known to us or that we currently deem immaterial could impair our financial condition and
results of operation.
SWGE filed for reorganization under Chapter 11 on February 1, 2011 and is subject to the risks
and uncertainties associated with the Bankruptcy Case. For the duration of the Bankruptcy Case, our
operations and our ability to execute our business strategy will be subject to the risks and
uncertainties associated with bankruptcy. These risks include:
| our ability to continue as a going concern; |
| our ability to operate within the restrictions and the liquidity limitations of
any DIP financing arrangement in connection with the Bankruptcy Case; |
| our ability to obtain Bankruptcy Court approval with respect to motions filed in
the Bankruptcy Case from time to time; |
| our ability to develop, prosecute, confirm and consummate a plan of
reorganization with respect to the Chapter 11 case; |
| our ability to obtain and maintain normal payment and other terms with
customers, vendors and service providers; |
| our ability to maintain contracts that are critical to our operations; |
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| our ability to attract, motivate and retain key employees; |
| our ability to attract and retain customers; and |
| our ability to fund and execute our business plan. |
We will also be subject to risks and uncertainties with respect to the actions and
decisions of our creditors and other third parties who have interests in the Bankruptcy Case that
may be inconsistent with our plans.
These risks and uncertainties could affect our business and operations in various ways.
For example, negative events or publicity associated with the Bankruptcy Case could adversely
affect our relationships with our vendors and employees, as well as with customers, which in turn
could adversely affect our operations and financial condition. Also, pursuant to the Bankruptcy
Code, we need Bankruptcy Court approval for transactions outside the ordinary course of business,
which may limit our ability to respond timely to events or take advantage of opportunities. Because
of the risks and uncertainties associated with the Bankruptcy Case, we cannot predict or quantify
the ultimate impact that events occurring during the Chapter 11 reorganization process will have on
our business, financial condition and results of operations, and there is no certainty as to our
ability to continue as a going concern.
A long period of operating under Chapter 11 could harm our business. A long period of
operating under Chapter 11 could adversely affect our business and operations. So long as the
Bankruptcy Case continues, our senior management will be required to spend a significant amount of
time and effort dealing with the Bankruptcy Case instead of focusing exclusively on business
operations. A prolonged period of operating under Chapter 11 will also make it more difficult to
attract and retain management and other key personnel necessary to the success of our business. In
addition, the longer the Bankruptcy Cases continue, the more likely it is that our vendors will
lose confidence in our ability to successfully reorganize our business, and they may seek to
establish alternative arrangements for providing us with goods and services, including alternative
payment arrangements, which in turn could have an adverse effect on our liquidity and/or results of
operations. Our having sought bankruptcy protection may also adversely affect our ability to
negotiate favorable terms from suppliers, contract or trading counterparties and others and to
attract and retain customers and counterparties. The failure to obtain such favorable terms and to
attract and retain customers and other contract or trading counterparties could adversely affect
our financial performance.
We have substantial liquidity needs and may be required to seek additional financing. Our
principal sources of liquidity have historically consisted of cash provided by operations, cash and
cash equivalents on hand and available borrowings under our credit agreements. Our liquidity
position is significantly influenced by our operating results, which in turn are substantially
dependent on commodity prices, especially prices for corn, ethanol, natural gas and unleaded
gasoline. As a result, adverse commodity price movements adversely impact our liquidity. We face
uncertainty regarding the adequacy of our liquidity and capital resources and have limited access
to additional financing. In addition to the cash requirements necessary to fund ongoing operations,
we have incurred significant professional fees and other costs in connection with the Bankruptcy
Case and expect that we will continue to incur significant professional fees and costs. We cannot
assure you that the amounts of cash available from operations, together with any DIP financing,
will be sufficient to fund our operations, including operations during the period until such time
as we are able to propose a plan of reorganization that will receive the requisite acceptance by
creditors and be confirmed by the Bankruptcy Court.
We may not have sufficient cash to service our indebtedness and other liquidity requirements.
Our ability to service any DIP financing indebtedness and successfully consummate a plan of
reorganization will depend, in part, on our ability to generate cash. We cannot be certain that
cash on hand together with cash from operations will by itself be sufficient to meet our cash and
liquidity needs. If we are unable to generate enough cash to meet our liquidity needs, we could be
forced to discontinue some or all of our operations.
Our DIP financing imposes significant operating and financial restrictions on us, compliance
or non-compliance with which could have a material adverse effect on our liquidity and operations.
Restrictions imposed by the terms of our DIP financing could adversely affect us by
limiting our ability to plan for or react to market conditions or to meet our capital needs and
could result in an event of default under the DIP financing. These restrictions will limit our
ability, subject to certain exceptions, to, among other things:
| incur additional indebtedness; |
| make prepayments on or purchase indebtedness in whole or in part; |
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| make investments; |
| enter into transactions with affiliates on other than arms-length terms; |
| create or incur liens to secure debt; |
| consolidate or merge with another entity; |
| lease, transfer or sell assets and use proceeds of permitted asset leases,
transfers or sales; |
| incur dividend or other payment restrictions; |
| make capital expenditures beyond specified limits; and |
| engage in specified business activities. |
These limitations could have a material adverse effect on our liquidity and operations. If we
fail to comply with the restrictions under any DIP financing and are unable to obtain a waiver or
amendment or a default exists and is continuing under the DIP financing, the lenders could declare
outstanding borrowings and other obligations under the DIP financing immediately due and payable.
Our ability to comply with these restrictions may be affected by events beyond our control, and any
material deviations from our forecasts could require us to seek waivers or amendments of covenants
or alternative sources of financing or to reduce expenditures. We cannot assure you that such
waivers, amendments or alternative financing could be obtained, or if obtained, would be on terms
acceptable to us. If we are unable to comply with the terms of the DIP financing, or if we fail to
generate sufficient cash flow from operations, or, if it became necessary, to obtain such waivers,
amendments or alternative financing, it could adversely impact the timing of, and our ultimate
ability to successfully implement, a plan of reorganization.
Risks Relating to Our Business
If the Federal Volumetric Ethanol Excise Tax Credit (VEETC) expires on December 31, 2011, it
could negatively impact our profitability. The ethanol industry is benefited by VEETC which is a
federal excise tax credit of 45 cents per gallon of ethanol blended with gasoline. This excise tax
credit is set to expire on December 31, 2011. We believe that VEETC positively impacts the price of
ethanol. If VEETC is allowed to expire, it could negatively impact the price we receive for our
ethanol and could negatively impact our profitability.
We have a significant amount of debt, and our existing debt financing agreements contain, and
our future debt financing agreements may contain, restrictive covenants that limit distributions
and impose restrictions on the operation of our business. The use of debt financing makes it more
difficult for us to operate because we must make principal and interest payments on the
indebtedness and abide by covenants contained in our debt financing agreements. The level of our
debt may have important implications on our operations, including, among other things: (a) limiting
our ability to obtain additional debt or equity financing; (b) placing us at a competitive
disadvantage because we may be more leveraged than some of our competitors; (c) subjecting all or
substantially all of our assets to liens, which means that there may be no assets left for unit
holders in the event of a liquidation; and (d) limiting our ability to make business and
operational decisions regarding our business, including, among other things, limiting our ability
to pay dividends to our unit holders, make capital improvements, sell or purchase assets or engage
in transactions we deem to be appropriate and in our best interest.
Our financial performance is significantly dependent on corn and ethanol prices and generally
we will not be able to pass on increases in input prices to our customers. Our results of
operations and financial condition are significantly affected by the cost and supply of corn and
the market price of ethanol. Changes in the relative prices of corn and ethanol are subject to and
determined by market forces over which we have no control.
The spread between ethanol and corn prices can vary significantly. Our gross margins depend
principally on the spread between ethanol prices and corn prices. The spread between the price of a
gallon of ethanol and the cost of corn required to produce a gallon of ethanol will likely continue
to fluctuate. A protracted reduction in the spread between ethanol and corn prices, whether a
result of an increase in corn prices or a reduction in ethanol prices, would adversely affect our
results of operations and financial condition.
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Risks Related to Ethanol Industry
The California Low Carbon Fuel Standard may decrease demand for corn based ethanol which could
negatively impact our profitability. Recently, California passed a Low Carbon Fuels Standard
(LCFS). The California LCFS requires that renewable fuels used in California must accomplish
certain reductions in greenhouse gases which are measured using a lifecycle analysis. Management
believes that these new regulations could preclude corn based ethanol produced in the Midwest from
being used in California. California represents a significant ethanol demand market. If the ethanol
industry is unable to supply ethanol to California, it could significantly reduce demand for the
ethanol we produce. Any decrease in ethanol demand could negatively impact ethanol prices which
could reduce our revenues and negatively impact our ability to profitably operate the ethanol
plant.
Overcapacity within the ethanol industry could cause an oversupply of ethanol and a decline in
ethanol prices. Excess capacity in the ethanol industry would have an adverse impact on our results
of operations, cash flows and general financial condition. Excess capacity may also result or
intensify from increases in production capacity coupled with insufficient demand. If the demand for
ethanol does not grow at the same pace as increases in supply, we would expect the price for
ethanol to decline.
Risks Related to Regulation and Governmental Action
Changes in environmental regulations or violations of the regulations could be expensive and
reduce our profitability. We are subject to extensive air, water and other environmental laws and
regulations. In addition, some of these laws require our plant to operate under a number of
environmental permits. These laws, regulations and permits can often require expensive pollution
control equipment or operation changes to limit actual or potential impacts to the environment. A
violation of these laws and regulations or permit conditions can result in substantial fines,
damages, criminal sanctions, permit revocations and/or plant shutdowns. In the future, we may be
subject to legal actions brought by environmental advocacy groups and other parties for actual or
alleged violations of environmental laws or our permits. Additionally, any changes in environmental
laws and regulations, both at the federal and state level, could require us to spend considerable
resources in order to comply with future environmental regulations. The expense of compliance could
be significant enough to reduce our profitability and negatively affect our financial condition.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Removed and Reserved |
Item 5. | Other Information. |
None.
Item 6. | Exhibits. The following exhibits are included herein: |
Exhibit No. | Description | |||
31.1 | Certificate Pursuant to 17 CFR 240.15d-14(a). |
|||
31.2 | Certificate Pursuant to 17 CFR 240.15d-14(a). |
|||
32.1 | Certificate Pursuant to 18 U.S.C. § 1350. |
|||
32.2 | Certificate Pursuant to 18 U.S.C. § 1350. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST UNITED ETHANOL, LLC |
||||
Date: May 23, 2011 | /s/ Murray Campbell | |||
Murray Campbell | ||||
Chief Executive Officer | ||||
Date: May 23, 2011 | /s/ Lawrence Kamp | |||
Lawrence Kamp | ||||
Chief Financial Officer |
34