Attached files
| file | filename |
|---|---|
| EX-31.2 - CERTIFICATION - LAKE AREA CORN PROCESSORS LLC | exhibit312-certification93.htm |
| EX-31.1 - CERTIFICATION - LAKE AREA CORN PROCESSORS LLC | exhibit311-certification93.htm |
| EX-32.1 - CERTIFICATION - LAKE AREA CORN PROCESSORS LLC | exhibit321-certification93.htm |
| EXCEL - IDEA: XBRL DOCUMENT - LAKE AREA CORN PROCESSORS LLC | Financial_Report.xls |
| EX-32.2 - CERTIFICATION - LAKE AREA CORN PROCESSORS LLC | exhibit322-certification93.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the fiscal quarter ended September 30, 2011 | |
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
Commission file number 000-50254 | |
LAKE AREA CORN PROCESSORS, LLC | |||
(Exact name of registrant as specified in its charter) | |||
South Dakota | 46-0460790 | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
46269 SD Highway 34 P.O. Box 100 Wentworth, South Dakota | 57075 | ||
(Address of principal executive offices) | (Zip Code) | ||
(605) 483-2676 | |||
(Registrant's telephone number, including area code) | |||
Securities registered pursuant to Section 12(b) of the Act: None | |||
Securities registered pursuant to Section 12(g) of the Act: Membership Units | |||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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).
x 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 x | Smaller Reporting Company o | |
(Do not check if a smaller reporting company) | ||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No
As of November 14, 2011, there are 29,620,000 membership units of the registrant outstanding.
INDEX
Page No. | |
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LAKE AREA CORN PROCESSORS, LLC
Consolidated Balance Sheets (Unaudited)
September 30, 2011 | December 31, 2010* | ||||||
ASSETS | |||||||
CURRENT ASSETS | |||||||
Cash | $ | 3,039,730 | $ | 637,804 | |||
Accounts receivable | 4,759,140 | 4,114,940 | |||||
Other receivables | 23,423 | 188,959 | |||||
Inventory | 9,186,061 | 10,063,208 | |||||
Due from broker | 623,862 | 3,725,998 | |||||
Derivative financial instruments | 4,052,338 | 73,800 | |||||
Prepaid expenses | 76,766 | 126,523 | |||||
Total current assets | 21,761,320 | 18,931,232 | |||||
PROPERTY AND EQUIPMENT | |||||||
Land | 676,097 | 676,097 | |||||
Land improvements | 2,665,358 | 2,665,358 | |||||
Buildings | 8,088,853 | 8,088,853 | |||||
Equipment | 39,239,055 | 40,799,589 | |||||
50,669,363 | 52,229,897 | ||||||
Less accumulated depreciation | (23,495,987 | ) | (22,469,329 | ) | |||
Net property and equipment | 27,173,376 | 29,760,568 | |||||
OTHER ASSETS | |||||||
Goodwill | 10,395,766 | 10,395,766 | |||||
Investments | 3,046,421 | 2,856,445 | |||||
Other | 170,907 | 234,410 | |||||
Total other assets | 13,613,094 | 13,486,621 | |||||
TOTAL ASSETS | $ | 62,547,790 | $ | 62,178,421 | |||
*Derived from audited financial statements. | |||||||
See Notes to Unaudited Consolidated Financial Statements.
3
September 30, 2011 | December 31, 2010* | ||||||
LIABILITIES AND MEMBERS’ EQUITY | |||||||
CURRENT LIABILITIES | |||||||
Outstanding checks in excess of bank balance | $ | — | $ | 584,412 | |||
Accounts payable | 3,118,640 | 5,377,598 | |||||
Accrued liabilities | 525,600 | 672,802 | |||||
Derivative financial instruments | 2,837,778 | 2,527,175 | |||||
Short-term notes payable | — | 1,872,000 | |||||
Current portion of guarantee payable | 52,382 | 52,382 | |||||
Current portion of notes payable | 384,181 | 1,813,494 | |||||
Total current liabilities | 6,918,581 | 12,899,863 | |||||
LONG-TERM LIABILITIES | |||||||
Notes payable, net of current maturities | 628,666 | 833,655 | |||||
Guarantee payable, net of current portion | 95,411 | 95,411 | |||||
Other | 196,442 | 252,344 | |||||
Total long-term liabilities | 920,519 | 1,181,410 | |||||
COMMITMENTS AND CONTINGENCIES | |||||||
MEMBERS’ EQUITY | |||||||
Capital units, $0.50 stated value, 29,620,000 units issued and outstanding | 14,810,000 | 14,810,000 | |||||
Additional paid-in capital | 96,400 | 96,400 | |||||
Retained earnings | 39,802,290 | 33,190,748 | |||||
Total members' equity | 54,708,690 | 48,097,148 | |||||
TOTAL LIABILITIES AND MEMBERS' EQUITY | $ | 62,547,790 | $ | 62,178,421 | |||
*Derived from audited financial statements. | |||||||
See Notes to Unaudited Consolidated Financial Statements.
4
LAKE AREA CORN PROCESSORS, LLC
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended September 30, 2011 | Three Months Ended September 30, 2010 | Nine Months Ended September 30, 2011 | Nine Months Ended September 30, 2010 | ||||||||||||
REVENUES | $ | 37,436,366 | $ | 24,502,954 | $ | 109,462,933 | $ | 67,587,399 | |||||||
COSTS OF REVENUES | 33,841,565 | 22,586,663 | 95,038,310 | 60,611,330 | |||||||||||
GROSS PROFIT | 3,594,801 | 1,916,291 | 14,424,623 | 6,976,069 | |||||||||||
OPERATING EXPENSES | 795,173 | 679,107 | 2,381,606 | 2,147,119 | |||||||||||
INCOME FROM OPERATIONS | 2,799,628 | 1,237,184 | 12,043,017 | 4,828,950 | |||||||||||
OTHER INCOME (EXPENSE) | |||||||||||||||
Interest and other income | 403,450 | 5,425 | 460,612 | 21,735 | |||||||||||
Equity in net income of investments | 77,885 | 51,702 | 189,976 | 196,026 | |||||||||||
Interest expense | (52,565 | ) | (81,198 | ) | (158,063 | ) | (324,071 | ) | |||||||
Total other income (expense) | 428,770 | (24,071 | ) | 492,525 | (106,310 | ) | |||||||||
NET INCOME | $ | 3,228,398 | $ | 1,213,113 | $ | 12,535,542 | $ | 4,722,640 | |||||||
BASIC AND DILUTED EARNINGS PER UNIT | $ | 0.11 | $ | 0.04 | $ | 0.42 | $ | 0.16 | |||||||
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING FOR THE CALCULATION OF BASIC & DILUTED EARNINGS PER UNIT | 29,620,000 | 29,620,000 | 29,620,000 | 29,620,000 | |||||||||||
DISTRIBUTIONS DECLARED PER UNIT | $ | 0.10 | $ | — | $ | 0.20 | $ | — | |||||||
See Notes to Unaudited Consolidated Financial Statements.
5
LAKE AREA CORN PROCESSORS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 2011 | Nine Months Ended September 30, 2010 | ||||||
OPERATING ACTIVITIES | |||||||
Net income | $ | 12,535,542 | $ | 4,722,640 | |||
Changes to net income not affecting cash | |||||||
Depreciation and amortization | 2,079,800 | 2,073,283 | |||||
Equity in net (income) loss of investments | (189,976 | ) | (196,026 | ) | |||
Gain on litigation settlement | (380,994 | ) | — | ||||
Gain on sale of equipment | (9,300 | ) | — | ||||
Derivative financial instruments | (3,667,935 | ) | 2,103,333 | ||||
(Increase) decrease in | |||||||
Receivables | (478,664 | ) | (78,140 | ) | |||
Inventory | 877,147 | (1,171,734 | ) | ||||
Prepaid expenses | 49,757 | 66,211 | |||||
Due from broker | 3,102,136 | (2,746,448 | ) | ||||
Increase (decrease) in | |||||||
Accounts payable | (2,258,958 | ) | (3,984,135 | ) | |||
Accrued liabilities | (203,104 | ) | (191,221 | ) | |||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 11,455,451 | 597,763 | |||||
INVESTING ACTIVITIES | |||||||
Litigation settlement | 1,000,000 | — | |||||
Purchase of equipment | (38,811 | ) | — | ||||
NET CASH PROVIDED BY INVESTING ACTIVITIES | 961,189 | — | |||||
FINANCING ACTIVITIES | |||||||
Increase (decrease) in outstanding checks in excess of bank balance | (584,412 | ) | 1,063,567 | ||||
Proceeds from (repayments of) short-term notes payable | (1,872,000 | ) | 1,458,000 | ||||
Principal payments on long-term notes payable | (1,634,302 | ) | (3,200,037 | ) | |||
Distributions paid to members | (5,924,000 | ) | — | ||||
NET CASH (USED FOR) FINANCING ACTIVITIES | (10,014,714 | ) | (678,470 | ) | |||
NET INCREASE (DECREASE) IN CASH | 2,401,926 | (80,707 | ) | ||||
CASH AT BEGINNING OF PERIOD | 637,804 | 365,066 | |||||
CASH AT END OF PERIOD | $ | 3,039,730 | $ | 284,359 | |||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||||||
Cash paid during the period for interest | $ | 261,627 | $ | 434,524 | |||
See Notes to Unaudited Consolidated Financial Statements
6
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2011 AND 2010
NOTE 1 . NATURE OF OPERATIONS
Principal Business Activity
Lake Area Corn Processors, LLC and subsidiary (the Company) is a South Dakota limited liability company located in Wentworth, South Dakota. The Company was organized by investors to provide a portion of the corn supply for a 40 million-gallon (annual capacity) ethanol plant, owned by Dakota Ethanol, LLC (Dakota Ethanol). The Company sells ethanol and related products to customers located in North America.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America although the Company believes that the disclosures are adequate to make the information not misleading.
In the opinion of management, all adjustments consisting only of normal recurring adjustments considered necessary for a fair presentation have been included in the accompanying financial statements. The results of operations for the nine and three months ended September 30, 2011 and 2010 are not necessarily indicative of the results to be expected for a full year.
These financial statements should be read in conjunction with the financial statements and notes included in the Company's audited financial statements for the year ended December 31, 2010, contained in the annual report on Form 10-K for 2010.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of its wholly owned subsidiary, Dakota Ethanol. All significant inter-company transactions and balances have been eliminated in consolidation.
Revenue Recognition
Revenue from the production of ethanol and related products is recorded when title transfers to customers, net of allowances for estimated returns. Generally, ethanol and related products are shipped FOB shipping point, based on written contract terms between Dakota Ethanol and its customers. Collectability of revenue is reasonably assured based on historical evidence of collectability between Dakota Ethanol and its customers. Interest income is recognized as earned.
Shipping costs incurred by the Company in the sale of ethanol, dried distillers grains and corn oil are not specifically identifiable and as a result, revenue from the sale of these products is recorded based on the net selling price reported to the Company from the marketer.
Cost of Revenues
The primary components of cost of revenues from the production of ethanol and related co-product are corn expense, energy expense (natural gas and electricity), raw materials expense (chemicals and denaturant), and direct labor costs.
Shipping costs incurred in the sale of dried distiller's grains are classified in net revenues.
Shipping costs on modified and wet distiller's grains are included in cost of revenues. Shipping costs were approximately $735,000 and $206,000 for the nine and three months ended September 30, 2011, respectively. Shipping costs were approximately $442,000 and $122,000 for the nine and three months ended September 30, 2010, respectively.
Inventory Valuation
Ethanol inventory, raw materials, work-in-process, and parts inventory are valued using methods which approximate the lower of cost (first-in, first-out) or market. Distillers grains and related products are stated at net realizable value. In the valuation of inventories and purchase and sale commitments, market is based on current replacement values except that it does not exceed net
7
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2011 AND 2010
realizable values and is not less than net realizable values reduced by allowances for approximate normal profit margin.
Investment in commodities contracts, derivative instruments and hedging activities
The Company is exposed to certain risks related to our ongoing business operations. The primary risks that we manage by using forward or derivative instruments are price risk on anticipated purchases of corn, natural gas and the sale of ethanol.
The Company is subject to market risk with respect to the price and availability of corn, the principal raw material we use 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 us 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 normal and exempted from the accounting and reporting requirements of derivative accounting. For transactions initiated prior to January 1, 2011, we applied the normal purchase and sales exemption under derivative accounting for forward purchases of corn and sales of distiller's grains. We are choosing not to exempt corn purchase contracts initiated after December 31, 2010 from the derivative accounting and reporting requirements. As of September 30, 2011, we are committed to purchasing 3.3 million bushels of corn on a forward contract basis with an average price of $6.29 per bushel, of which 2.7 million bushels are subject to derivative accounting treatment and 600,000 bushels are accounted for as normal purchases, and accordingly, are not marked to market and are accounted for using lower of cost or market accounting. Dakota Ethanol has a derivative financial instrument liability of approximately $2.8 million related to the forward contracted purchases of corn. The corn purchase contracts represent 19% of the annual corn usage.
The Company enters into firm-price purchase commitments with some of our natural gas suppliers under which we agree to buy natural gas at a price set in advance of the actual delivery of that natural gas to us. Under these arrangements, we assume 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. At September 30, 2011, we are committed to purchasing 110,000 MMBtu's of natural gas with an average price of $4.05 per MMBtu. We account for these transactions as normal purchases, and accordingly, do not mark these transactions to market.
The Company enters into short-term forward, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. The Company enters 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, the Company uses futures and option contracts offered through regulated commodity exchanges to reduce risk and we are exposed to risk of loss in the market value of inventories. To reduce that risk, we generally take positions using forward and futures contracts and options.
Derivatives not designated as hedging instruments at September 30, 2011 and December 31, 2010 were as follows:
Balance Sheet Classification | September 30, 2011 | December 31, 2010* | ||||||||
Futures and options contracts | Current Assets | $ | 4,052,338 | $ | — | |||||
Forward contracts | Current Assets | $ | — | $ | 73,800 | |||||
Futures and options contracts | (Current Liabilities) | $ | — | $ | (2,527,175 | ) | ||||
Forward contracts | (Current Liabilities) | $ | (2,837,778 | ) | $ | — | ||||
8
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2011 AND 2010
*Derived from audited financial statements.
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas purchases are included as a component of cost of revenues and derivative contracts related to ethanol sales are included as a component of revenues in the accompanying financial statements.
Statement of Income | Three Months Ended September 30, | |||||||||
Classification | 2011 | 2010 | ||||||||
Net realized and unrealized gains (losses) related to purchase contracts: | ||||||||||
Futures and options contracts | Cost of Revenues | $ | (1,233,860 | ) | $ | (5,010,977 | ) | |||
Forward contracts | Cost of Revenues | $ | (869,690 | ) | $ | 739,384 | ||||
Statement of Income | Nine Months Ended September 30, | |||||||||
Classification | 2011 | 2010 | ||||||||
Net realized and unrealized gains (losses) related to sales contracts: | ||||||||||
Futures and options contracts | Revenues | $ | — | $ | 252,938 | |||||
Net realized and unrealized gains (losses) related to purchase contracts: | ||||||||||
Futures and options contracts | Cost of Revenues | $ | 647,376 | $ | (2,164,572 | ) | ||||
Forward contracts | Cost of Revenues | $ | (3,996,370 | ) | $ | 171,546 | ||||
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Environmental Liabilities
Dakota Ethanol's operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdiction in which it operates. These laws require Dakota Ethanol to investigate and remediate the effects of the release or disposal of materials at its locations. Accordingly, Dakota Ethanol has adopted policies, practices and procedures in the areas of pollution control, occupational health and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability which could result from such events. Environmental liabilities are recorded when Dakota Ethanol's liability is probable and the costs can be reasonably estimated.
Recent Accounting Pronouncements
On September 15, 2011 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This ASU gives an entity the option in its annual goodwill impairment test to first assess revised qualitative factors to determine whether it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount (“qualitative assessment”). In certain cases, this will allow an entity to forego the existing two-step goodwill impairment test. The guidance is effective for fiscal years beginning after December 15, 2011. The Company does not expect that the adoption of this guidance will have a material impact on the Company's consolidated financial position or results of operations.
9
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2011 AND 2010
NOTE 3. INVENTORY
Inventory consisted of the following as of September 30, 2011 and December 31, 2010:
September 30, 2011 | December 31, 2010* | |||||||
Raw Materials | $ | 6,252,701 | $ | 6,100,759 | ||||
Finished Goods | 1,035,783 | 2,233,676 | ||||||
Work in process | 982,734 | 821,897 | ||||||
Parts inventory | 914,843 | 906,876 | ||||||
$ | 9,186,061 | $ | 10,063,208 | |||||
*Derived from audited financial statements.
NOTE 4. SHORT-TERM NOTE PAYABLE
On June 6, 2011, Dakota Ethanol renewed a revolving promissory note from First National Bank of Omaha in the amount of $10,000,000. The note expires on May 1, 2012 and the amount available is subject to certain restrictive covenants establishing minimum reporting requirements, ratios, working capital, net worth and borrowing base requirements. Interest on the outstanding principal balances will accrue at 350 basis points above the 1 month LIBOR rate (4.00 percent at September 30, 2011). The rate is subject to a floor of 4.0 percent. There is a commitment fee of 0.4 percent on the unused portion of the $10,000,000 availability. In addition, the bank draws the checking account balance to a minimum balance on a daily basis. The excess cash pays down or the shortfall is drawn upon the note as needed. The note is collateralized by the ethanol plant, its accounts receivable and inventories. On September 30, 2011, Dakota Ethanol had $0 outstanding and $10,000,000 available to be drawn on the revolving promissory note. On December 31, 2010, Dakota Ethanol had $1,872,000 outstanding and $3,128,000 available to be drawn on the revolving promissory note.
NOTE 5. LONG-TERM NOTES PAYABLE
Dakota Ethanol has a note payable to First National Bank of Omaha, Nebraska (the Bank) (Term Note 5).
As part of the note payable agreement, Dakota Ethanol is subject to certain restrictive covenants establishing minimum reporting requirements, ratios, working capital and net worth requirements. The notes are collateralized by the ethanol plant and equipment, its accounts receivable and inventories. We are in compliance with our financial covenants as of September 30, 2011.
On June 6, 2011, Dakota Ethanol restructured Term Note 5. Term Note 5 is a reducing revolving note with an availability of $5,000,000. Interest on outstanding principal balances will accrue at 350 basis points above the 1 month LIBOR rate (4.00 percent at September 30, 2011). The rate is subject to a floor of 4.0 percent. Dakota Ethanol may elect to borrow any principal amount repaid on Term Note 5 up to $5,000,000 subject to the terms of the agreement. Should Dakota Ethanol elect not to utilize this feature, the lender will assess an unused commitment fee of 0.4 percent on the unused portion of the note. Term Note 5 has a reducing feature through which the available amount of the note is reduced by $500,000 on the anniversary of the note. The note matures on May 1, 2014. On September 30, 2011, Dakota Ethanol had $0 outstanding and $5,000,000 available to be drawn on Term Note 5. On December 31, 2010, Dakota Ethanol had $0 outstanding and $5,000,000 available to be drawn on Term Note 5.
During December 2008, Dakota Ethanol issued a note payable related to the purchase of land adjacent to the plant site. The note was issued for $450,000. The note matures on December 1, 2012. The note is payable in annual installments of $112,500 plus interest. Interest on outstanding principal balances will accrue at a fixed rate of 7.0 percent.
Dakota Ethanol conducted a private placement offering of subordinated unsecured debt securities which closed on May 30, 2009. We raised $1,439,000 in subordinated debt through this offering. Interest on the outstanding balances accrued at a fixed rate of 9 percent. The securities matured two years after the date of issuance. Interest was paid annually on January 30th of each year
10
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2011 AND 2010
beginning on January 30, 2010. The outstanding balances were paid off during the second quarter of 2011.
On May 22, 2009, Dakota Ethanol entered into two loan agreements for alternative financing for our corn oil extraction equipment as we had agreed with FNBO; one loan with Rural Electric Economic Development, Inc (REED) and the other loan with First District Development Company (FDDC).
The note to REED for $1 million has a fixed interest rate of 4.7%. The note requires monthly installments of $18,734 and matures on May 25, 2014. The note is secured by the oil extraction equipment.
The note to FDDC for $200,000 has a fixed interest rate of 5.5%. The note requires monthly installments of $3,820 and matures on May 22, 2014. The note is secured by the oil extraction equipment.
The balances of the notes payable are as follows:
September 30, 2011 | December 31, 2010* | |||||||
Note payable to First National Bank, Omaha | ||||||||
Term Note 5 | $ | — | $ | — | ||||
Note payable - Land | 225,000 | 225,000 | ||||||
Note payable - Subordinated notes | — | 1,439,000 | ||||||
Note payable - REED | 562,992 | 708,881 | ||||||
Note payable - FDDC | 113,464 | 142,497 | ||||||
Note payable - Other | 111,391 | 131,771 | ||||||
1,012,847 | 2,647,149 | |||||||
Less current portion | (384,181 | ) | (1,813,494 | ) | ||||
$ | 628,666 | $ | 833,655 | |||||
*Derived from audited financial statements
Minimum principal payments for the next five years are as follows:
Years Ending September 30, | Amount | |||
2012 | $ | 384,181 | ||
2013 | 397,658 | |||
2014 | 209,210 | |||
2015 | 21,798 | |||
2016 | — | |||
NOTE 6. FAIR VALUE MEASUREMENTS
The Company complies with the fair value measurements and disclosures standard which defines fair value, establishes a framework for measuring fair value, and expands disclosure for those assets and liabilities carried on the balance sheet on a fair value basis.
The Company's balance sheet contains derivative financial instruments that are recorded at fair value on a recurring basis. Fair value measurements and disclosures require that assets and liabilities carried at fair value be classified and disclosed according to the process for determining fair value. There are three levels of determining fair value.
Level 1 uses quoted market prices in active markets for identical assets or liabilities.
Level 2 uses observable market based inputs or unobservable inputs that are corroborated by market data.
11
LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2011 AND 2010
Level 3 uses unobservable inputs that are not corroborated by market data.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Derivative financial instruments. Commodity futures and options contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the CBOT and NYMEX markets. Over-the-counter commodity options contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the over-the-counter markets. Forward purchase contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from local grain terminal bid values. The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based off the CBOT markets.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
September 30, 2011 | ||||||||||||||||
Assets: | ||||||||||||||||
Derivative financial instruments, futures and options contracts | $ | 4,052,338 | $ | 4,052,338 | $ | — | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivative financial instruments, forward contracts | $ | (2,837,778 | ) | $ | — | $ | (2,837,778 | ) | $ | — | ||||||
December 31, 2010* | ||||||||||||||||
Assets: | ||||||||||||||||
Derivative financial instruments, forward contracts | $ | 73,800 | $ | — | $ | 73,800 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivative financial instruments, futures and options contracts | $ | (2,527,175 | ) | $ | (2,527,175 | ) | $ | — | $ | — | ||||||
*Derived from audited financial statements.
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring 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). Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at September 30, 2011.
Disclosure requirements for fair value of financial instruments require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are
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LAKE AREA CORN PROCESSORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2011 AND 2010
measured at fair value on a recurring or non recurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below.
The Company believes the carrying amount of cash, cash equivalents, accounts receivable, due from broker, outstanding checks in excess of bank balance, accounts payable and short-term debt approximates fair value due to the short maturity of these instruments.
The carrying amount of long-term obligations at September 30, 2011 of $1,226,530 had an estimated fair value of approximately $1,228,604 based on estimated interest rates for comparable debt. The carrying amount and fair value were $2,794,942 and $2,797,016 respectively at December 31, 2010.
NOTE 7. RELATED PARTY TRANSACTIONS
Dakota Ethanol owns an 8% interest in RPMG, in which Dakota Ethanol has entered into marketing agreements for the exclusive rights to market, sell and distribute the entire ethanol and dried distiller's grains inventories produced by Dakota Ethanol. The marketing fees are included in net revenues.
Sales and marketing fees related to the agreements are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Sales ethanol | $ | 30,991,989 | $ | 20,864,223 | $ | 90,932,374 | $ | 56,553,530 | ||||||||
Sales co-products | 3,120,057 | 2,201,118 | 6,766,808 | 5,803,893 | ||||||||||||
Marketing fees ethanol | 54,257 | 53,203 | 172,048 | 160,196 | ||||||||||||
Marketing fees co-products | 21,131 | 25,503 | 58,444 | 69,257 | ||||||||||||
September 30, 2011 | December 31, 2010 | |||||||||||||||
Amounts due included in accounts receivable | $ | 3,628,051 | $ | 3,504,400 | ||||||||||||
NOTE 8. SUBSEQUENT EVENTS
During November 2011, the Company declared and paid a distribution to its members of $2,962,000, or $0.10 per capital unit.
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ITEM 2. MANAGEMENT'S 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 nine month periods ended September 30, 2011, compared to the same periods of the prior year. This discussion should be read in conjunction with the consolidated financial statements and the Management's Discussion and Analysis section for the fiscal year ended December 31, 2010, included in the Company's Annual Report on Form 10-K for 2010.
Disclosure Regarding Forward-Looking Statements
This report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "future," "intend," "could," "hope," "predict," "target," "potential," "continue" or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report and our annual report on Form 10-K for the fiscal year ended December 31, 2010.
The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.
Overview
Lake Area Corn Processors, LLC is a South Dakota limited liability company that owns and manages its wholly-owned subsidiary, Dakota Ethanol, L.L.C. Dakota Ethanol, L.L.C. owns and operates an ethanol plant located near Wentworth, South Dakota that has a nameplate production capacity of 40 million gallons of ethanol per year. Lake Area Corn Processors, LLC is referred to in this report as "LACP," the "company," "we," or "us." Dakota Ethanol, L.L.C. is referred to in this report as "Dakota Ethanol" "we" "us" or the "ethanol plant."
Our revenue is derived from the sale and distribution of our ethanol, distillers grains and corn oil. The ethanol plant currently operates in excess of its nameplate capacity, producing approximately 47 million gallons of ethanol per year. Corn is supplied to us primarily from our members who are local agricultural producers and from purchases of corn on the open market. We have engaged RPMG, Inc. to market all of the ethanol and corn oil that we produce at the plant. Further, RPMG, Inc. markets all of the distillers grains that we produce that we do not market internally to local customers.
In May 2011, our board of directors declared and paid a distribution to our members. The total amount of this distribution was $2,962,000, or $0.10 per capital unit. In July 2011, our board of managers declared and paid an additional distribution to our members. The total amount of the July 2011 distribution was $2,962,000, or $0.10 per capital unit. In November 2011, our board of managers declared and paid an additional distribution to our members of $0.10 per capital unit for a total distribution of $2,962,000.
Also, we received a settlement payment of $1 million related to a prior legal matter during our third quarter of 2011. This settlement is subject to a confidential settlement agreement.
The ethanol industry is currently impacted by the Volumetric Ethanol Tax Credit (VEETC) which is frequently referred to as the blenders' credit. This blenders' credit provides a tax credit of 45 cents per gallon of ethanol that is blended with gasoline. This incentive is scheduled to expire on December 31, 2011. Management anticipates that VEETC will not be renewed and therefore will not be available starting January 1, 2012. Management believes that the expiration of VEETC will not have a significant effect on ethanol demand provided gasoline prices remain high and the renewable fuels use requirement of the Federal Renewable Fuels Standard (RFS) is maintained. The RFS requires that a certain amount of renewable fuels, including ethanol, must be used in the United States each year. However, if the RFS is repealed, ethanol demand may be significantly impacted. Recently, there have been proposals in Congress to reduce or eliminate the RFS. Management does not believe that these proposals will be adopted in
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the near future. However, if the RFS is reduced or eliminated and the blenders' credit is allowed to expire, the market price and demand for ethanol will likely decrease which could negatively impact our financial performance.
Results of Operations
Comparison of the Fiscal Quarters Ended September 30, 2011 and 2010
The following table shows the results of our operations and the percentage of revenues, cost of revenues, operating expenses and other items to total revenues in our consolidated statements of operations for the fiscal quarters ended September 30, 2011 and 2010:
2011 | 2010 | |||||||||||||
Income Statement Data | Amount | % | Amount | % | ||||||||||
Revenue | $ | 37,436,366 | 100.0 | $ | 24,502,954 | 100.0 | ||||||||
Cost of Revenues | 33,841,565 | 90.4 | 22,586,663 | 92.2 | ||||||||||
Gross Profit | 3,594,801 | 9.6 | 1,916,291 | 7.8 | ||||||||||
Operating Expense | 795,173 | 2.1 | 679,107 | 2.8 | ||||||||||
Income from Operations | 2,799,628 | 7.5 | 1,237,184 | 5.0 | ||||||||||
Other Income (Expense) | 428,770 | 1.1 | (24,071 | ) | (0.1 | ) | ||||||||
Net Income | $ | 3,228,398 | 8.6 | $ | 1,213,113 | 5.0 | ||||||||
Revenues
Revenue from ethanol sales increased by approximately 49% during our third quarter of 2011 compared to the same period of 2010. Revenue from distillers grains increased by approximately 87% during our third quarter of 2011 compared to the same period of 2010. Revenue from corn oil increased by approximately 133% during our third quarter of 2011 compared to the same period of 2010.
Ethanol
Our ethanol revenue was approximately $10.1 million greater during our third quarter of 2011 compared to our third quarter of 2010, an increase of approximately 49%. This increase in ethanol revenue was due to an increase in the average price we received for our ethanol of approximately $0.92 per gallon, an increase of approximately 52%, during our third quarter of 2011 compared to our third quarter of 2010. Management attributes this increase in ethanol prices with significantly higher corn and energy prices during our third quarter of 2011 compared to the same period of 2010. Management anticipates that ethanol prices will remain at their current levels due to strong domestic and export demand and higher corn prices. However, if the RFS is eliminated or reduced, it could negatively impact demand for ethanol which could result in lower ethanol prices.
Partially offsetting this increase in ethanol prices was a decrease in ethanol sales during our third quarter of 2011 compared to the same period of 2010. Our total ethanol sales during our third quarter of 2011 were approximately 2% less than during the same period of 2010, a decrease of approximately 279,000 gallons. Management attributes this decrease in ethanol sales with decreased operating hours at the ethanol plant during the 2011 period. Management anticipates that ethanol sales will be comparable to prior years going forward.
Ethanol demand remained high during our third quarter of 2011 due to increased ethanol exports to Canada along with ethanol exports to Europe and Brazil. Canada recently passed legislation requiring the use of more ethanol in Canada. However, Canada does not currently have sufficient ethanol production capacity to satisfy this ethanol requirement. As a result, Canada has been importing the ethanol shortfall from the United States. However, Canada has taken steps to increase domestic ethanol production in order to satisfy its own ethanol use requirements. Therefore, these increased ethanol exports to Canada may not continue indefinitely as Canada's domestic ethanol industry increases production. Management believes that ethanol demand in the United States is affected by what is referred to as the "blend wall." Most gasoline used in the United States is blended at a rate of 10% ethanol and 90% gasoline. The blend wall refers to the maximum amount of ethanol that can be used in the United States, based on the total gasoline demand, when ethanol is blended at a rate of 10%. It is estimated that 135 billion gallons of
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gasoline are consumed in the United States each year. Therefore, the blend wall is approximately 13.5 billion gallons of ethanol. Because of the blend wall, domestic ethanol demand is not expected to increase significantly without the use of more mid-level blends of ethanol. Management believes that the recent push to increase ethanol demand in the United States through E15 may not result in a significant increase in ethanol demand due to infrastructure restrictions which limit the availability of E15. Further, management believes that gasoline retailers may refuse to carry E15 due to the fact that not all standard vehicles can use E15 and due to potential liability for gasoline retailers if customers use E15 in vehicles that are not approved for E15. Without increases in domestic ethanol demand, we may experience periods when ethanol supply exceeds ethanol demand which may negatively impact the price we receive for our ethanol.
Distillers Grains
Our total distillers grains sales increased significantly for our third quarter of 2011 compared to the same period of 2010. We sold less distillers grains in the dried form during our third quarter of 2011 compared to the same period of 2010. For our third quarter of 2011, we sold approximately 37% of our total distillers grains in the dried form and approximately 63% of our total distillers grains in the modified/wet form. For our third quarter of 2010, we sold approximately 58% of our total distillers grains in the dried form and approximately 42% of our total distillers grains in the modified/wet form. This change in the composition of our distillers grains sales was due to market conditions in the distillers grains market, including increased local demand. The average price we received for our dried distillers grains was approximately 83% greater during our third quarter of 2011 compared to the same period of 2010, an increase of approximately $74 per ton. The average price we received for our modified/wet distillers grains was approximately 90% greater for our third quarter of 2011 compared to the same period of 2010, an increase of approximately $76 per ton. Management attributes this increase in the selling price of our distillers grains with increased corn prices and increased distillers grains demand. Since distillers grains are typically used as a feed substitute for corn, as the price of corn increases, the price of and demand for distillers grains also increase.
Management expects to continue to make decisions as to whether our distillers grains will be marketed as dried distillers grains as opposed to modified/wet distillers grains based on market conditions. These market conditions include supply and demand factors as well as the price difference between dried distillers grains and modified/wet distillers grains along with the higher natural gas costs associated with drying our distillers grains.
Corn Oil
Our total pounds of corn oil sold increased by approximately 27% during our third quarter of 2011 compared to the same period of 2010, primarily due to improved operation of the corn oil extraction equipment. Management anticipates that our corn oil sales will remain at their current levels into the foreseeable future. In addition to the increase in corn oil sales, the average price we received for our corn oil increased by approximately 83% for our third quarter of 2011 compared to the same period of 2010. Management attributes this increase in corn oil prices with higher corn prices and increased corn oil demand. Management anticipates corn oil prices will remain high due to current and anticipated high corn prices.
Cost of Revenues
The primary raw materials we use to produce ethanol and distillers grains are corn and natural gas. Our cost of revenues was approximately 50% greater for our third quarter of 2011 compared to the same period of 2010 due to higher corn costs. Our average cost per bushel of corn increased by approximately 102% for our third quarter of 2011 compared to our third quarter of 2010, an increase of approximately $3.29 per bushel of corn. Management attributes this increase in corn costs with higher market corn prices due to decreased corn carryover from the 2009/2010 crop year. However, the area surrounding our ethanol plant had a good harvest in the fall of 2010 so we have not experienced the same corn price increases that ethanol plants in other areas of the country may have experienced. Management anticipates that the area surrounding the ethanol plant will continue to produce a significant amount of corn and that we will not have any difficulty securing the corn that we need to operate the ethanol plant. We used approximately 4% less bushels of corn during our third quarter of 2011 compared to the same period of 2010 due to the fact that the corn we used in the 2011 period was of higher quality than the corn we used in the 2010 period and due to our decreased production during the 2011 period.
Our cost of revenues related to natural gas decreased by approximately $97,000, a decrease of approximately 6%, for our third quarter of 2011 compared to our third quarter of 2010. This decrease was due to a decrease in market natural gas prices during our third quarter of 2011 compared to the same period of 2010. Our average cost per MMBtu of natural gas during our third quarter of 2011 was the same compared to our third quarter of 2010. Management anticipates that natural gas prices will remain at their current low levels compared to prior years due to steady natural gas demand, strong supplies of natural gas and increased natural gas production. We anticipate higher natural gas prices during the winter months due to increased natural gas demand for heating needs which typically results in premium natural gas pricing during the winter months.
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We used less natural gas during our third quarter of 2011 compared to the same period of 2010 due to the fact that we were producing less distillers grains in the dried form. We used approximately 6% less natural gas, a decrease of approximately 20,000 MMBtu of natural gas, during our third quarter of 2011 compared to the same period of 2010. Management anticipates that our natural gas consumption will remain at current levels into the foreseeable future.
Operating Expense
Our operating expenses were higher for our third quarter of 2011 compared to the same period of 2010 due primarily to higher bonus and wage expenses. We pay a bonus to our chief executive officer based on the profitability of the ethanol plant which was higher during our third quarter of 2011 compared to the same period of 2010. We also experienced increased environmental expenses during our third quarter of 2011 compared to the same period of 2010.
Other Income and Expense
Our interest expense was lower for our third quarter of 2011 compared to the same period of 2010 because we had less debt outstanding. We had more interest income during our third quarter of 2011 compared to the same period of 2010 due to having more cash on hand during the 2011 period. In addition, we recorded income from a litigation settlement in 2011.
Comparison of the Nine Months Ended September 30, 2011 and 2010
The following table shows the results of our operations and the percentage of revenues, cost of revenues, operating expenses and other items to total revenues in our consolidated statements of operations for the nine months ended September 30, 2011 and 2010:
2011 | 2010 | |||||||||||||
Income Statement Data | Amount | % | Amount | % | ||||||||||
Revenue | $ | 109,462,933 | 100.0 | $ | 67,587,399 | 100.0 | ||||||||
Cost of Revenues | 95,038,310 | 86.8 | 60,611,330 | 89.7 | ||||||||||
Gross Profit | 14,424,623 | 13.2 | 6,976,069 | 10.3 | ||||||||||
Operating Expense | 2,381,606 | 2.2 | 2,147,119 | 3.2 | ||||||||||
Income from Operations | 12,043,017 | 11.0 | 4,828,950 | 7.1 | ||||||||||
Other Income (Expense) | 492,525 | 0.4 | (106,310 | ) | (0.2 | ) | ||||||||
Net Income | $ | 12,535,542 | 11.5 | $ | 4,722,640 | 7.0 | ||||||||
Revenues
Revenue from ethanol sales increased by approximately 60% during the nine months ended September 30, 2011 compared to the same period of 2010. Revenue from distillers grains increased by approximately 72% during the nine months ended September 30, 2011 compared to the same period of 2010. Revenue from corn oil increased by approximately 124% during the nine months ended September 30, 2011 compared to the same period of 2010.
Ethanol
Our ethanol revenue was approximately $34,126,000 greater during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, an increase of approximately 60%. The average price we received for our ethanol increased by approximately 55% for the nine months ended September 30, 2011 compared to the same period of 2010, an increase of approximately $0.88 per gallon of ethanol sold. Our total ethanol sales during the nine months ended September 30, 2011 were approximately 3% greater than during the same period of 2010, an increase of approximately 1,004,000 gallons. This increase was due in part to increased ethanol sales that resulted from ethanol that we carried over from December 2010 into January 2011.
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Distillers Grains
Our total distillers grains revenue increased by approximately $6,540,000 for the nine months ended September 30, 2011 compared to the same period of 2010. We sold a comparable number of tons of distillers grains during both periods, however, the prices we received for our distillers grains were significantly higher for the nine months ended September 30, 2011 compared to the same period of 2010. The average price we received for our dried distillers grains increased by approximately $50 per ton, an increase of approximately 54%, for the nine months ended September 30, 2011 compared to the same period of 2010. The average price we received for our modified/wet distillers grains increased by approximately $70 per ton, an increase of approximately 82%, for the nine months ended September 30, 2011 compared to the same period of 2010. For the nine months ended September 30, 2011, we sold approximately 27% of our distillers grains in the dried form and approximately 73% in the modified/wet form. During the nine months ended September 30, 2010, we sold approximately 48% of our distillers grains in the dried form and approximately 52% in the modified/wet form.
Corn Oil
Our total pounds of corn oil sold increased by approximately 27% during the nine months ended September 30, 2011 compared to the same period of 2010. In addition, the average price we received for our corn oil increased by approximately 76% for the nine months ended September 30, 2011 compared to the same period of 2010.
Cost of Revenues
Our cost of revenues was approximately 57% greater for the nine months ended September 30, 2011 compared to the same period of 2010 due to higher corn costs. Our average cost per bushel of corn increased by approximately 75% for the nine months ended September 30, 2011 compared to the same period of 2010, an increase of approximately $2.53 per bushel of corn. We used approximately 2% fewer bushels of corn during the nine months ended September 30, 2011 compared to the same period of 2010.
Our cost of revenues related to natural gas decreased by approximately $542,000, a decrease of approximately 10%, for the nine months ended September 30, 2011 compared to the same period of 2010. Our average cost per MMBtu of natural gas during the nine months ended September 30, 2011 was approximately 8% lower compared to the nine months ended September 30, 2010, a decrease of approximately $0.44 per MMBtu of natural gas. We used approximately the same amount of natural gas during the nine months ended September 30, 2011 compared to the same period of 2010.
Operating Expense
Our operating expenses were higher for the nine months ended September 30, 2011 compared to the same period of 2010, due primarily to higher bonus and wage expenses.
Other Income and Expense
Our interest expense was lower for the nine months ended September 30, 2011 compared to the same period of 2010 because we had significantly less debt outstanding. We had more interest income during the nine months ended September 30, 2011 compared to the same period of 2010 due to having more cash on hand during the 2011 period. In addition, we recorded income from a litigation settlement in 2011.
Changes in Financial Condition for the Nine Months Ended September 30, 2011.
Current Assets
Our current assets were higher at September 30, 2011 compared to December 31, 2010 primarily due to increased cash on hand, accounts receivable and unrealized gains on our risk management positions. The increases in our cash on hand and accounts receivable are tied to recent increases in ethanol, distiller grains and corn oil prices. The amount we had due from our commodities broker was lower at September 30, 2011 compared to December 31, 2010 because we were required to hold less cash in our margin account with our commodities broker due to fewer unrealized losses on our risk management positions. Further, we had a significant unrealized gain on our risk management positions as of September 30, 2011 which was a current asset on our balance sheet.
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Property and Equipment
Our net property and equipment was lower at September 30, 2011 compared to December 31, 2010 as a result of a write down related to our litigation settlement. We did not make any significant capital expenditures during the nine months ended September 30, 2011 that increased the value of our property and equipment.
Current Liabilities
We had less checks issued in excess of our bank balances as of September 30, 2011 compared to December 31, 2010 related to our ongoing operations. Our accounts payable was lower at September 30, 2011 compared to December 31, 2010 because our corn suppliers typically seek to defer payments for corn that is delivered at the end of the year for tax purposes. These deferred payments were made early in our first quarter of 2011. We did not have any amount outstanding on our short-term revolving line of credit as of September 30, 2011 compared to approximately $1.9 million outstanding as of December 31, 2010. The current portion of our notes payable was significantly lower at September 30, 2011 compared to December 31, 2010 because we repaid all of the subordinated unsecured debt securities we issued to certain of our members in 2009 during our first two quarters of 2011.
Long-Term Liabilities
Our long-term liabilities were lower at September 30, 2011 compared to December 31, 2010 because of our continuing payments on our various long-term promissory notes and a decrease in our anticipated liability related to our railcar leases.
Liquidity and Capital Resources
Our main sources of liquidity are cash from our continuing operations and amounts we have available to draw on our revolving lines of credit. Management does not anticipate that we will need to raise additional debt or equity financing in the next twelve months and management believes that our current sources of liquidity will be sufficient to continue our operations during that time period. We do not anticipate making any significant capital expenditures in the next 12 months other than ordinary repair and replacement of equipment in our ethanol plant.
Currently, we have two revolving loans which allow us to borrow funds for working capital. These two revolving loans are described in greater detail below in the section entitled “Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Indebtedness.” As of September 30, 2011, we had $0 outstanding and $15,000,000 available to be drawn on these revolving loans. Management anticipates that this is sufficient to maintain our liquidity and continue our operations.
The following table shows cash flows for the nine months ended September 30, 2011 and 2010:
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Net cash provided by operating activities | $ | 11,455,451 | $ | 597,763 | ||||
Net cash provided by investing activities | 961,189 | — | ||||||
Net cash (used for) financing activities | (10,014,714 | ) | (678,470 | ) | ||||
Cash Flow From Operations. Our operating activities provided more cash during the nine months ended September 30, 2011 compared to the same period of 2010, primarily due to increased net income during the 2011 period.
Cash Flow From Investing Activities. We received proceeds of $1 million from a litigation settlement during the nine months ended September 30, 2011 which provided cash from our investing activities which was offset by a purchase of equipment.
Cash Flow From Financing Activities. We used more cash in our financing activities during the nine months ended September 30, 2011 compared to the same period of 2010 due to higher payments on our credit facilities and two distributions we paid during our 2011 fiscal year.
Indebtedness
First National Bank of Omaha (FNBO) is our primary lender. We have two loans outstanding with FNBO, a short-term revolving loan and a long-term revolving loan. During our third quarter of 2010, we repaid the entire balance of our term loan
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with FNBO. In June 2011, we executed amendments to our FNBO revolving loans. The material terms of these loans, as amended, are described below.
We also have two loans that we used to offset the cost of our corn oil extraction equipment which totaled $1,200,000. We have a long-term loan related to a piece of property that we purchased adjacent to our ethanol plant. The specifics of each credit facility are discussed below.
Short-Term Debt Sources
We have a short-term revolving promissory note with FNBO that expires on May 1, 2012. The principal amount of this short-term revolving promissory note is $10 million. However, the maximum amount we can draw on this short-term loan is limited by a borrowing base calculation, described in the June 2011 amendment, based on a percentage of our inventory and accounts receivable less certain accounts payable and letters of credit that we may have outstanding from time to time. We agreed to pay a variable interest rate on the revolving promissory note at an annual rate 350 basis points above the one month London Interbank Offered Rate (LIBOR), adjusted monthly. The revolving promissory note is subject to a minimum interest rate of 4.0% per year. The interest rate for this loan at September 30, 2011 was the minimum interest rate of 4.0%. We are required to pay a fee of 0.4% on the unused portion of the revolving promissory note. The revolving promissory note is collateralized by the ethanol plant, its accounts receivable and inventories. As of September 30, 2011, we had $0 outstanding on our revolving promissory note and $10,000,000 available to be drawn.
Long-Term Debt Sources
During our third quarter of 2010, we repaid our term note that was used for the permanent financing of the ethanol plant.
We restructured our long-term revolving loan that we refer to as Term Note 5 in June 2011. Term Note 5 was restructured into a $5,000,000 loan with an interest rate that accrues at 350 basis points above the one month LIBOR, adjusted monthly. Term Note 5 is subject to a minimum interest rate of 4.0% per year. The credit limit on Term Note 5 reduces each year by $500,000 until the maturity date on May 1, 2014. Therefore, the funds available for us to draw on Term Note 5 will decrease each year. If in any year we have a principal balance outstanding on Term Note 5 in excess of the new credit limit, we must make a payment to FNBO such that the amount outstanding on Term Note 5 does not exceed the new credit limit. We are required to pay a fee of 0.4% on the unused portion of Term Note 5. On September 30, 2011, we had $0 outstanding and $5,000,000 available to be drawn on this loan. As of September 30, 2011, interest accrued on Term Note 5 at the minimum interest rate of 4.0% per year.
We also have a long-term debt obligation related to our purchase of an additional 135 acres of land pursuant to a land purchase contract. The total cost of this additional land was $550,000. As of September 30, 2011, we had $225,000 remaining to be paid pursuant to this land purchase contract.
We have a long-term debt obligation on a portion of a tax increment revenue bond series issued by Lake County, South Dakota of which we were the recipient of the proceeds. The portion for which we are obligated is currently estimated at $172,000. Taxes levied on our property are used for paying the debt service on the bonds. We are obligated to pay any shortfall in debt service on the bonds should the property taxes collected not be sufficient to pay the entire debt service. The interest rate on the bonds is 7.75% annually. The bonds require semi-annual payments of interest on December 1 and June 1, in addition to a payment of principal on December 1 of each year. While our obligation under the guarantee is expected to continue until maturity in 2018, such obligation may cease at some point in time if the property on which the plant is located appreciates in value to the extent that Lake County is able to collect a sufficient amount in taxes to cover the principal and interest payments on the taxable bonds. The principal balance outstanding was approximately $1,217,000 as of September 30, 2011.
Subordinated Debt
During our 2009 fiscal year, we completed a private placement offering of subordinated unsecured debt securities. The debt securities that we offered were not registered with the Securities and Exchange Commission and were offered pursuant to claimed exemptions from registration under state and federal securities laws. We raised a total of $1,439,000 in subordinated debt through this offering. Interest on the subordinated notes accrued at a fixed interest rate of 9% per year. These subordinated debt securities had a two-year maturity from the date they were issued, with interest being paid on January 30th of each year and at maturity. We repaid the final subordinated unsecured debt securities during our second quarter of 2011, so as of September 30, 2011, the outstanding principal balance of our subordinated unsecured debt securities was $0.
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We raised a total of $1,200,000 in subordinated loans to help offset the cost of our corn oil extraction equipment from two different parties. We secured $1,000,000 in financing for the corn oil extraction equipment from the Rural Electric Economic Development, Inc. (REED) and $200,000 from the First District Development Company (FDDC). We closed on these loans on May 22, 2009. We agreed to pay 4.70% interest on the $1,000,000 loan from REED and 5.5% interest on the $200,000 FDDC loan. Both loans are amortized over a period of five years and both loans require monthly payments. The principal balance of the REED loan was approximately $612,000 as of September 30, 2011. The principal balance of the FDDC loan was approximately $123,000 as of September 30, 2011.
Covenants
Our credit facilities with FNBO are subject to various loan covenants. If we fail to comply with these loan covenants, FNBO can declare us to be in default of our loans. The material loan covenants applicable to our credit facilities are our fixed charge coverage ratio, our minimum net worth and minimum working capital requirements. We are required to maintain a fixed charge coverage ratio of no less than 1.10 to 1.0. This fixed charge coverage ratio compares our EBITDA adjusted earnings, as defined in our credit agreements, with our scheduled principal and interest payments on our outstanding debt obligations, including our subordinated debt. We are also required to maintain at least $4.8 million in working capital and maintain a minimum net worth of $20 million.
As of September 30, 2011, we were in compliance with all of our loan covenants. Management's current financial projections indicate that we will be in compliance with our financial covenants for the next 12 months and we expect to remain in compliance thereafter. Management does not believe that it is reasonably likely that we will fall out of compliance with our material loan covenants in the next 12 months. If we fail to comply with the terms of our credit agreements with FNBO, and FNBO refuses to waive the non-compliance, FNBO may require us to immediately repay all amounts outstanding on our loans.
Application of Critical Accounting Policies
Management uses estimates and assumptions in preparing our consolidated 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. Of the significant accounting policies described in the notes to our consolidated financial statements, we believe that the following are the most critical:
Derivative Instruments
We enter into short-term forward grain, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. We 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 and natural gas purchases are included as a component of cost of revenues 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.
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.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of market fluctuations associated with commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We have loans that are subject to variable interest rates, however, they are currently accruing interest at minimum interest rates which based on current market conditions is expected to continue for the foreseeable future. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes.
Commodity Price Risk
We are exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process. We seek to minimize the risks from fluctuations in the prices of corn and natural gas through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases, they are not designated as such for hedge accounting purposes, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are marking to market our hedge positions, which means as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of revenues.
The immediate recognition of hedging gains and losses can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged. We recorded a increase to our cost of revenues of approximately $2.1 million related to derivative instruments for the quarter ended September 30, 2011. We recorded an increase to our cost of revenues of approximately $4.3 million related to derivative instruments for the quarter ended September 30, 2010. There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of corn or natural gas. However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.
As of September 30, 2011, we were committed to purchasing approximately 3.2 million bushels of corn valued at approximately $20.6 million using forward contracts. These corn purchases represent approximately 19% of our expected corn usage for the next 12 months As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects to our financial results, but are designed to produce long-term positive growth for us.
As of September 30, 2011, we were committed to purchasing approximately 110,000 MMBtus of natural gas during our 2011 fiscal year, valued at approximately $450,000. The natural gas purchases represent approximately 7% of the annual plant requirements.
A sensitivity analysis has been prepared to estimate our exposure to corn and natural gas price risk. The table presents the fair value of our derivative instruments as of September 30, 2011 and December 31, 2010 and the potential loss in fair value resulting from a hypothetical 10% adverse change in such prices. The fair value of the positions is a summation of the fair values calculated by valuing each net position at quoted market prices as of the applicable date. The results of this analysis, which may differ from actual results, are as follows:
Period Ended | Fair Value | Effect of Hypothetical Adverse Change - Market Risk | ||||||
September 30, 2011 | $ | 7,926,907 | $ | 792,691 | ||||
December 31, 2010 | 6,535,668 | 653,567 | ||||||
ITEM 4. CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit 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 Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief
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Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
Our management, including our Chief Executive Officer (the principal executive officer), Scott Mundt, along with our Chief Financial Officer (the principal financial officer), Robbi Buchholtz, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2011. Based on this review and evaluation, these officers believe that our disclosure controls and procedures are effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission.
For the fiscal quarter ended September 30, 2011, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time in the ordinary course of business, Dakota Ethanol or Lake Area Corn Processors may be named as a defendant in legal proceedings related to various issues, including, worker's compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings, directly or indirectly, and we are not aware of any claims pending or threatened against us or any of the managers that could result in the commencement of material legal proceedings.
ITEM 1A. RISK FACTORS.
The following risk factor is provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K. The risk factor set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section for the fiscal year ended December 31, 2010, included in our annual report on Form 10-K.
If the Federal Renewable Fuels Standard is repealed or reduced, it may negatively impact our ability to profitably operate the ethanol plant.
Recently, there have been proposals in Congress to repeal or reduce the Federal Renewable Fuels Standard (RFS) which provides a requirement that a certain amount of renewable fuels must be used in the United States each year. The RFS requirement increases each year in order to further develop the use of renewable fuels in the United States. Without the RFS, demand for ethanol may decrease significantly. While management believes it is unlikely that the RFS will be repealed or reduced, if Congress were to repeal or reduce the RFS it could negatively impact our ability to profitably operate the ethanol plant.
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.
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ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The following exhibits are filed as part of this report.
Exhibit No. | Exhibit | |
31.1 | Certificate Pursuant to 17 CFR 240.13a-14(a)* | |
31.2 | Certificate Pursuant to 17 CFR 240.13a-14(a)* | |
32.1 | Certificate Pursuant to 18 U.S.C. Section 1350* | |
32.2 | Certificate Pursuant to 18 U.S.C. Section 1350* | |
101 | The following financial information from Lake Area Corn Processors, LLC's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, and (iv) the Notes to Consolidated Financial Statements.** | |
* Filed herewith.
** Furnished herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
LAKE AREA CORN PROCESSORS, LLC | |||
Date: | November 14, 2011 | /s/ Scott Mundt | |
Scott Mundt | |||
President and Chief Executive Officer (Principal Executive Officer) | |||
Date: | November 14, 2011 | /s/ Robbi Buchholtz | |
Robbi Buchholtz | |||
Chief Financial Officer (Principal Financial and Accounting Officer) | |||
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