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EX-31.1 - CEO CERTIFICATION - Lincolnway Energy, LLCexhibit311fy1110k.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2011
OR
¨
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: 000-51764
 LINCOLNWAY ENERGY, LLC
(Exact name of registrant as specified in its charter) 
Iowa
 
20-1118105
(State or other jurisdiction of
 
(IRS Employer
incorporation or organization)
 
Identification No.)
59511 W. Lincoln Highway, Nevada, Iowa
 
50201
(Address of principal executive offices)
 
(Zip Code)
Registrant's telephone number, including area code: (515) 232-1010

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  Limited Liability Company Units

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   ¨      No        R

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.          Yes    ¨      No        R

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.               Yes     R     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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      R      No          ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.           R

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       
¨
Accelerated filer
¨
Non-accelerated filer
R
Smaller reporting company    
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         Yes      ¨      No      R
 
The aggregate market value of the units held by non-affiliates of the registrant was $50,939,970 as of March 31, 2011. The units are not listed on an exchange or otherwise publicly traded.  The value of the units for this purpose has been based upon the $1,285 book value per-unit as of March 31, 2011.  In determining this value, the registrant has assumed that all of its directors and its president and its chief financial officer are affiliates, but this assumption shall not apply to or be conclusive for any other purpose.
 
The number of units outstanding as of November 30, 2011 was 42,049.

DOCUMENTS INCORPORATED BY REFERENCE:  Portions of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission with respect to the 2011 annual meeting of the members of the registrant are incorporated by reference into Item 11 of Part III of this Form 10-K.



LINCOLNWAY ENERGY, LLC
FORM 10-K
For the Fiscal Year Ended September 30, 2011

INDEX

Part I.
 
 
 
 
 
 
 
 
Item 1.
Business.
 
Item 1A.
Risk Factors.
 
Item 1B.
Unresolved Staff Comments.
 
Item 2.
Properties.
 
Item 3.
Legal Proceedings.
 
 
 
 
Part II.
 
 
 
 
 
 
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Item 6.
Selected Financial Data.
 
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
 
Item 8.
Financial Statements and Supplementary Data.
 
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
 
Item 9A.
Controls and Procedures.
 
Item 9B.
Other Information.
 
 
 
 
Part III.
 
 
 
 
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance.
 
Item 11.
Executive Compensation.
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
 
Item 14.
Principal Accounting Fees and Services.
 
 
 
 
Part IV.     
 
 
 
Item 15.       
Exhibits and Financial Statement Schedules.
 
 
 
 
SIGNATURES
 
Certification of President and CEO
E-1
Certification of Chief Financial Officer
E-2
Section 1350 Certification of President and CEO
E-3
Section 1350 Certification of Chief Financial Officer
E-4

                            







CAUTIONARY STATEMENT ON FORWARD LOOKING STATEMENTS
AND INDUSTRY AND MARKET DATA

Various discussions and statements in this annual report are or contain forward looking statements that express Lincolnway Energy's current beliefs, forecasts, projections and predictions about future events.  All statements other than statements of historical fact are forward looking statements, and include statements with respect to financial results and condition; anticipated trends in business, revenues, net income, net profits or net losses; projections concerning operations, capital needs and cash flow; investment, business, growth, expansion, acquisition and divestiture opportunities and strategies; management's plans or intentions for the future; competitive position or circumstances; and other forecasts, projections and statements of expectation.  Words such as "expects," "anticipates," "estimates," "plans," "may," "will," "contemplates," "forecasts," "strategy," "future," "potential," "predicts," "projects," "prospects," "possible," "continue," "hopes," "intends," "believes," "seeks," "should," "could," "thinks," "objectives" and other similar expressions or variations of those words or those types of words help identify forward looking statements.

Forward looking statements involve and are subject to various material risks, uncertainties and assumptions.  Forward looking statements are necessarily subjective and are made based on numerous and varied estimates, projections, views, beliefs, strategies and assumptions made or existing at the time of such statements and are not guarantees of future results or performance.  Forecasts and projections are also in all events likely to be inaccurate, at least to some degree, and especially over long periods of time, and in particular in a still developing industry such as the ethanol industry.  Forecasts and projections are also currently difficult to make with any degree of reliability or certainty given the difficult and uncertain credit, market and other economic circumstances and uncertainties in existence at the time of the preparation of this annual report, both generally and with respect to the ethanol industry.  Lincolnway Energy disclaims any obligation to update or revise any forward looking statements based on the occurrence of future events, the receipt of new information, or otherwise.  Lincolnway Energy cannot guarantee Lincolnway Energy's future results, performance or business conditions, and strong or undue reliance must not be placed on any forward looking statements.

Actual future performance, outcomes and results may differ materially from those suggested by or expressed in forward looking statements as a result of numerous and varied factors, risks and uncertainties, some that are known and some that are not, and many of which are beyond the control of Lincolnway Energy and Lincolnway Energy's management.  It is not possible to predict or identify all of those factors, risks and uncertainties, but they include inaccurate assumptions or predictions by management, the accuracy and completeness of the publicly available information upon which part of Lincolnway Energy's business strategy is based and all of the various factors, risks and uncertainties discussed in this annual report, and in particular in Items 1, 1A, 7 and 7A of this annual report.

Lincolnway Energy may have obtained industry, market, competitive position and other data used in this annual report or in Lincolnway Energy's general business plan from Lincolnway Energy's own research or internal surveys, studies conducted by other persons and/or trade or industry associations or general publications and other publicly available information.  Lincolnway Energy attempts to utilize third party sources of information that Lincolnway Energy believes to be materially complete, accurate, balanced and reliable, but there is no assurance of the accuracy, completeness or reliability of any third party information.  For example, a trade or industry association for the ethanol industry may present information in a manner that is more favorable to the ethanol industry than would be presented by an independent source.  Industry publications and surveys and other publicly available information also generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of any information.

[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

i



PART I



Item 1.    Business.

General Overview

Lincolnway Energy, LLC is an Iowa limited liability company that operates a dry mill, coal fired ethanol plant located in Nevada, Iowa.  Lincolnway Energy has been processing corn into fuel grade ethanol and distiller's grains at the ethanol plant since May 22, 2006.  The first full month of production at full capacity was July of 2006.

The ethanol plant has a nameplate production capacity of 50,000,000 gallons of ethanol per year, which, at that capacity, would also generate approximately 136,000 tons of distiller's grains per year. Lincolnway Energy has been operating at least 10% above nameplate since that time, subject to normal shutdown and other maintenance related days and matters.

Lincolnway Energy began extracting corn oil from the syrup which is generated in the production of ethanol in April, 2008.  Lincolnway Energy estimates that it will produce approximately 4,700 tons of corn oil per year at the plant.

Lincolnway Energy entered into an agreement with EPCO Carbon Dioxide Products, Inc. on April 16, 2010 pursuant to which EPCO constructed a plant on Lincolnway Energy's site to collect the carbon dioxide that is produced as part of the ethanol production process and to convert that raw carbon dioxide into liquid carbon dioxide.  The EPCO plant became fully operational in August 2010.  EPCO also markets and sells the liquid carbon dioxide.  Lincolnway Energy estimates that it will produce approximately 105,000 tons of carbon dioxide per year.  Lincolnway Energy had not captured or marketed the carbon dioxide which is produced as part of the ethanol production process prior to entering into the agreement with EPCO.

Lincolnway Energy does not anticipate that sales of corn oil and carbon dioxide will be material sources of revenue for Lincolnway Energy, but Lincolnway Energy was able to implement the processes to collect corn oil and carbon dioxide on an economical basis and Lincolnway Energy does not have significant operating or other costs related to those processes.

Lincolnway Energy entered into a Purchase and Sale Agreement with DuPont Danisco Cellulosic Ethanol, LLC ("DDCE") on June 23, 2011. The real estate that was purchased by DDCE was approximately 59.05 acres that is located to the southwest of the real estate on which Lincolnway Energy's ethanol plant is located.

Lincolnway Energy and DDCE also entered into a Load Out Services Agreement. The Load Out Services Agreement provides, in general, that DDCE will construct an aboveground pipeline from DDCE's plant to a holding tank on Lincolnway Energy's property, and that Lincolnway Energy will load out DDCE's product at Lincolnway Energy's rail or truck facilities. The Load Out Services Agreement sets forth the various fees and other amounts that DDCE will pay to Lincolnway Energy for those services, as well as allocating various costs and expenses between Lincolnway Energy and DDCE. The Load Out Services Agreement provides that if it is terminated, then Lincolnway Energy will grant DDCE an easement for the purpose of DDCE constructing its own rail tracks, and that Lincolnway Energy and DDCE will also at that time enter into a track usage agreement that will address how Lincolnway Energy and DDCE will jointly use certain tracks of Lincolnway Energy and other related matters.

Lincolnway Energy does not anticipate that the revenues under the Load Out Services Agreement will be a material source of revenue for Lincolnway Energy, but Lincolnway Energy believes that it will be able to provide the services required under the Load Out Services Agreement without materially increasing its operating or other costs.


Financial Information

Financial statements for Lincolnway Energy are included in Item 8 of this annual report.  The financial statements include information regarding Lincolnway Energy's revenues, profits or losses and total assets.  Item 6 of this annual report includes summary selected financial data.

Lincolnway Energy did not derive any revenue during the fiscal year ended September 30, 2011 from any customers located in any foreign country, and Lincolnway Energy did not have any assets located in a foreign country during that fiscal year.




1



Principal Products and Their Markets

Lincolnway Energy's principal products are fuel grade ethanol and distiller's grains.

Ethanol

Lincolnway Energy produces ethanol from corn.  The ethanol produced by Lincolnway Energy is fuel grade ethanol, which can be used as a blend component/fuel additive in gasoline.  Ethanol increases the octane rating of gasoline and reduces vehicle emissions, primarily carbon monoxide.  The use of ethanol is currently heavily supported by various governmental incentives and programs.  The loss of one or more of those incentives or programs could be highly detrimental to the ethanol industry.

All of Lincolnway Energy's ethanol production was sold to RPMG, Inc. until September 30, 2009, when Lincolnway Energy entered into an ethanol marketing agreement with Green Plains Trade Group LLC, as is discussed below. 

Lincolnway Energy entered into an ethanol marketing agreement with Green Plains Trade Group LLC effective as of September 25, 2009.  Under the agreement, Green Plains Trade Group LLC has the exclusive right to market all of the ethanol which is produced by Lincolnway Energy, except that the agreement permitted Lincolnway Energy to close out any outstanding purchase orders under Lincolnway Energy's agreement with RPMG, Inc. and that Lincolnway Energy may market some of its ethanol in certain limited circumstances, such as ethanol which is the subject of any purchase order which was submitted by Green Plains Trade Group LLC but was rejected by Lincolnway Energy.  Lincolnway Energy may reject any purchase orders submitted by Green Plains Trade Group LLC, in Lincolnway Energy's sole discretion.  The purchase price payable to Lincolnway Energy under the agreement is Green Plains Trade Group LLC's contract selling price for the ethanol in question, less various costs and a fee to Green Plains Trade Group LLC, but the agreement includes a minimum purchase price.  Lincolnway Energy is dependent upon its agreement with Green Plains Trade Group LLC for the marketing and sale of Lincolnway Energy's ethanol, and Lincolnway Energy's loss of the agreement, or Lincolnway Energy's inability to negotiate a new agreement with Green Plains Trade Group LLC or another marketer before the expiration or termination of the agreement, could have material adverse effects on Lincolnway Energy.

The primary purchasers of ethanol are refiners, blenders or wholesale marketers of gasoline.  Lincolnway Energy anticipates that its ethanol production will be sold in various regional markets given the availability of rail service at Lincolnway Energy's ethanol plant and local markets that will be shipped by truck, but Green Plains Trade Group LLC controls the marketing of all of Lincolnway Energy's ethanol output.

Lincolnway Energy’s primary means of shipping and distributing ethanol will be by rail and truck.

The nameplate production capacity of Lincolnway Energy's ethanol plant is 50,000,000 gallons of ethanol per year, or approximately 4,167,000 gallons per month.  The ethanol plant exceeded the nameplate production capacity for the fiscal year ended September 30, 2011, however, by approximately 14%, with 57,071,798 gallons of ethanol produced during that period, and with an average daily production of 166,818 gallons. This is a 3% increase from the prior comparable year.

Lincolnway Energy anticipates that the ethanol plant will produce ethanol at a similar rate or higher during the fiscal year ending September 30, 2012.


Lincolnway Energy's revenues from the sale of ethanol during the fiscal years ended September 30, 2009, September 30, 2010 and September 30, 2011 accounted for approximately 80%, 83% and 80%, respectively, of Lincolnway Energy's total revenues during those periods.  Lincolnway Energy estimates that its revenues from the sale of ethanol for the fiscal year ending September 30, 2012 will account for approximately 80% of Lincolnway Energy's total revenues for that fiscal year.

Distiller's Grains


Lincolnway Energy's other primary product is distiller's grains, which is a byproduct of the ethanol production process.  Distiller's grains are, in general, the solids which are left after the processing and fermentation of corn into ethanol.  Distiller's grains are a high protein feed supplement that are marketed primarily in the swine, dairy and beef industries.  Distiller's grains can also be used in poultry and other livestock feed.



2



A dry mill ethanol process such as that utilized by Lincolnway Energy can produce wet distiller's grains and dried distiller's grains.  Wet distiller's grain contains approximately 60% moisture, and has a shelf life of approximately ten days.  Wet distiller's grains can therefore only be sold to users located within relatively close proximity to the ethanol plant.  Dried distiller's grain is wet distiller's grain that has been dried to 10% to 12% moisture.  Dried distiller's grain has an extended shelf life and may be sold and shipped to any market.

Lincolnway Energy's output of distiller's grains is sold to Hawkeye Gold, LLC under a Distiller's Grains Marketing Agreement that became effective on October 1, 2007.  Lincolnway Energy pays Hawkeye Gold, LLC a marketing fee for dried distiller's grains equal to the greater of 2% of the FOB plant price for the dried distiller's grains or a per-ton fee of $1.30 for the dried distiller's grains.  The marketing fee for wet distiller's grains is the greater of 3% of the FOB plant price for the wet distiller's grains or a per-ton fee of $1.00 for the wet distiller's grains.  The Distiller's Grains Marketing Agreement can be terminated by Lincolnway Energy or Hawkeye Gold, LLC on 90 days written notice.  Lincolnway Energy is dependent upon its agreement with Hawkeye Gold, LLC for the marketing and sale of Lincolnway Energy's distiller's grains, and Lincolnway Energy's loss of the agreement, or Lincolnway Energy's inability to negotiate a new agreement with Hawkeye Gold or another marketer before the expiration or termination of the agreement, could have material adverse effects on Lincolnway Energy.

The primary purchasers of distiller's grains are individuals or companies involved in dairy, beef or other livestock production.  Lincolnway Energy anticipates that approximately 7% of its distiller's grains will be locally marketed to nearby livestock producers, but Hawkeye Gold, LLC controls the marketing of all of Lincolnway Energy's distiller's grains.

Lincolnway Energy's primary means of shipping and distributing distiller's grain will be by rail and truck.  Local livestock producers are also able to pick up distiller's grains directly from the ethanol plant.

Lincolnway Energy produced 154,767 tons of distiller's grains during the fiscal year ended September 30, 2011, or approximately 12,897 tons of distiller's grains per month.  The composition of the distiller's grains was approximately 8% wet distiller's grains and 92% dried distiller's grains. Dried distillers production increased approximately 10% from the prior comparable year.

Lincolnway Energy anticipates processing approximately 154,000 tons of distiller's grains during the fiscal year ending September 30, 2012.

Lincolnway Energy's revenues from the sale of distiller's grains during the fiscal years ended September 30, 2009, September 30, 2010 and September 30, 2011 accounted for approximately 19%, 17% and 18%, respectively, of Lincolnway Energy's total revenues during those periods.  Lincolnway Energy estimates that its revenues from the sale of distiller's grains for the fiscal year ending September 30, 2012 will account for approximately 19% of Lincolnway Energy's total revenues for that fiscal year.


Other Byproducts

There are other byproducts from the production of ethanol at a dry mill plant, primarily corn oil, and carbon dioxide.



Corn Oil

Lincolnway Energy installed a corn oil extraction system in April, 2008 that extracts corn oil from the syrup which is generated in the production of ethanol. Lincolnway Energy entered into an agreement with FEC Solutions, L.L.C. on October 13, 2008 under which FEC Solutions, L.L.C. purchases all of Lincolnway Energy's output of corn oil for resale by FEC Solutions, L.L.C. Lincolnway Energy pays FEC Solutions, L.L.C. a marketing and technical assistance fee of 5% of the FOB sales price of the corn oil. The agreement has an initial term of 36 months commencing from October 13, 2008, and will renew for successive 36 month terms unless Lincolnway Energy or FEC Solutions, L.L.C. elect to terminate the agreement at the end of the then current 36 month term.

Lincolnway Energy's primary means of shipping and distributing corn oil will be by truck.

Lincolnway Energy anticipates that FEC Solutions, L.L.C. will sell the corn oil in the biodiesel, livestock feed and industrial industry, but FEC Solutions, L.L.C. controls the marketing of all of Lincolnway Energy's output of corn oil.


3



Lincolnway Energy estimates that it will produce and sell approximately 4,700 tons of corn oil per year at the plant.  Lincolnway Energy does not, however, anticipate that corn oil will be a material product of Lincolnway Energy because Lincolnway Energy’s corn oil sales were approximately $1,200,000 and $1,500,000 and $3,400,000 respectively, for the fiscal years ended September 30, 2009 and September 30, 2010, and September 30, 2011 which represented less than 2%, of Lincolnway Energy's total revenues for those respective fiscal years.  Lincolnway Energy's oil sales did increase approximately 127% compared to the prior year. This was due to an additive that was added to the process to improve the oil yield. The cost of the additive for the year was approximately 8% of corn oil revenue.


Carbon Dioxide

Lincolnway Energy entered into a Carbon Dioxide Purchase and Sale Agreement and a related Non-Exclusive CO2 Facility Site Lease Agreement with EPCO Carbon Dioxide Products, Inc. on April 16, 2010.  Under those agreements, EPCO constructed a plant on Lincolnway Energy's site to collect the carbon dioxide which is produced as part of the ethanol production process and to convert that raw carbon dioxide into liquid carbon dioxide.  The EPCO plant became fully operational in August of 2010.

EPCO also markets and sells the liquid carbon dioxide gas under those agreements.  The purchase price payable by EPCO for the raw carbon dioxide provided by Lincolnway Energy is based upon EPCO's shipped tons of liquid carbon dioxide.  The agreement also includes a "take or pay" term which requires EPCO to purchase, during each contract year, the greater of 180 shipped tons per day or 70% of the annual liquid carbon dioxide production capacity of the EPCO plant at full capacity.  The annual liquid carbon dioxide production capacity of the EPCO plant will be determined based upon the capacity run procedures as set out in the agreement.  The take or pay obligation is trued up at the end of each contract year, and the purchase price for any "take or pay" tons will be the average per shipped ton purchase price paid by EPCO during the contract year. The term of the marketing agreement with EPCO is ten years from the date on which liquid carbon dioxide was first produced at the EPCO plant, which was during August, 2010, unless the agreement is earlier terminated for any of the other reasons set out in the agreement. EPCO is required to remove the plant and related equipment following any termination of the agreement.

EPCO is responsible for the shipment of all liquid carbon dioxide, which Lincolnway Energy contemplates, will be by truck.
Lincolnway Energy estimates it will sell approximately 87,000 tons of carbon dioxide per year at its plant. Lincolnway Energy does not, however, anticipate that revenues from the sale of carbon dioxide to EPCO will be a material product of Lincolnway Energy, given that Lincolnway Energy estimates that such revenues will constitute less than 1% of Lincolnway Energy's total revenues during any fiscal year.


Sources and Availability of Raw Materials

Corn and coal are the primary raw materials that are utilized by Lincolnway Energy in the production of ethanol.  Corn is used to produce the ethanol, and coal is Lincolnway Energy's primary energy source for its ethanol plant.


Corn

Lincolnway Energy estimates that it will utilize approximately 21,000,000 bushels of corn per year at its ethanol plant, or approximately 1,750,000 bushels per month, assuming production at a capacity of approximately 59,000,000 gallons of ethanol per year.

Lincolnway Energy's ethanol plant is located in Nevada, Iowa. which is located in Story County. Although Lincolnway Energy anticipates purchasing corn from various sources and areas, Lincolnway Energy believes that Story County will produce a sufficient supply of corn, assuming normal growing conditions, to generate the necessary annual requirements of corn for the ethanol plant.  There is not, however, any assurance that Lincolnway Energy will be able to purchase sufficient corn supplies from Story County or regarding the supply or availability of corn given the numerous factors which affect the supply and price for corn.







4



Lincolnway Energy has an agreement with Heart of Iowa Cooperative, dba Key Cooperative pursuant to which Lincolnway Energy can obtain up to 50% of its corn needs from Key Cooperative's facility located adjacent to Lincolnway Energy's ethanol plant, with the remaining 50% to be obtained from other Key Cooperative facilities or other licensed grain dealers. The 50% limitation for Key Cooperative's Nevada, Iowa location was imposed by the Iowa Department of Natural Resources, as part of the air permitting process.  Key Cooperative is a licensed grain dealer and has locations throughout central Iowa.  Key Cooperative is also a member of Lincolnway Energy.

Lincolnway Energy's agreement with Key Cooperative will terminate by its terms on May 22, 2026.  The agreement may also be terminated, however, at any time upon six months notice and the payment of a termination fee by the terminating party.  The termination fee starts at $2,000,000, and is reduced by $50,000 for each completed year of the agreement.  The term of the agreement commenced on May 22, 2006.

Lincolnway Energy purchased 20,029,808 bushels of corn for $127,764,206 from Key Cooperative during the fiscal year ended September 30, 2011, and, respectively, 19,884,281 and 18,797,250 bushels of corn for $71,804,446 and $69,259,682 during the fiscal years ended September 30, 2010 and September 30, 2009.

Corn is delivered to Lincolnway Energy's ethanol plant by truck.

Lincolnway Energy has corn storage capabilities for approximately 10 days of continuous ethanol production.


Coal

Lincolnway Energy's ethanol plant is a coal fired plant.  Lincolnway Energy's ethanol plant will utilize approximately 300 tons of coal per day, assuming production at a capacity of 59,000,000 gallons of ethanol per year.

Lincolnway Energy purchased approximately 102,000 tons of coal for $7.0 million during the fiscal year ended September 30, 2011, and, respectively, 99,000 and 95,000 tons of coal for $6.0 million and $5.6 million during the fiscal years ended September 30, 2010 and September 30, 2009.

Lincolnway Energy currently obtains all of its coal pursuant to an agreement between Lincolnway Energy and Williams Bulk Transfer.  The agreement allows Lincolnway Energy to purchase up to 220,000 tons of coal per year at a per ton price equal to the sum of the coal price and the transportation price, as those terms are defined in the agreement.  The coal price and the transportation price are subject to adjustment in various circumstances and based on various factors.  For example, the transportation price is subject to quarterly adjustment, upward or downward (but never below the initial transportation price stated in the agreement), by 100% of the quarterly percentage change in the All Inclusive Index—Less Fuel, and to a monthly adjustment, upward but not downward, through the addition of a fuel surcharge determined by the amount by which the average Retail On-Highway Diesel Fuel Price of the U.S. exceeds a specified amount per gallon.  The transportation price will also be increased on the scheduled adjustment dates set out in the agreement.  The coal price adjustments are based upon, in general, any increased costs as a result of any changes in laws, changes in inflation as determined by designated indices, and the quality of the coal.  Lincolnway Energy is required to pay a penalty of $16.00 per ton multiplied by the difference of the minimum requirement and actual quantity purchased, if Lincolnway Energy fails to purchase a minimum of 80,000 tons of coal in any calendar year.  The $16.00 per ton penalty amount is subject to adjustment as provided in the agreement.  Lincolnway Energy's agreement with Williams Bulk Transfer will expire by its terms on January 1, 2013.

Lincolnway Energy is dependent upon its agreement with Williams Bulk Transfer for the supply of all of Lincolnway Energy's coal needs.  Lincolnway Energy's loss of its contract with Williams Bulk Transfer, or Lincolnway Energy's inability to negotiate a new contract with Williams Bulk Transfer or another supplier on favorable terms before the expiration or termination of the agreement, would have material adverse effects on Lincolnway Energy.

All of the coal utilized by Lincolnway Energy is delivered by truck.  Lincolnway Energy has coal storage for approximately 6 days of continuous ethanol production.








5



Other Raw Materials

Lincolnway Energy's ethanol plant also requires a significant amount of electricity and water supply. Lincolnway Energy's electricity needs are currently met by Alliant Energy.  Lincolnway Energy pays the general service rates for its electricity. Lincolnway Energy utilizes approximately two gallons of water to produce a gallon of ethanol, which results in the use of approximately 325,000 gallons of water per day.  Lincolnway Energy discharges 275,000 gallons of water per day that has been purified by a reverse osmosis system. Lincolnway Energy's water needs are currently met by the City of Nevada.


Rail Access

Rail access is critical to the operation of Lincolnway Energy's ethanol plant because rail is used for the shipment and distribution of ethanol and distiller's grains.  Lincolnway Energy utilizes rail track owned by Lincolnway Energy, as well as tracks owned by the Union Pacific and Key Cooperative.  Lincolnway Energy has agreements with the Union Pacific and Key Cooperative regarding the use of their railroad tracks.

Lincolnway Energy owns approximately 25 acres of real estate which is to the west of Lincolnway Energy's existing real estate and which is adjacent to the Union Pacific Railroad tracks near Nevada, Iowa. The real estate was acquired primarily for potential future use in the construction of additional railroad spur tracks.

Lincolnway Energy entered into an agreement with J.B. Holland Construction, Inc. on October 15, 2010 to perform the dirt work for the additional rail spur that Lincolnway Energy is adding to its existing railroad track. The dirt work was completed during August, 2011. Lincolnway Energy entered into a contract with Central States Railroad Services, Inc. on June 30, 2011 for the construction of the rail spur, and construction began during August, 2011. The addition of the rail spur should allow Lincolnway Energy to ship unit trains on the Union Pacific mainline, which is intended to allow Lincolnway Energy to obtain the savings in shipment costs and other efficiencies that generally come through the use of unit trains. Lincolnway Energy estimates that the additional rail spur project will cost approximately $3.4 million in the aggregate. The rail expansion project will be completed in December 2011.


Expansion Plans

Lincolnway Energy currently has no definite plans to expand its ethanol plant or to construct or acquire any additional ethanol plants.  Lincolnway Energy will, however, consider those matters as part of its ongoing operations and analysis of its business and the ethanol industry in general.


Technology Changes

Lincolnway Energy continues to monitor and evaluate any opportunities that may arise with respect to possible technological improvements and alternative energy sources for Lincolnway Energy's ethanol plant.  For example, Lincolnway Energy is considering switching the fuel source for its plant from coal to biomass or natural gas.  Lincolnway Energy also continues to monitor technological developments in the industry, such as those purported to increase operating or production efficiencies or to generate energy or other savings in ethanol or distillers' grains production.


Research and Development Activities

Lincolnway Energy is not currently engaged in any significant research or development activities.











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Competition

The ethanol industry and markets remain highly competitive even though new construction and expansion of ethanol plants slowed during the last three years due to generally unfavorable credit and market conditions. According to the Renewable Fuels Association,2010 annual report there were approximately 204 ethanol plants in the U.S. with an ethanol production capacity of approximately 14.1 billion gallons per year and annualized production of approximately 13.5 billion gallons per year. According to the Iowa Renewable Fuels Association, Iowa has 41 ethanol refineries in production, with a production capacity of approximately 3.7 billion gallons per year and utilizing over 1 billion bushels of corn. The U.S. became the world's largest producer of ethanol in 2006, surpassing Brazil. World production was approximately 23.0 billion gallons in 2010, as opposed to approximately 19.5 billion gallons in 2009 and approximately 17.3 billion gallons in 2008, according to the Renewable Fuels Association, and representing nearly 400% growth since 2000. Over 40 countries are now producing ethanol, including Brazil, Canada, China, India, Thailand, Columbia, Australia, Turkey, Pakistan, Argentina and various other countries in the European Union and Central America. Many of those countries have also enacted renewable fuel use requirements.

The general economic and ethanol industry circumstances have, however, been difficult and adverse over much of the past two to four years, with various ethanol plants having been closed or having reduced production and some openings or construction of new plants or expansions of existing plants having been canceled or postponed. The past projections for the growth of the ethanol industry may, therefore, no longer be accurate. Many plants did, however, return to some level of profitability in the second half of 2009 and into the start of 2010 and last half of 2011, and some idle ethanol plants have resumed operations. The industry has, however, continued to be somewhat volatile.

Given that the Energy Independence and Security Act of 2007 increased the renewable fuels standard to 36 billion gallons of annual renewable fuel use by 2022 (up from the prior mandate of 7.5 billion gallons of annual use by 2012), it is likely that there will continue to be some growth in the ethanol industry, both domestically and internationally, over the longer term.

Lincolnway Energy's competitors in the U.S. include regional farmer-owned entities, and also the major oil companies and other large companies.

The competition in the ethanol industry has increased during the past four years, with sustained periods of declining ethanol prices, excess supplies of ethanol and higher and volatile corn prices.

The ethanol industry will also continue to face increasing competition from international suppliers of ethanol. International suppliers produce ethanol primarily from inputs other than corn, such as sugar cane, and have cost structures that may be substantially lower than Lincolnway Energy's and other U.S. based ethanol producers. Ethanol imports equivalent to up to approximately 7% of total U.S. production in any given year from various countries were exempted from the tariff under the Caribbean Basin Initiative to spur economic development in Central America and the Caribbean. Foreign suppliers of ethanol may significantly increase their imports into the U.S. Also, Canada may import ethanol duty free, and Mexico may import ethanol under a duty rate of $.10 per gallon. Some of the larger competitors in the ethanol industry may construct or establish ethanol plants in Central America or the Caribbean. Also, the $.54 per gallon tariff on most foreign produced ethanol will expire on December 31, 2011, and as of the date of this annual report it did not appear that the tariff would be extended or reenacted at any time in the near future, or perhaps at all.

Smaller competitors also pose a threat. Farmer-owned cooperatives and independent companies consisting of groups of individual farmers and investors have been able to compete successfully in the ethanol industry; although Lincolnway Energy believes that smaller ethanol plants may have increasing difficulty in competing with larger plants over the longer term and if the volatile market conditions of the last few years continue. These smaller competitors operate smaller facilities which do not affect the local price of corn grown in the proximity to the facility as much as larger facilities do, and some of the smaller competitors are farmer-owned and the farmer-owners either commit, or are incented by their ownership in the facility, to sell corn to the facility.

The continuing increase in domestic or foreign competition could cause Lincolnway Energy to have to reduce its prices and take other steps to compete effectively, which could adversely affect Lincolnway Energy's results of operations and financial position.








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Many competitors will have greater production capacity, greater experience, more access to information and/or greater capital or other financial resources, any of which will make it difficult for Lincolnway Energy to compete with those competitors. For example, greater ethanol production may allow a competitor to market its ethanol or distiller's grains at lower prices than Lincolnway Energy. Lincolnway Energy believes there may be acquisitions and consolidations in the ethanol industry in 2012, and if those acquisitions and consolidations occur, they could lead to additional competitors with greater advantages over Lincolnway Energy. A competitor may also offer other products or services that are not offered by Lincolnway Energy, which may give the competitor an additional advantage over Lincolnway Energy.

An ethanol plant utilizing corn to produce ethanol may also experience competition in the form of other plants which produce ethanol from other products. For example, ethanol can be produced from corn stover, corn fiber, wheat straw, barley straw, switchgrass, miscanthus, trees, grasses. woodwastes, vegetative wastes and other wastes. Lincolnway Energy's ethanol plant is designed to produce ethanol only from corn.

The Energy Independence and Security Act of 2007 requires that 21 billion gallons of the new 36 billion gallon renewable fuels standard must come from advanced biofuels, with 16 billion gallons of that amount required to come from cellulosic ethanol by 2022. Research will therefore continue regarding cellulosic ethanol, and it is likely that processes will be developed in the near future which will make the production of ethanol from these types of sources economical. According to the Renewable Fuels Association, there were approximately 22 companies with 28 cellulosic ethanol projects under development or construction or in operation in 23 states as of January, 2010. Some of those projects are properly categorized as "pilot" or "test" plants, but others are at a larger production level. For example, Poet intends to open a 25,000,000 gallon per year cellulosic ethanol plant in Iowa sometime in 2012, with the plant to produce ethanol from corn cobs. As discussed elsewhere in this annual report, DuPont Danisco Cellulosic Ethanol, LLC has purchased approximately 59 acres of real estate from Lincolnway Energy for the purpose of constructing a cellulosic or advanced biofuels plant on the real estate. Some of the cellulosic ethanol plants are working with the U.S. Department of Energy, and have received grant funds.

It is also possible that one or more of the other sources for producing ethanol may have greater advantages than corn, which would adversely affect an ethanol plant that produces ethanol solely from corn. For example, a plant using one of those sources may be able to produce ethanol on a more economical basis or on a more efficient or greater scale.

The increased production of ethanol from other sources could also adversely affect the price for ethanol generally.

Some competitors operate their ethanol plant and produce ethanol using different sources of energy than coal, or using various other sources of energy. The other sources of energy include natural gas and various forms of waste type products, such as woodwaste, tires, construction waste and other waste products. Those competitors may have lower production and input costs and/or higher operating efficiencies than Lincolnway Energy, which would allow them to produce and market their ethanol at lower prices than Lincolnway Energy.

Competition from newly developed fuel additives would also reduce the use of ethanol and Lincolnway Energy's profitability. Although it is difficult to predict if any new fuel additives will be developed, it likely will occur at some point, and it could be in the near future.

Research is also continually being conducted for alternatives to petroleum based fuel products and for additional renewable fuel products. For example, research is ongoing regarding the use of hydrogen, electric or solar powered vehicles and fuel cells. A breakthrough or discovery in any research could conceivably occur at any time, and could have the effect of greatly reducing the use of ethanol or of even making the use of ethanol obsolete at some point. There will be increased incentives to develop alternatives to petroleum based fuel products given the higher gasoline prices that began in 2008 and the continuing security and other concerns with the Middle East and certain other major oil producing nations.

Ethanol is a commodity and is priced on a very competitive basis. Lincolnway Energy believes that its ability to compete successfully in the ethanol industry will depend upon its ability to price its ethanol competitively, which in turn will depend on many factors, many of which are beyond the control of Lincolnway Energy and its management. As indicated above, one of those factors is that Lincolnway Energy is subject to material and substantial competition, including from competitors who will be able to produce or market significantly higher volumes of ethanol and at lower prices.

Lincolnway Energy believes that the principal competitive factors with respect to distiller's grains are price, proximity to purchasers and product quality.




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Government Oversight and Regulation

Lincolnway Energy's business is subject to substantial governmental oversight and regulation, including relating to the discharge of materials into the air, water and soil; the generation, storage, handling, use, transportation and disposal of hazardous materials; and the health and safety of Lincolnway Energy's employees.

Lincolnway Energy needs to maintain various permits to be able to maintain and continue its operations. The permits include water and air permits from the Iowa Department of Natural Resources.

As part of the process of settling allegations of the Iowa Environmental Protection Commission regarding emissions limit exceedences (which were settled in April, 2010) and to otherwise comply with air emissions requirements, Lincolnway Energy filed an application with the Iowa Department of Natural Resources on August 28, 2008 for Lincolnway Energy to obtain a new air quality permit under the 250 ton rules which were adopted in late 2007. Lincolnway Energy received its new operating air permit under the revised 250 ton rules on July 8, 2011.  The new permit does have more testing mandates, and Lincolnway Energy will be subject to higher ongoing compliance and operating costs to show compliance under the new air quality permit. Up to this issuance date, the Iowa Department of Natural Resources had issued a variance to Lincolnway Energy's present operating permit to allow Lincolnway Energy to operate at the higher production level requested within the new permit.  

The principal risks associated with the substantial governmental oversight and regulation of Lincolnway Energy and its business are discussed in Item 1A of this annual report, at "Lincolnway Energy's Operations Are Subject To Substantial and Extensive Governmental Laws and Regulations Which Restrict and Increase the Cost of Lincolnway Energy's Business".

The ethanol industry is also substantially supported by and dependent upon various federal and state programs, including various subsidies, tax exemptions and other forms of financial incentives. Some of those programs and the principal risks associated with the governmental support of the ethanol industry are discussed in Item 1A of this annual report, under "Loss of Current Governmental Support and Incentives for Ethanol Could Reduce the Use of Ethanol and Materially and Adversely Affect Lincolnway Energy's Results of Operations and Financial Position".


Employees

As of December 15, 2011, Lincolnway Energy had 42 employees, with 3 open positions.











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Item 1A.        Risk Factors.

Any of the following risks could significantly and adversely affect Lincolnway Energy's prospects, business, results of operation and financial condition.  The following risks are not the only risks Lincolnway Energy is subject to or may face, and they are not intended to be set forth in order of materiality or significance. An investment in units of Lincolnway Energy involves substantial risk, and is a speculative investment.
 
Risks Relating to Lincolnway Energy and Its Business

The Economy And The Ethanol Industry Continue To Be Subject To Generally Difficult Market, Credit And Other Circumstances The United States and virtually all international economies are still widely viewed as facing difficult and uncertain economic circumstances that may continue well into 2012, and perhaps longer. The United States and nearly all international economic circumstances include a shortage of available loans and credit to many industries, significant unemployment, flat or falling profits or losses in many industries, volatile stock and other investment markets, individual and business failures and bankruptcies, significant deficit spending and "bailout" programs by governments, and uncertain business and consumer confidence.

The ethanol industry has been similarly affected. For example, lenders and the credit markets have been generally unfavorable to the ethanol industry during the last two to four years, and the lack of available credit is one factor that has played a part in the proposed construction or expansion of some ethanol plants being canceled or indefinitely delayed. The ethanol industry also experienced decreasing profits over portions of that time period, and many ethanol plants experienced losses over most or some of that time period. The ethanol industry has also struggled with volatile corn prices, and record high corn prices, during parts of the last three years. The record high corn prices, coupled with declining ethanol prices, negatively impacted profits, and caused some ethanol companies to declare bankruptcy or to halt construction or expansion projects and/or to delay the opening of recently completed ethanol plants during 2008 and 2009.

There continues to be a substantial amount of political and economic uncertainty surrounding the budget deficit and related budget and tax issues in the United States. It is not clear at this time what exact measures will be taken to address those various and complex issues, but substantial cuts in the federal budget and changes to the tax code, including the elimination of various tax incentives and deductions and possibly higher tax rates, are likely to occur. Nearly all of the states are facing similar political, economic, budget and tax issues. The possible outcomes to, and effects of, all of those issues are very difficult to analyze or predict at this time, but there will almost certainly be some adverse effects, at least in some ways and for some period of time, on certain groups or sectors of the economy, and perhaps the economy as a whole. Similar issues are also being faced by many other countries.

There is also uncertainty in the economy arising from continuing terrorism concerns, both in the United States and internationally, and the uncertainties and difficulties in Pakistan, Afghanistan, Iraq and Iran.

There is a substantial amount of civil unrest and other political uncertainty in the Middle East and other oil producing nations, and there have been changes in the government in some countries, with additional and further changes appearing to be very likely. It is not possible to predict with any certainty at this time the possible end results of the unrest and changes in government, and how that may affect oil supplies and prices, the general stability of those countries and the region, and those countries' economies and relationship with the United States. The results could, however, be materially adverse to the United States in general and to energy related industries, such as ethanol.

Lincolnway Energy is therefore still operating in an uncertain and volatile economic and industry environment.


Lincolnway Energy Is Heavily Dependent On A Management Team And Certain Suppliers And Service Providers, But Could Lose Any Of Their Services At Any Time.  Lincolnway Energy is heavily dependent upon its core management team of its president and chief executive officer, chief financial officer, plant manager, commodities manager and controller, as well as on the companies which provide coal and corn to Lincolnway Energy and the companies which market Lincolnway Energy's ethanol and distiller's grains.  If any of those management team members or companies terminate their services or for any reason cease to provide services to Lincolnway Energy, Lincolnway Energy's business and operations could be adversely affected in a sudden and material way.  The services could be lost for reasons outside of anyone's control, such as death or disability.  The marketing companies may also be heavily dependent upon one or more key employees or other relationships, and the loss of any of those employees or relationships by a company could adversely affect the company's ability to continue to provide timely and quality services to Lincolnway Energy.

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Lincolnway Energy Is Subject To Risk Because Its Ethanol Plant Utilizes Coal.  The primary energy source for Lincolnway Energy's ethanol plant is coal.  The use of coal is subject to numerous federal and state regulations, including regarding permissible emissions levels.

Lincolnway Energy's ability to comply with the emissions and other requirements arising from its use of coal will depend to a degree on the type and quality of coal that is provided to Lincolnway Energy by its coal supplier.  If the coal does not meet the content and quality standards anticipated by Lincolnway Energy, Lincolnway Energy may not be able to meet its emissions and other regulatory and permit conditions and requirements.

As global warming and climate change issues become more prevalent and accepted, there will likely be increased governmental and public sentiment for more regulation of the use of coal as a source of energy.  Coal is generally viewed unfavorably in any "carbon footprint" type analysis in any event, but may be viewed even more unfavorably when used by an ethanol plant because some experts and federal and state regulatory agencies are taking the position that the ethanol industry in general also performs poorly in any carbon footprint and/or land use type analysis.  One result of those types of analysis will likely be stricter emissions requirements, which could lead to the need for capital expenditures in order to meet those requirements and higher ongoing compliance and operating costs.  Those expenditures and costs could be material, and adversely affect Lincolnway Energy's results of operation and business.

Lincolnway Energy believes there will be increased regulatory requirements for coal at some point in the future.

The use, storage and handling of coal also creates risks related to dust explosions and fire.  Although Lincolnway Energy will take precautions to try to avoid those types of incidents, there is no assurance that those precautions will be successful in every circumstance.

The use of coal also generates fly ash, and Lincolnway Energy may face economic, logistic and environmental issues and difficulties in disposing of its fly ash.

Lincolnway Energy currently obtains all of its coal from one coal supplier.  If the agreement is terminated or if that supplier fails to perform for any reason, Lincolnway Energy might face an interruption in the supply of coal and have to seek an alternate supply source.  Lincolnway Energy does not have any agreement with any alternative suppliers at this time. As with natural gas and other energy sources, coal supplies can be subject to interruption by weather, strikes, transportation, and production problems that can cause supply interruptions or shortages.  Lincolnway Energy has coal storage for approximately 6 days of continuous ethanol production, and an interruption in the supply of coal beyond that period could cause Lincolnway Energy to temporarily halt or discontinue the production of ethanol.

Lincolnway Energy May Not Be Successful In Converting To Another Fuel Source For Its Plant, And Even If It Is Successful, There Will Be Other Risks Associated With Other Fuel Sources.  Lincolnway Energy is considering the possibility of changing the energy source for its plant from coal to another source or sources, such as wood waste, agricultural residues  and/or construction and demolition waste.  There is not, however, any assurance that Lincolnway Energy will be successful in converting its plant from coal to another energy source because the conversion involves various material considerations and issues, including regulatory, technological and financial considerations and issues.  You therefore should not assume that Lincolnway Energy will be able to convert its plant to another energy source, or on economical terms.

Even if Lincolnway Energy determines that it is technologically and economically feasible to convert its plant to another energy source, and is able to successfully implement the conversion, Lincolnway Energy will still face regulatory and other risks related to another energy source.  For example, there will still be air permit and emission limits requirements and issues that will need to be met by Lincolnway Energy.  As another example, Lincolnway Energy will need to be able to secure adequate sources of supply of the other energy source at an economical price, and from reputable third parties.  Some of the other possible energy sources, such as woodwastes, may vary in availability from time to time due to various factors, such as the economic circumstances of the industry in question.  For example, the availability of woodwaste from the construction industry will decline when the construction industry is struggling, such as was the case at the time of the preparation of this annual report.  Some of these other risks are not as equally applicable to coal.







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If Lincolnway Energy Ever Expands Or Attempts To Convert Its Plant To Another Fuel or Cellulosic Source, It Will Be Subject To The Risks Inherent In The Development And Construction Process.  If Lincolnway Energy ever determines to expand its existing ethanol plant or to pursue the construction of an additional ethanol plant, or to convert its plant to a fuel source other than coal or to convert from corn to a cellulosic source, Lincolnway Energy will be subject to the numerous material risks and uncertainties inherent in the development and construction process.  For example, it may be difficult to identify a suitable location for another ethanol plant because many favorable locations have already been acquired by other ethanol plants or ethanol plant developers.  Lincolnway Energy also believes that it could be difficult to obtain the necessary financing, at least at this time, given the generally unfavorable debt and equity financing market for the ethanol industry at the time of the preparation of this annual report.  Any expansion of Lincolnway Energy's plant or conversion of the plant to another fuel or cellulosic source may also involve some down time for the plant, which would in turn result in decreased ethanol and distiller's grain production.

Lincolnway Energy May Make Other Investments Or Engage In Other Business.  Lincolnway Energy's board has the authority to cause Lincolnway Energy to construct or acquire or to invest in other ethanol plants or to make other investments or to engage in other businesses.  The scope and nature of Lincolnway Energy's business could therefore change significantly, which could expose Lincolnway Energy to numerous other risks and uncertainties.  Lincolnway Energy's business may not always be limited only to owning and operating its current ethanol plant.

Lincolnway Energy Is Leveraged And Has Debt And Debt Service Requirements.  Lincolnway Energy financed the construction and start-up of its ethanol plant with significant debt, and Lincolnway Energy will have loans outstanding from time to time under its operating and working lines of credit.  Lincolnway Energy has, however, lowered its outstanding debt since it commenced ethanol production in 2006 from $34,612,543 to $4,190,430 as of September 30, 2011.  Lincolnway Energy therefore does not believe that it was substantially leveraged at the time of the preparation of this annual report.

Lincolnway Energy may, however, increase its debt in the future, and the use of leverage creates risks.  For example, if Lincolnway Energy ever became unable to generate profits and cash flow to service its debt and its ongoing operations and working capital needs, Lincolnway Energy could be forced to reduce or delay capital expenditures or any expansion plans, sell assets or operations, obtain additional loans or capital or attempt to restructure its loans and other debt.  Lincolnway Energy also may not be able to renew, extend or replace any existing loans or financing arrangements Lincolnway Energy may have in place from time to time.  If any of those events occur, Lincolnway Energy will need to attempt to obtain additional financing through the sale of additional units or debt in Lincolnway Energy or through additional loans from other lenders, but there is no assurance that any of those steps would be successful.

Lincolnway Energy will also need to comply with the various restrictions and covenants that will be included as part of Lincolnway Energy's credit and loan agreements.  The restrictions and covenants will likely include prohibitions or restrictions on incurring additional debt, granting additional security interests or liens, acquiring additional assets, mergers, the issuance of additional units, and making distributions to Lincolnway Energy's members.  The credit and loan agreements will also likely require Lincolnway Energy to maintain various financial ratios and other similar financial covenants.  Those restrictions and requirements may limit Lincolnway Energy's flexibility in planning for, or reacting to, competition or changes in the ethanol industry and Lincolnway Energy's ability to pursue other perceived business opportunities.

Lincolnway Energy's loans are secured by liens on all of Lincolnway Energy's assets, and if Lincolnway Energy breaches any of its agreements with its lenders, the lenders will be able to foreclose on Lincolnway Energy's assets.

Lincolnway Energy's Financing Costs Will Rise If Interest Rates Increase.  Lincolnway Energy could be adversely affected by any increase in interest rates or other lending costs because Lincolnway Energy could likely generally have some outstanding loans or debt, which at times might be substantial.  Although difficult to predict and outside of Lincolnway Energy's control, it is possible that there may be increases in interest rates, at least over the longer term.

Lincolnway Energy's Potential Success Is Almost Exclusively Dependent On Ethanol Sales, And The Price Of Ethanol And Gasoline Can Vary Greatly And Are Beyond Lincolnway Energy's Control.  Although Lincolnway Energy's ethanol plant produces distiller's grains, corn oil and carbon dioxide, ethanol is the primary and material source of revenue for Lincolnway Energy, having generated approximately 80%, 83% and 80% of Lincolnway Energy's total revenues for the fiscal years ended September 30, 2009, 2010 and 2011, respectively.

Ethanol prices can vary significantly over both short and long term periods, and it is difficult to accurately predict changes in ethanol prices or in ethanol trends. As examples, the Chicago Board of Trade price of ethanol was $3.068 on July 27, 2011, but was at $1.901 on September 7, 2010, and was $2.365 on November 9, 2010, but was at $1.495 on July 28, 2010.



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The price of gasoline also varies significantly over both short and long term periods. The price for ethanol has generally had some correlation to the price of gasoline, so low gasoline prices or reductions in gasoline prices will also generally reduce ethanol prices and profitability.

The higher prices for gasoline over the past two years have caused businesses and consumers to actively seek ways to lower or reduce their gasoline consumption. For example, there is increased attention to requiring the auto industry to produce cars with higher fuel efficiency. Higher gasoline prices also increase the focus and attention on the research and development of alternative energy options, such as fuel cells. The existence of higher gasoline prices can therefore also adversely affect gasoline and ethanol prices and the profitability of ethanol plants.

On the other hand, if ethanol becomes more expensive than gasoline, blenders have little incentive to buy more ethanol beyond that required to meet the federal renewable fuel standards, and that incentive will become even less in that circumstance if the federal 45 cent per gallon tax credit is not extended past December 31, 2011.

Lincolnway Energy's inability to foresee or accurately predict changes in the supply or prices of ethanol or gasoline will adversely affect Lincolnway Energy's business.

If ethanol prices decline to the point where it is unprofitable to produce ethanol and remain at that level, Lincolnway Energy could be required to suspend operations until the price increases to the level where it is once again economical or profitable to produce and market the ethanol. Any suspension of operations would have a material adverse effect on Lincolnway Energy's business, results of operations and financial condition. Some ethanol plants have delayed opening or have curtailed production due to the unfavorable market conditions which were in existence over the two to four year period preceding the date of this annual report.

Even if ethanol prices are generally favorable, Lincolnway Energy still may not be able to sell all of its ethanol, or at favorable prices.

Increases In Supplies Of Ethanol May Adversely Affect Ethanol And Ethanol Byproduct Prices.  Lincolnway Energy anticipates that there will continue to be increases in ethanol production over the long term, both in the United States and internationally.  For example, there will need to be increased ethanol production in order to meet the renewable fuels standards that were part of the Energy Independence and Security Act of 2007.

The existing renewable fuels standard requirements may at least provide some indirect price support as ethanol production increases to meet those standards, but it is possible that increasing ethanol production may at times lead or contribute to lower ethanol prices.  For example, at least currently, the demand for ethanol is primarily driven by the renewable fuels standard requirements, as opposed to general consumer demand, so if ethanol production exceeds the amounts required to meet the renewable fuels standard, there could be excess ethanol available, which would lower ethanol prices.

Excess ethanol production capacity could also result from decreases in demand for ethanol, which could result from a number of factors, such as regulatory developments at the federal or state level, reduced gasoline consumption in the United States or advancements in alternatives to gasoline or in other gasoline additives.

Any increase in ethanol production will also lead to increases in distillers' grains and corn oil production, and increased supplies of those products could also lead to lower prices for those products.

Continued Growth In The Ethanol Industry Depends On Use Of Increased Ethanol Blends And Related Expansion Of Infrastructure, Change In Public Views And Regulatory Support, Which May Not Occur On A Timely Basis, If At All.  Most experts believe that for ethanol use to grow significantly over both the near and longer term, there must be increased use of ethanol blends in excess of 10%, such as E15, E20, E30 and, in particular, E85. Although the U.S. Environmental Protection Agency approved the use of E15 in 2011, the approval was limited to vehicles manufactured in 2001 or earlier. There are also various areas that need development and expansion in order for there to be any material increase in the use of higher ethanol blends, including E15, such as expanded production of flex fuel vehicles and the expanded use of pumps that can utilize higher ethanol blends, such as blender pumps. A blender pump allows a driver to fill his or her vehicle with any blend of ethanol from 0% to 85% depending on the type of vehicle they drive. There will likely need to be government subsidies and support, however, in order to cause service stations to install those types of pumps, and there is increasing support in Congress to discontinue, or to not renew, those support programs, and it is likely that those programs will be discontinued at some point. There will also need to be changes in the public's views and perceptions of ethanol in order for there to be increased use of higher blends of ethanol, as well as regulatory developments at both the federal and state level which allow the use of, and promote the use of, higher ethanol blends and the use of blender pumps and flex fuel vehicles.

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Reports continue to be issued by various groups, however, such as the National Research Council, that question the use of ethanol and other biofuels, both from an economic and environmental perspective. Ethanol organizations disagree with, and respond to, most of those types of reports, but the reports continue to cause governmental, regulatory and public perception concerns and issues for the ethanol industry.

Lincolnway Energy's Results Of Operations, Financial Position And Business Outlook Will Likely Fluctuate Substantially Because Lincolnway Energy's Business Is Highly Dependent On Commodity Prices, Which Are Subject To Significant Volatility And Uncertainty, And On The Availability Of Raw Materials Supplies.  Lincolnway Energy's results of operations will be substantially dependent on commodity prices, especially prices for corn, coal, ethanol and unleaded gasoline. The prices of these commodities are volatile and beyond Lincolnway Energy's control.

Lincolnway Energy estimates that corn costs will, on the average, make up approximately 77% of Lincolnway Energy's total annual operating costs, but the percentage could be higher or lower dependent on the price of corn from time to time. Accordingly, rising corn prices could lower profit margins, and, at certain levels, corn prices would make ethanol uneconomical to produce and to use in the fuel markets. For example, corn prices began to rise significantly in approximately July, 2006 (when the cash corn price in Lincolnway Energy's local market area was approximately $2.09 per bushel) and generally continued to rise until mid-year 2008 (when the cash corn price in Lincolnway Energy's local market area reached approximately $7.15 per bushel). The cash corn price in Lincolnway Energy's local market area was approximately $5.81 per bushel as of November 30, 2011, as opposed to approximately $5.32 per bushel as of November 30, 2010. The corn price on the Chicago Board of Trade daily futures ranged from a low of $5.35 per bushel to a high of $7.60 per bushel during Lincolnway Energy's fiscal year ended September 30, 2011, and from a low of $3.25 per bushel to a high of $5.29 per bushel during Lincolnway Energy's fiscal year ended September 30, 2010.

The supply and price of corn are influenced by many factors, including drought, hail and other adverse weather conditions; insects or disease; farmer planting decisions; imports; government policies and subsidies with respect to agriculture and international trade; and global and local demand and supply. The price for corn in the market area encompassing Lincolnway Energy's ethanol plant could be higher than the corn price payable in other markets. Lincolnway Energy will also compete for corn with the livestock producers and elevators located within Lincolnway Energy's market area.

There is also uncertainty regarding climate change, and any climate changes could adversely affect corn production in Lincolnway Energy's primary market area or other corn production areas in the United States and elsewhere, and thereby both the supply and price of corn.

Lincolnway Energy's gross margin will depend significantly on the spread between ethanol and corn prices, and in particular the spread (sometimes referred to as the crush spread) between the price of a gallon of ethanol and the price for the amount of corn required to produce a gallon of ethanol. The price of ethanol and corn fluctuates frequently and widely, however, so any favorable spread between ethanol and corn prices which may exist from time to time cannot be relied upon as indicative of the future. It is possible for the circumstance to arise where corn costs increase and ethanol prices decrease to the point where Lincolnway Energy could be required to suspend operations, as some other ethanol plants did during 2008 and parts of 2009. Any suspension of operations could have a material adverse effect on Lincolnway Energy's business, results of operations and financial condition.
 
The supply and cost of other inputs needed by Lincolnway Energy can also vary greatly, such as coal, electric and other energy costs. Lincolnway Energy's ethanol plant utilizes coal as its primary energy source, and Lincolnway Energy estimates that coal costs will, on average, make up approximately 4% of Lincolnway Energy's annual total operating costs. The prices for and availability of coal are subject to numerous market conditions and factors which are beyond Lincolnway Energy's control. Significant disruptions in the supply of coal would impair Lincolnway Energy's ability to produce ethanol, and increases in coal prices or changes in Lincolnway Energy's coal costs relative to the costs paid by Lincolnway Energy's competitors would adversely affect Lincolnway Energy's competitiveness and results of operation and financial position.

Lincolnway Energy may attempt to offset a portion of the effects of such fluctuations by entering into forward contracts to supply ethanol or to purchase corn, coal or other items or by engaging in hedging and other futures related activities, but those activities also involve substantial risks and may be ineffective to mitigate price fluctuations and may in fact lead to substantial losses.
Transportation issues and costs can also be a factor in the price for ethanol because ethanol is currently shipped by truck or by rail, and not by pipeline, and because ethanol generally needs to be shipped relatively long distances to a terminal where the ethanol can be blended with gasoline.



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Lincolnway Energy's inability to foresee or accurately predict changes in the supply or prices of ethanol or of corn, coal and other inputs will adversely affect Lincolnway Energy's business, results of operation and financial position. Also, as a result of the volatility of the prices for these commodities, Lincolnway Energy's results will likely fluctuate substantially over time. Lincolnway Energy will experience periods during which the prices for ethanol and distiller's grains decline and the costs of Lincolnway Energy's raw materials increase, which will result in lower profits or operating losses and which will adversely affect Lincolnway Energy's financial condition.

There Are Many Factors Important To The Success Of An Ethanol Plant That Are Beyond The Control Of Lincolnway Energy.  Lincolnway Energy's ability to successfully operate its ethanol plant and to market the ethanol, distillers grains and corn oil produced at the plant are subject to numerous factors and risks.

Some of those factors and risks relate directly to Lincolnway Energy, such as Lincolnway Energy's ability to retain qualified employees and other personnel, and on favorable terms, labor disputes or other employee issues, and unforeseen accidents at, or damages to, Lincolnway Energy's plant or other facilities.
  
Some of the factors and risks relate to the fact that the agricultural economy and the economy in general, and market prices and futures prices for oil, gasoline, ethanol, distiller's grains, corn oil, corn, coal and other inputs needed for Lincolnway Energy's ethanol operation, are all highly volatile and are influenced by many varying factors.  It is not possible to identify all possibly relevant factors, but some of the factors include the following and rumors or speculation about the following:

Changing supply and demand relationships and trade deficit issues;
Weather and other environmental conditions;
Acts of God, including drought and storms;
Agricultural, fiscal, monetary, economic, trade and exchange control programs and policies of governments;
International, national, regional and local political and economic events and policies;
Changes in fuel and energy costs or in interest rates or rates of inflation;
Controversies or disputes about the use of biotechnology in crops, or errors or adverse reactions caused by the use of biotechnology in crops;
Infestations or diseases in crops;
Acts of terrorism or war, both nationally and internationally;
Railcar or truck shortages or strikes within those industries;
Environmental and other regulations which impact both the demand for ethanol and the cost of operation of an ethanol plant;
Governmental incentives related to ethanol;
Illegal or improper activities or scandals by participants in the markets, such as those that have previously occurred in the accounting industry, the stock and mutual fund industry and the insurance industry; and
The general emotions and psychology of businesses, consumers and of the market place in general, which at times can be totally unrelated to actual economic or market conditions or other more tangible factors.

The internet, e-mail, television and other forms of communication allow rumors and speculation to be quickly and widely circulated, which can have immediate and substantial effects on the markets, even if the rumor or speculation is later found to be incorrect or unjustified.

It is very likely that there will be further acts of terrorism in the United States and abroad, including the possibility of acts aimed at disrupting the economy or the markets or various industries or sectors within the markets.  For example, there has been speculation about possible acts of terrorism aimed at the energy, agricultural and food industries.  Any speculation or rumors about, or actual acts of, terrorism could cause immediate and substantial reactions in a wide range of the markets and industries and in the economy in general.  The continued uncertainty in Afghanistan, Pakistan and the Middle East also continues to create uncertainties and could cause adverse reactions in the oil and energy markets and in the markets and economy in general.

Most of the above factors or occurrences cannot be controlled by Lincolnway Energy, and it will be impossible to always accurately predict or identify which factors are relevant or are likely to occur.

Also, even if Lincolnway Energy were somehow able to have fully current and correct information as to all factors, prices would still not always react as predicted or as would seem likely given the information.  For example, there have been many occasions where the movements of the futures markets have seemed totally unrelated to actual supply and demand and other more tangible factors.  The latter fact may be caused, in part, because of the substantial speculative trading that occurs in the futures markets.


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The Use Of The Futures Markets By Lincolnway Energy Could Be Unsuccessful And Result In Substantial Losses.  Lincolnway Energy will likely attempt to minimize the effects of the volatility of corn, coal, ethanol, distiller's grains and other prices by entering into forward pricing contracts and taking positions in the futures markets. The primary intent of those positions will be to attempt to protect the supply of, and the price at which Lincolnway Energy can buy, corn, coal or other inputs and the price at which Lincolnway Energy can sell its ethanol, but not all of the positions may be able to be properly categorized as being for hedging purposes.

Any attempt by Lincolnway Energy to use forward pricing contracts or the futures markets, whether in the form of hedging strategies or for more speculative trading purposes, may be unsuccessful, and in fact could result in substantial losses because commodity price movements and price movements in futures contracts and options are highly volatile and speculative, and are influenced by many factors which are beyond the control of anyone. Some of those factors include those noted above in "There Are Many Factors Important To The Success Of An Ethanol Plant That Are Beyond The Control Of Lincolnway Energy."

Lincolnway Energy will likely vary the amount of forward pricing, hedging and other risk mitigation strategies Lincolnway Energy may undertake, and Lincolnway Energy may at times choose not to engage in any such transactions. As a result, Lincolnway Energy's results of operations and financial position may be adversely affected by increases in the price of corn or coal or decreases in the price of ethanol or unleaded gasoline.

Futures markets will also sometimes be illiquid, and Lincolnway Energy may not be able to execute a buy or sell order at the desired price, or to close out an open position in a timely manner. The inability to close out an open position in a timely manner may result in substantial losses to Lincolnway Energy. Lincolnway Energy's potential losses and liabilities for any futures or options positions are not limited to margin amounts or to the amount held in or the value of Lincolnway Energy's trading account, and in the event of a deficiency in Lincolnway Energy's trading account due to a margin call made to the trading account, a loss exceeding the value of the trading account, or otherwise, Lincolnway Energy will be responsible for the full amount of the deficiency. Given the volatility of futures trading, margin calls can occur frequently and the amount of a margin call can be significant.

Losses from trades in the futures markets, coupled with the volatility in the corn markets and record high corn prices, are factors that have caused some ethanol companies to incur significant losses and, in some cases, to seek bankruptcy protection.

Lincolnway Energy's Operations Are Subject To Substantial And Extensive Governmental Laws And Regulations Which Restrict And Increase The Costs Of Lincolnway Energy's Business.  Lincolnway Energy's ethanol operations are subject to substantial and extensive governmental laws and regulations, including those relating to the discharge of materials into the air, water or ground, and the generation, storage, handling, use, transportation and disposal of hazardous materials. Some of those laws and regulations require Lincolnway Energy to maintain various permits and other approvals in order to continue ongoing operations. Lincolnway Energy will need to meet the various requirements and conditions necessary to the issuance and maintenance of those permits and approvals. The requirements and conditions may include that the ethanol plant facilities and operations meet various specifications regarding air quality, discharge, water and waste treatment, and various other operational matters. Lincolnway Energy's compliance with all necessary permits, approvals and laws and regulations will increase Lincolnway Energy's costs and expenses. Lincolnway Energy's failure to comply with those requirements or to maintain those permits and approvals may result in fines or penalties, the loss of the right to continue operations or claims by third parties.

Lincolnway Energy also anticipates that there will be changes in the approval requirements and other laws and regulations over time, and that those changes will increase the regulatory oversight and costs and expenses of Lincolnway Energy. For example, the regulation of the environment, including the use of water, wastewater, storm water and air emissions, is a constantly changing area of the law, and it is likely that more stringent federal or state environmental laws, rules or regulations, or interpretation or enforcement of existing laws, rules or regulations, could be adopted which would require Lincolnway Energy to make substantial capital expenditures and/or increase Lincolnway Energy's operating costs and expenses. New laws, rules and regulations may be advanced based upon claims related to global warming and climate change. It is also possible that federal or state environmental laws, rules or regulations could be adopted which have an adverse effect on the use of ethanol, such as changes in the regulations regarding the required oxygen content of automobile fumes. The new laws, rules or regulations could also arise or become necessary because of currently unknown conditions or problems arising from the production or use of ethanol, similar to what have occurred with methyl tertiary-butyl ether (MTBE) because of the adverse environmental and health issues now known to be caused by MTBE.

Lincolnway Energy believes that increased regulation of plants powered by coal, such as Lincolnway Energy's ethanol plant, is particularly likely. Lincolnway Energy also foresees the possibility of increased regulation of ethanol plants arising from carbon footprint and life cycle and indirect land use change type analysis by regulators.



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For example, in 2009, the State of California adopted a state low carbon fuels standard, which requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which are measured using a life cycle analysis that includes indirect land use change considerations. The current predominant views on how to apply a life cycle and indirect land use change analysis (including those of the United States EPA) generally lead to results that are not favorable to coal or to ethanol, and that is the case for California. The practical effect of California's low carbon fuel standard is that it precludes grain-based ethanol from outside California.

The Renewable Fuels Association, together with other parties, have filed a lawsuit challenging California's low carbon fuel standard on the grounds that it violates both the supremacy clause and the commerce clause of the U.S. Constitution. California represents a significant ethanol market, and if corn based ethanol cannot be utilized in California, it could significantly reduce demand for corn-based ethanol such as that produced by Lincolnway Energy. Various other states are also looking at implementing low carbon fuel standard requirements for their states, so the outcome of the California lawsuit could have significant effects on the ethanol industry.

Lincolnway Energy May Become Subject To Various Environmental And Health And Safety And Property Damage Type Claims And Liabilities.  The nature of Lincolnway Energy's operations will expose it to the risk of environmental and health and safety claims and property damage claims. For example, if any of Lincolnway Energy's operations are found to have polluted the air or surface water or ground water, such as through an ethanol spill, Lincolnway Energy could become liable for substantial investigation, clean-up and remediation costs, both for its own property and for the property of others that may have been affected by the pollution or spill. Those types of claims could also be made against Lincolnway Energy based upon the acts or omissions of other persons, including persons transporting or handling ethanol. Environmental and property damages claims and issues can also arise due to spills, losses or other occurrences arising from events outside of Lincolnway Energy's control and which are possible in Lincolnway Energy's business, such as fire, explosions or blowouts.

A serious environmental violation or repeated environmental violation could result in Lincolnway Energy being unable to construct or operate any additional ethanol plants and the loss of defenses to nuisance suits. Lincolnway Energy may also be unable to obtain financing or necessary permits if Lincolnway Energy is subject to any pending administrative or legal action regarding environmental matters.

Any of those types of events could have a material adverse effect on Lincolnway Energy's financial condition and future prospects.

There Is Continuing Negative Press And Public Sentiment Against The Ethanol Industry Which Could Lead To Reduced Governmental And Public Support For The Use Of Ethanol.  There continues to be negative press and public sentiment against the ethanol industry based upon claims that the use of corn to produce ethanol drives up grain prices, which hurts livestock farmers and also consumers due to increased food prices.  The claims also include environmental type allegations, including that increased corn acreage and ethanol production could strain water supplies and worsen pollution in rivers and streams.  The criticisms also include that ethanol production is leading to land use changes, including the clearing of rain forests and other native lands for purposes of growing corn or other crops to be used for the production of ethanol or to replace land which is now used to produce crops for ethanol, which in turn releases carbon into the atmosphere that has been stored in the soil and otherwise has negative environmental impacts.  The continuing and growing criticism has come from, among others, environmental groups, the National Academy of Sciences, the American Lung Association and through the United Nations.

The negative press and public sentiment is also developing towards the "next generation" biofuels that are a significant component of achieving the use mandates in the renewable fuels standards. Those biofuels are those made from nonfeed stocks/cellulose, such as corn stalks, wheat straw, grasses and trees. Some organizations, including the National Resource Council, have recently issued reports critical of those biofuels, including that those biofuels are not economical without heavy government subsidies and will not have any positive overall environmental effect, and may have negative environmental results.

The criticism of the ethanol and biofuels industry could lead to reduced governmental supports for the industry and reduced public support and use of ethanol and other biofuels. The current criticisms regarding ethanol are based primarily on the production of ethanol from corn, and could accelerate the development of other economical sources for the production of ethanol and the development of other biofuels. Lincolnway Energy's plant can only produce ethanol from corn.

Loss Of Current Governmental Support And Incentives For Ethanol Could Reduce The Use Of Ethanol And Materially And Adversely Affect Lincolnway Energy's Results Of Operations And Financial Position.  There are various federal and state laws and regulations and programs which have lead to the increasing use of ethanol, including various subsidies, tax exemptions and other forms of financial incentives. Some of the laws provide economic incentives to produce or use ethanol and other biofuels and some of the laws mandate the use of ethanol and other biofuels.

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No guarantee can be given that any of those laws, regulations or programs will be continued, and the revocation or amendment of any one or more of those laws, regulations or programs could adversely affect the future use and price of ethanol in a material way. Governmental support of the ethanol industry may decrease due to governmental budget issues. The current governmental support of the ethanol industry may also decrease as the ethanol industry matures and advances, or in the event of any adverse environmental or other occurrences in the ethanol industry.

For example, a current, material legislative risk to the ethanol industry is that Congress only extended the various ethanol tax incentives, including the 45¢ per gallon blenders credit for ethanol use and the 54¢ secondary tariff on imported ethanol, through December 31, 2011. It appears that this credit will not be extended into 2012. The loss of those tax incentives could have materially adverse effects on the ethanol industry.

Another current legislative risk is that Congress will discontinue the programs providing incentives for the installation of blender pumps that permit the use of ethanol blends above E10. Votes were taken in June of 2011 and proposed in October of 2011 to discontinue those programs, and the proposals were only narrowly defeated.

As noted above, the ethanol and biofuels industry has received substantial negative press as of late regarding the possible negative effects and side effects of ethanol and other biofuels production. Any negative public sentiment could lead to decreases in governmental support of the ethanol industry.

Another continuing regulatory or governmental support issue for the ethanol industry is the fact that current law and infrastructure effectively preclude the use of higher ethanol blends in conventional automobiles, sometimes referred to as the "blend wall." The prior permitted blend amount was E10. Advocates lobbied the EPA and Congress for years to increase the permitted percentage for all vehicles from anywhere to 12% to 20%, but the EPA elected in 2011 to only permit E15 and only for use in automobiles produced in 2001 or later. The EPA's action was not viewed as significant to the ethanol industry because of the limitation to vehicles made in 2001 or later and also because many retailers do not have the proper dispensing equipment needed in order to offer E15.

One key component of the federal government's support for the ethanol industry is the renewable fuels standard that arose out of the Energy Independence and Security Act of 2007. Under that legislation, the renewable fuels mandate was increased to 36 billion gallons by 2022, with that requirement broken down among conventional biofuel, which includes ethanol derived from corn starch, advanced biofuels and cellulosic biofuels.

Some other key areas of legislative interest in the ethanol industry are increasing the required use of flexible fuel vehicles, particularly E85 vehicles, and blender pumps, and providing incentives to develop and utilize blender pumps. A current legislative risk is that Congress will discontinue the programs providing incentives for the installation of blender pumps that permit the use of ethanol blends above E10. Votes were taken in June of 2011 and proposed in October of 2011 to discontinue those programs, and the proposals were only narrowly defeated.

The actions of states are also important to the ethanol industry, and some states, such as Iowa and Minnesota, have various requirements which support the ethanol industry. A key state, however, California, has passed a low carbon fuel standard which will effectively shut out grain-based ethanol from outside California in the coming years. As noted elsewhere, a lawsuit has been brought challenging California's low carbon fuel standard, and the outcome of that litigation could have significant effects on the ethanol industry, in particular if California's legislation is allowed to stand, and other states adopt similar legislation. The legislation adopted by California, and any other similar legislation that would be adopted by any other states, could make it difficult to timely meet the renewable fuels standard.

Interruptions In The Supply Of Water, Electricity, Coal Or Other Energy Sources Or Other Interruptions In Production Would Have An Adverse Effect On Lincolnway Energy's Ethanol Plant.  Interruptions in the supply of water, electricity, coal or other energy sources at Lincolnway Energy's ethanol plant would have a material adverse impact on operations, and could require Lincolnway Energy to halt production at the ethanol plant.

Interruptions in or the loss of the supply of water, electricity, coal or other energy sources could occur, for example, because of software or other computer problems at the ethanol plant or at the plants of the suppliers of the water, electricity, coal or other energy.  Lincolnway Energy's and any suppliers' use of its software and other computer systems will be subject to attack by computer hackers, and to failure or interruption through equipment failures, viruses, acts of God and other events beyond the control of Lincolnway Energy or a supplier.




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Lincolnway Energy's operations are also subject to significant interruption if its ethanol plant experiences a major accident or is damaged by severe weather or other natural disasters.  Lincolnway Energy's operations are also subject to labor disruptions and unscheduled down time, and other operational hazards inherent in the ethanol industry, such as equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents and natural disasters.  Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties against Lincolnway Energy.

Lincolnway Energy's business is dependent upon the continuing availability of railroads, railcars, truck fleets and other infrastructure necessary for the production, transportation and use of ethanol.  Any disruptions or interruptions in that infrastructure could have a material adverse effect on Lincolnway Energy.

Lincolnway Energy may not have insurance covering any of these types of matters or occurrences.  Any insurance Lincolnway Energy may have in place may not be adequate to fully cover the potential losses and hazards, and Lincolnway Energy may not be able to renew the insurance on commercially reasonable terms or at all.

Competition From Other Ethanol Producers Or Energy Sources Could Adversely Affect Lincolnway Energy And Could Reduce Lincolnway Energy's Profitability.  The ethanol industry is competitive and will likely become increasingly more competitive.  The competitors include both regional farmer-owned entities, and also the major oil companies and other large companies.  The U.S. ethanol industry may also face increasing competition from international suppliers of ethanol.

Any increase in domestic or foreign competition could cause Lincolnway Energy to have to reduce its prices and take other steps to compete effectively, which could adversely affect Lincolnway Energy's results of operations and financial position.

Many competitors will have greater production capacity and/or greater capital or other financial resources, any of which may make it difficult for Lincolnway Energy to compete with the competitor.  A competitor may also offer other products or services that are not offered by Lincolnway Energy, which may give the competitor an additional advantage over Lincolnway Energy.

An ethanol plant utilizing corn to produce ethanol will also experience competition from other plants which produce ethanol from other products. For example, ethanol can be produced from corn stover, rice straw, wheat, cheese whey, potatoes, wheat, oats, barley straw, milo, sorghum, sugar bogasse, rice hulls, various wastes (such as wood and vegetation) and cellulose based biomass. Various federal incentives have been enacted to encourage and support the development of cellulosic based ethanol production, and the Energy Independence and Security Act of 2007 provides that 16 billion gallons of the 36 billion gallon renewable fuels mandate for 2022 must come from cellulosic biofuel. Approximately 25 companies were developing cellulosic based ethanol plants as of January 2011. Cellulosic and other ethanol technologies are viewed by many as the "next generation" ethanol technologies.

Although Lincolnway Energy believes there will continue to be a place for corn based ethanol production within the ethanol industry, it is possible that at some point in the future governmental and public support of the ethanol industry may be focused primarily upon, and provide significant advantages or benefits to, cellulosic and other developing ethanol technologies, which could have adverse effects on Lincolnway Energy and corn based ethanol production in general. The requirements for the use of cellulosic and other advanced biofuels in the 2007 energy act are evidence of the government's support of, and trending to, those types of biofuels. The public may also eventually support cellulosic and other advanced biofuels because of the perception that those types of biofuels do not have some of the perceived negative effects of corn based ethanol, such as the food and fuel debate, given that cellulosic and other advanced biofuels are not made from products otherwise used in the food chain and are in some cases produced from "waste" products.

It is also possible that one or more of the other sources of products for ethanol production may from time to time have greater advantages than corn, which would adversely affect an ethanol plant that produces ethanol solely from corn. For example, a plant using one of those sources may be able to produce ethanol on a more economical basis or on a more efficient or greater scale. The increased production of ethanol from any of those sources could also adversely affect the price for ethanol generally. Lincolnway Energy's ethanol plant is designed to produce ethanol only from corn.

Some competitors operate their ethanol plant and produce ethanol using different sources of energy than coal, or using various other sources of energy. The other sources of energy include natural gas and various forms of waste type products such as wood, tires, construction waste and manure. Those competitors may have lower production and input costs and/or higher operating efficiencies than Lincolnway Energy, which would allow them to produce and market their ethanol at lower prices than Lincolnway Energy.

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Competition from newly developed fuel additives would also reduce the use of ethanol and Lincolnway Energy's profitability. Although it is difficult to predict if any new fuel additives will be developed, it will likely occur at some point, and it could be in the near future.

Research is also continually being conducted for alternatives to petroleum based fuel products and for additional renewable fuel products. For example, research is ongoing regarding the use of hydrogen, electric or solar powered vehicles and fuel cells. A breakthrough or discovery in any research could conceivably occur at any time, and will occur at some point, and could have the effect of greatly reducing the use of ethanol or of even making the use of ethanol obsolete over time. There will be increased incentives to develop alternatives to petroleum based fuel products given the recent high gasoline prices and uncertainty in the Middle East. It is also commonly agreed that the dependence of the U.S. on foreign oil places the U.S. in difficult political and economic circumstances, and the federal government will likely assist in the development of alternatives to petroleum based fuel products given the issues that arise from the dependence of the U.S. on foreign oil.


Technological Advances Could Make Lincolnway Energy's Ethanol Plant Less Competitive.  Technological advances in the processes and procedures for producing ethanol and in the efficiency of ethanol plants are continually occurring, and further ongoing advances should be expected.  It is possible that those advances could make the processes and procedures that are utilized at Lincolnway Energy's ethanol plant or the ethanol and/or other by-products produced at the ethanol plant less competitive when compared to other producers.  Any modifications or changes to Lincolnway Energy's ethanol plant to utilize any new technology could be technologically or cost prohibitive, and could, at least initially, reduce Lincolnway Energy's profitability.

There Are Potential Conflicts Of Interest In The Structure And Operation Of Lincolnway Energy.  Although Lincolnway Energy does not believe any conflict of interest exists which in practice will be detrimental to Lincolnway Energy, potential conflicts of interest do exist in the structure and operation of Lincolnway Energy and its business.    For example, the directors and officers of Lincolnway Energy are not required to devote their full time or attention to Lincolnway Energy, and they are all involved in other full time businesses and may provide services to others.  Some of the directors or officers might be owners or otherwise interested in other ethanol plants.  The directors and the officers will experience conflicts of interest in allocating their time and services between Lincolnway Energy and their other businesses and interests.

The various companies that provide marketing and other services to Lincolnway Energy are also not required to devote their full time or attention to those services, and they will very likely be involved in other ethanol plants and ethanol related businesses and possibly other businesses or ventures, including having ownership or other interests in other ethanol plants.  The companies will therefore experience conflicts of interest in allocating their time and services between Lincolnway Energy and their various other ethanol plants or business ventures.  The companies providing ethanol and distiller's grains marketing services to Lincolnway Energy will be providing those same services to other ethanol plants, and may experience conflicts of interest in allocating favorable sales and sales when the supply of ethanol or distiller's grains exceeds the demand.

Risks Relating To Lincolnway Energy's Units.

Lincolnway Energy's Units Are Not A Liquid Investment.  No market exists for Lincolnway Energy's units.  A market will not develop for the units because the units are not freely transferable and can only be sold, assigned or otherwise transferred in compliance with the federal and applicable state securities laws and the terms and conditions of the second amended and restated operating agreement and unit assignment policy of Lincolnway Energy, which require the prior approval of the board for all sales and assignments of any units.  The restrictions set out in the securities laws, the second amended and restated operating agreement and the unit assignment policy may at times preclude the transfer of a unit.  The units are therefore not a liquid investment.


There Is No Guarantee Of Any Distributions From Lincolnway Energy.  Lincolnway Energy is not required to make any distributions to its members.  Lincolnway Energy could also be prohibited, or at least limited or restricted, from making any distributions under the terms of Lincolnway Energy's credit and loan agreements.  Lincolnway Energy's financial situation may also not allow it to make any distributions to its members in any event.  The payment of distributions will also always be at the discretion of the board of Lincolnway Energy and will depend on, among other things, the board's analysis of Lincolnway Energy's earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions regarding the payment of distributions and any other considerations that the board deems relevant.  There is therefore no assurance of regular distributions, or any distributions at all, to Lincolnway Energy's members.




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The Staggered Terms Of Lincolnway Energy's Board May Delay Or Prevent Lincolnway Energy's Acquisition By A Third Party.  Lincolnway Energy's second amended and restated operating agreement provides for three classes of directors, based upon the term of office, with each director holding a three year term.  Some view that type of provision as making more difficult, or as deterring, a merger, tender offer or acquisition involving Lincolnway Energy that might result in the members receiving a premium for their units.

Taxation And Other Risks.

Members Will Owe Taxes On Lincolnway Energy's Profits But May Never Receive Any Distributions From Lincolnway Energy.  Lincolnway Energy is not required to make any distributions, and it is possible that no distributions will be made by Lincolnway Energy, even if Lincolnway Energy has profits.

Any Lincolnway Energy profits will be taxable to its members in accordance with the members' respective percentage ownership of the units, whether or not the profits have been distributed.  Even if distributions are made, the distributions may not equal the taxes payable by a member on the member's share of Lincolnway Energy's profits.

Lincolnway Energy could also sustain losses offsetting the profits of a prior tax period, so a member might never receive a distribution or be able to sell the member's units for an amount equal to the taxes which have already been paid by the member.

The Internal Revenue Service Could Challenge Allocations And Audit Lincolnway Energy's Tax Returns.  The second amended and restated operating agreement of Lincolnway Energy provides for the allocation of profits, losses and credits among the members.  The Internal Revenue Service might challenge those allocations and reallocate various items in a manner which reduces deductions or increases income to the members, both of which would result in additional tax liability for members.

The Internal Revenue Service might also audit Lincolnway Energy's returns, and adjustments might be required as a result of an audit.  If an audit results in an adjustment, members could be required to file amended returns and to pay back taxes, plus interest and possibly penalties.  The members' tax returns might also be audited.

The Tax Laws May Change To The Detriment Of Lincolnway Energy And Its Members.  It is possible that the current federal and/or state tax treatment given to an investment in the units or to Lincolnway Energy may be changed by subsequent legislative, administrative or judicial action.  Any such changes could significantly alter the tax consequences and decrease the after tax rate of return on investment in the units.

For example, although Lincolnway Energy anticipates being treated as a partnership for tax purposes, if for some reason Lincolnway Energy was classified or treated as a corporation, or Lincolnway Energy's board determined that it would be beneficial for Lincolnway Energy and its members for Lincolnway Energy to become taxed as a corporation, Lincolnway Energy would pay corporate income tax and no profits or losses would flow through to the members.  The payment of taxes by Lincolnway Energy would lower the cash available for distribution to the members, and any distributions would be taxed to the members as dividends.

Software Problems And Computer Viruses May Have A Materially Adverse Effect Upon Lincolnway Energy.  Lincolnway Energy will utilize various software applications in connection with its ethanol operation.  There is no assurance that the operation of any software or other computer systems will be uninterrupted or error free or will otherwise be successful.  There is also no assurance or guarantee that the software will continue to be available to Lincolnway Energy or that the software will be able to be maintained and updated as necessary from time to time.

Lincolnway Energy 's use of its software and other computer systems will be subject to attack by computer hackers and to failure or interruption through viruses or acts of God or other occurrences beyond the control of Lincolnway Energy, such as computer failure, communications line failure, power failure, mechanical failure, equipment malfunction or failure, and lightning.

The refiners, suppliers and other persons who Lincolnway Energy has business relationships with are also subject to the same software and computer system risks, and may affect their ability to do business with Lincolnway Energy.

Any problems with any software or other computer systems might have material adverse effects on Lincolnway Energy.

Item 1B.    Unresolved Staff Comments.

This Item is not applicable to Lincolnway Energy because Lincolnway Energy is not an accelerated filer, a large accelerated filer or a well-known seasoned issuer, as those terms are defined in the rules of the Securities and Exchange Commission.

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Item 2.    Properties.

Lincolnway Energy's office and its ethanol plant are located on approximately 64 acres in Nevada, Iowa. Iowa.  Lincolnway Energy owns the real estate and its office and ethanol plant, but all of those properties are subject to a first mortgage and security interest held by Lincolnway Energy's primary lender, CoBank, and to other security interest held by the Iowa Department of Transportation.

Lincolnway Energy's office building has approximately 1,400 square feet.  Lincolnway Energy utilizes the office building for office space for Lincolnway Energy's management and other staff.  Lincolnway Energy was utilizing approximately 90% of the available office space as of the date of this annual report, with the remaining 10% being available to accommodate any expansion of Lincolnway Energy's staff.  The office building also includes grain receiving facilities.

Lincolnway Energy's ethanol plant and related facilities include the following material buildings and related fixtures and equipment:
process building containing lab, offices and control room;
maintenance building containing offices, storage and a welding shop;
administration building containing furniture and fixtures, office equipment, computers, telephone system, board room and grain receiving; and
rail spur, paved access roads, dryers, evaporators, fermenters, grain bins and storage facilities for ethanol and distiller's grains.

Lincolnway Energy also owns approximately 147 acres of real estate which is adjacent to the 64 acre parcel noted above.  Lincolnway Energy purchased a portion of this real estate for use in the construction of additional railroad spur tracks, and the remainder of real estate is for future development.  Except as noted in the following paragraph, Lincolnway Energy does not, however, have any definite plans for the use of the real estate in Lincolnway Energy's ethanol operations, and most of the real estate will likely be custom farmed during 2012.

Lincolnway Energy, LLC is just completing the construction of an additional 9,372 feet of rail spur to Lincolnway Energy's existing track. Lincolnway Energy began the dirt work for the additional rail spur in October 2010, and Lincolnway Energy signed the agreement for the construction of the rail spur in June 2011. The current estimated cost of the additional rail spur project is $3.4 million. The primary purpose for constructing the additional rail spur is to add rail car capacity so that Lincolnway Energy will be able to ship ethanol in unit trains, which generally means a rail shipment of between at least 84 cars and generally up to 100 rail cars. It will also allow Lincolnway Energy to have a sorting track for 20 cars.

Lincolnway Energy had also owned an additional 59.05 acres of real estate that was also adjacent to Lincolnway Energy's 64 acre parcel noted above. The 59.05 acres were sold to DuPont Danisco Cellulosic Ethanol, LLC on October 5, 2011. The sale of the real estate is discussed in more detail in Item 1 above in this annual report.

Lincolnway Energy leases 120 hopper rail cars which are used for transporting distiller's grains. Lincolnway Energy has a lease for 90 hopper rail cars for a three year term which is scheduled to expire in March 2014 and a month to month lease agreement for an additional 30 hopper rail cars. Lincolnway Energy also leases 130 tank rail cars that are used for transporting ethanol. The scheduled term of leases goes to March 2014 for 30 cars and September, 2016 for 100 cars.

Lincolnway Energy also leases various miscellaneous office equipment and equipment utilized in the operation of the ethanol plant.

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Item 3.    Legal Proceedings.

Except as noted in the following paragraph, as of the date of this annual report, Lincolnway Energy was not aware of any material pending legal proceeding to which Lincolnway Energy was a party or of which any of Lincolnway Energy's property was the subject, other than ordinary routine litigation, if any, that was incidental to Lincolnway Energy's business. As of the date of this annual report, Lincolnway Energy was not aware that any governmental authority was contemplating any material proceeding against Lincolnway Energy or any of Lincolnway Energy's property.

A Complaint for Patent Infringement was filed against Lincolnway Energy and certain other parties on May 3, 2010 by GS CleanTech Corporation, a wholly owned subsidiary of Green Shift Corporation. The Complaint was filed in the United States District Court for the Northern District of Iowa, Western Division, as Case No. 5:10-cv-04036. The Complaint alleges, in general, that the corn oil extraction equipment and related processes used by Lincolnway Energy and the other parties infringes upon one or more of the claims under certain patents held by GS CleanTech Corporation. The Complaint seeks injunctive relief, an award of damages with interest, and any other remedies available under certain patent statutes or otherwise under law. The Complaint claims damages of at least a reasonable royalty rate and lost profits. The Complaint also alleges that the alleged infringing conduct by Lincolnway Energy is willful, resulting in the right to recover treble damages and attorney fees pursuant to 35 U.S.C. §284. The case has been transferred to the United States District Court for the Southern District of Indiana pursuant to Multi-District Litigation proceedings. The initial claims construction hearing has been held, and the United States District Court has construed the disputed terms. Various discovery activities, motions and other procedural actions have also been made or taken. Lincolnway Energy, however, is unable as of the date of this annual report to determine if the Complaint will have a material adverse effect on Lincolnway Energy.











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PART II

Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Lincolnway Energy is authorized to issue an unlimited number of units, but member approval is required in order to issue more than 45,608 units.  Lincolnway Energy had 42,049 outstanding units as of November 30, 2011, which were held of record by 969 different members.  The determination of the number of members is based upon the number of record holders of the units as reflected in Lincolnway Energy's internal unit records.

Lincolnway Energy did not issue any units during the fiscal year ended September 30, 2011.

Lincolnway Energy's units are not listed on any exchange, and there is no public trading market for Lincolnway Energy's units.  An investment in Lincolnway Energy's units is not a liquid investment because the second amended and restated operating agreement of Lincolnway Energy establishes various conditions on the issuance of additional units and various restrictions on the sale, assignment or other transfer of units.

The second amended and restated operating agreement of Lincolnway Energy provides that the board of Lincolnway Energy may not issue any units for a consideration or value of less than $500 per unit or issue more than an aggregate of 45,608 units, without the vote of the members, except that the directors of Lincolnway Energy may effectuate a split of the outstanding units into a lesser or greater number of units, based upon a uniform multiple, without the vote of the members.  In that event, the $500 amount and the 45,608 amount shall also be increased or decreased in accordance with the multiple that was utilized in the split of the units.  The second amended and restated operating agreement also provides that Lincolnway Energy may not issue any units to any director or officer of Lincolnway Energy in their capacity as such, without the vote of the members.  The necessary vote in any of the circumstances described in this paragraph is the vote of the members holding at least a majority of the outstanding units represented at a meeting at which a quorum of the members is present.  The members holding at least 25% of the outstanding units constitute a quorum at any meeting of the members.

The second amended and restated operating agreement of Lincolnway Energy also provides that no member shall, directly or indirectly, own, hold or control more than 49% of the outstanding units at any time, unless the member exceeds that percentage by reason of Lincolnway Energy purchasing units.  The second amended and restated operating agreement provides that for this purpose a member will be deemed to indirectly own, hold and control all units which are owned by the member's spouse or any of the member's parents or minor children and by any entity of which any one or more of the member or any of those relatives owns at least 10% of the outstanding voting equity of the entity.

The second amended and restated operating agreement of Lincolnway Energy also establishes restrictions on the sale, assignment or other transfer of units.

The second amended and restated operating agreement provides that a member may not sell, transfer, assign or otherwise dispose of or convey any units, whether voluntarily or involuntarily, or grant a security interest in any units, except in compliance with the second amended and restated operating agreement and also only with the prior written approval of the board of Lincolnway Energy and in compliance and accordance with the policies and procedures as may be adopted from time to time by the board.  The board is authorized to adopt and implement those policies and procedures for any reasonable purpose, as determined by the board.  A reasonable purpose includes prohibiting, restricting, limiting, delaying or placing conditions on any assignment of units which, alone or together with any other past or anticipated assignments, would or might reasonably be determined to:

Violate or cause Lincolnway Energy to violate or to otherwise be in noncompliance with any law, rule, regulation or order, including any securities law, rule, regulation or order;
Cause Lincolnway Energy to be taxed as a corporation for tax purposes, including by reason of Section 7704 of the Internal Revenue Code of 1986;
Result in the termination of Lincolnway Energy or Lincolnway Energy's tax year for tax purposes, including under Section 708 of the Internal Revenue Code of 1986, or cause the application to Lincolnway Energy of Sections 168(g)(1)(B) or 168(h) of the Internal Revenue Code of 1986 or similar or analogous rules;
Violate any term or condition of the second amended and restated operating agreement, including the 49% ownership limitation noted above;
Violate or cause Lincolnway Energy to violate or to otherwise be in noncompliance with any law, rule, regulation or order applicable to Lincolnway Energy's selection or use of its then current fiscal year, including Section 444 of the Internal Revenue Code of 1986;

24



Require Lincolnway Energy to become licensed, registered or regulated as an investment company, a broker-dealer or any other form of regulated entity under any law, rule, regulation or order; or
Create or result in any fractional units.

The policies and procedures adopted by the board regarding the assignment of units are referred to as the unit assignment policy.  Lincolnway Energy's current unit assignment policy mirrors the terms of the second amended and restated operating agreement and provides that all assignments require the prior approval of the board, and that the board may prohibit, restrict, limit, delay or place conditions on any assignment which might have any of the effects described in the preceding subparagraphs.  Several of those potential effects could be applicable to Lincolnway Energy at any given time.

One example that will be applicable to Lincolnway Energy on an ongoing basis arises from the fact that Lincolnway Energy is taxable as a partnership for income tax purposes.  There are various statutes and regulations that Lincolnway Energy must comply with in order to maintain that tax classification.  One applicable statute and related regulation is Section 7704 of the Internal Revenue Code of 1986 and Section 1.7704-1 of the Treasury Regulations.  Section 7704 provides, in general, that a partnership which becomes a publicly traded partnership under Section 7704 will be taxed as a corporation.  Section 7704 provides that a publicly traded partnership is a partnership whose interests either are traded on an established securities market or are readily tradable on a secondary market or the substantial equivalent.  Section 1.7704-1 sets forth some rules for making a determination of whether a partnership is readily tradable on a secondary market or the substantial equivalent for that purpose, and establishes some specified processes and procedures as "safe harbors" under the publicly traded partnership rules.  The safe harbors include a limited matching service and a limited repurchase option.

The general rule under the publicly traded partnership rules is that no more than 2% of a partnership's outstanding units may be transferred during any taxable year, unless the partnership has established one of the safe harbors that are available under the publicly traded partnership rules.  As noted above, the safe harbors include a limited matching service and a limited repurchase option.  If one or both of those processes have been established, a partnership may permit the transfer of up to an aggregate of 10% of the partnership's outstanding units during any taxable year, so long as no more than 2% of the transfers occur outside of the matching service or the repurchase option and all of the other transfers are made in accordance with the terms of the matching service or the repurchase option.

Lincolnway Energy has established a qualified matching service on Lincolnway Energy's website, and the second amended and restated operating agreement of Lincolnway Energy includes a repurchase provision which complies with the safe harbor for a repurchase option under the publicly traded partnership rules.  There are numerous conditions and requirements in both the qualified matching service and the repurchase option, so neither provides any significant liquidity for Lincolnway Energy's units.  Also, Lincolnway Energy has no obligation to purchase any units under the repurchase provisions in the second amended and restated operating agreement.

Lincolnway Energy has not made any repurchases of its units pursuant to the repurchase provisions set forth in the second amended and restated operating agreement.

There have been some sales of units pursuant to Lincolnway Energy's qualified matching service.  The purchase price and other terms of any transactions pursuant to Lincolnway Energy's qualified matching service are negotiated and established solely by the seller and the buyer.  Lincolnway Energy does not endorse or recommend any sale of units and is not responsible for the fairness of the purchase price paid in any transactions made pursuant to the qualified matching service, or for the payment or other terms of any transaction.  Lincolnway Energy therefore does not represent or guarantee in any way that any of the prices paid pursuant to the qualified matching service are fair or accurately reflect the value of Lincolnway Energy's units, and Lincolnway Energy does not endorse or recommend any sales of units at any of the prices listed by a member in the qualified matching service or on the same or similar terms.

The publicly traded partnership rules exclude some types of transfers from the 2% and 10% limitations.  As an example, a gift of units by a member to certain family members of the member is not counted towards the 2% and 10% limitations.

Another example of a transfer limitation that currently will be applicable to Lincolnway Energy on an ongoing basis arises from the fact that Lincolnway Energy has elected to utilize a September 30 fiscal year end.  Given that fact, no more than 5% of Lincolnway Energy's units can be owned by pass-through type entities, such as Subchapter S corporations, limited liability companies or partnerships.  At the time of the preparation of this annual report, Lincolnway Energy was at the 5% maximum amount, so no transfers of any units to a pass-through type entity were permitted.




25



The second amended and restated operating agreement and the unit assignment policy both contemplate that a member desiring to assign any units must present Lincolnway Energy with a unit assignment application and any other information requested by the board.  The board is not required to act on a unit assignment application until the next regularly scheduled meeting of the board which follows the date on which Lincolnway Energy receives the completed and executed unit assignment application.

An assignment of a unit which is approved by the board will be effective for all purposes, including for purposes of allocations and distributions, only as of the date determined by the board, but the date must be within 32 days of the date of the approval of the assignment by the board.  Lincolnway Energy believes that approach is necessary in order to provide a uniform effective date for assignments of units.

The unit assignment policy also provides that Lincolnway Energy may require the assigning member or the assignee to provide a legal opinion to Lincolnway Energy regarding the assignment, and that Lincolnway Energy may require that Lincolnway Energy be paid or reimbursed for all of its fees, costs and expenses incurred in connection with any assignment, including legal and accounting fees.

As of the date of this annual report, Lincolnway Energy did not have any equity compensation plans (including any individual equity compensation arrangements) in place for any directors, officers, employees or other persons.

As of the date of this annual report, Lincolnway Energy had no plans to, and had not agreed to register any of its units under any federal or state securities laws.

There were no outstanding warrants, options or other rights to purchase any units of Lincolnway Energy as of the date of this annual report, and there were no outstanding securities which were convertible or exchangeable into or for any units of Lincolnway Energy.  Lincolnway Energy's units are not convertible into any other securities.

The payment of distributions to members by Lincolnway Energy is within the discretion of the board of Lincolnway Energy, and there is no assurance of any distributions from Lincolnway Energy.  The payment of distributions is also subject to Lincolnway Energy's compliance with the various covenants and requirements of Lincolnway Energy's credit and loan agreements, and it is possible that those covenants and requirements will at times prevent Lincolnway Energy from paying a distribution to its members.

Lincolnway Energy has declared five distributions since Lincolnway Energy was organized in May 2004.  The first distribution was declared in November 2006 and was in the amount of $150 per unit, resulting in an aggregate distribution of $6,428,850.  The second distribution was declared in May 2007, and was in the amount of $200 per unit, resulting in an aggregate distribution of $8,409,800.  The third distribution was declared in November 2007, and was in the amount of $125 per unit, resulting in an aggregate distribution of $5,256,125.  The fourth distribution was declared in May 2008, and was in the amount of $75 per unit, resulting in an aggregate distribution of $3,153,675.  The fifth distribution was declared in February 2010, and was in the amount of $50 per unit, resulting in an aggregate distribution of $2,102,450.

Lincolnway Energy does not contemplate being able to establish a definite or regular distribution policy or history because the determination of whether a distribution can or should be made by Lincolnway Energy will need to be made by the board of Lincolnway Energy based upon the then existing facts and circumstances of Lincolnway Energy, which could change materially from time to time. For example, although a distribution was declared in November of both 2006 and 2007 and in May of both 2007 and 2008, the board of Lincolnway Energy determined that no distribution should be made by Lincolnway Energy during November 2008, May 2009 or in November 2009, given the generally unfavorable economic outlook and the prevailing conditions in the ethanol industry. As noted above, Lincolnway Energy did declare a distribution in February of 2010, but it was at a lower per unit amount than the prior distributions by Lincolnway Energy. Also, no distribution was declared in November of 2010 or in February or November of 2011. Although no firm decision has been made, it is possible that no, or perhaps reduced, distributions will be declared and paid by Lincolnway Energy during the fiscal year ending September 30, 2012.

None of Lincolnway Energy's units were purchased by or on behalf of Lincolnway Energy or any affiliated purchaser (as defined in Rule 10b-18(a)(3) of the Securities Exchange Act of 1934) of Lincolnway Energy during the period of July 1, 2011 to September 30, 2011. As of the date of this annual report, Lincolnway Energy did not have any publicly announced plans or programs with respect to purchases of its units.

26




Item 6.    Selected Financial Data.

The following information is summary selected financial data for Lincolnway Energy for the fiscal years ended September 30, 2011, 2010, 2009, 2008 and 2007 with respect to statements of operations data and balance sheet data. The data is qualified by, and must be read in conjunction with, Item 1A of this annual report, "Risk Factors", Item 7 of this annual report, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and with the financial statements and supplementary data included in Item 8 of this annual report.

Statements of Operations Data:
2011
 
2010
 
2009
 
2008
 
2007
Revenues
$
173,951,126

 
$
114,373,268

 
$
110,223,531

 
$
147,040,911

 
$
118,783,540

Cost of goods sold
169,817,362

 
106,744,081

 
113,576,938

 
138,309,541

 
94,233,456

Gross profit(loss)
4,133,764

 
7,629,187

 
(3,353,407
)
 
8,731,370

 
24,550,084

General and administrative expense
2,649,796

 
2,440,390

 
2,366,638

 
2,647,368

 
2,903,436

Operating income (loss)
1,483,968

 
5,188,797

 
(5,720,045
)
 
6,084,002

 
21,646,648

Interest expense
(593,461
)
 
(851,358
)
 
(860,303
)
 
(1,430,469
)
 
(2,228,179
)
Other income-interest and grant
9,542

 
25,019

 
165,007

 
181,895

 
536,897

Net income (loss)
$
900,049

 
$
4,362,458

 
$
(6,415,341
)
 
$
4,835,428

 
$
19,955,366

Weighted average units outstanding
42,049

 
42,049

 
42,049

 
42,049

 
42,519

Net income (loss) per unit - basic and diluted
$
21.40

 
$
103.75

 
$
(152.57
)
 
$
115.00

 
$
469.33

Cash distributions per unit
$

 
$
50.00

 
$

 
$
200.00

 
$
350.00


 
2011
 
2010
 
2009
 
2008
 
2007
Working Capital
$
10,403,670

 
$
11,493,635

 
$
6,670,560

 
$
10,216,873

 
$
11,845,308

Net Property Plant & Equipment
$
44,693,362

 
$
49,821,446

 
$
57,293,563

 
$
65,010,487

 
$
71,617,762

Total Assets
$
61,198,788

 
$
65,898,900

 
$
71,092,101

 
$
90,516,722

 
$
88,820,957

Long-Term Obligations
$
3,188,021

 
$
9,859,711

 
$
14,938,584

 
$
19,998,369

 
$
24,743,372

Members' Equity
$
53,139,309

 
$
52,239,260

 
$
49,979,252

 
$
56,394,593

 
$
59,968,965

Book Value per Member Unit
$
1,264

 
$
1,242

 
$
1,189

 
$
1,341

 
$
1,426


Lincolnway Energy's ethanol plant became operational during May 2006.

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Except for the historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties, and which speak only as of the date of this annual report.  No one should place strong or undue reliance on any forward looking statements.  Lincolnway Energy's actual results or actions may differ materially from these forward-looking statements for many reasons, including the risks described in Item 1A and elsewhere in this annual report.  This Item should be read in conjunction with the financial statements and related notes and with the understanding that Lincolnway Energy's actual future results may be materially different from what is currently expected or projected by Lincolnway Energy.

Overview

Lincolnway Energy is an Iowa limited liability company that operates a dry mill, coal fired ethanol plant located in Nevada, Iowa. Lincolnway Energy has been processing corn into fuel grade ethanol and distillers grains since May 22, 2006. The ethanol plant has a nameplate production capacity of 50,000,000 gallons, which, at that capacity, would also generate approximately 136,000 tons of distillers' grains per year. The ethanol plant produced 57,071,798 gallons of ethanol and 154,767 tons of distillers' grains during the fiscal year ended September 30, 2011. Lincolnway Energy had a planned shut down during the months of October, 2010 and May, 2011 to complete routine maintenance work.

Lincolnway Energy's plant also produces corn oil and carbon dioxide.

27




Lincolnway Energy's revenues for the fiscal year ended September 30, 2011 were derived from the sale of Lincolnway Energy's ethanol to Green Plains Trading Group, LLC. (GPTG), the sale of its distiller's grains to Hawkeye Gold, LLC, the sale of its corn oil to FEC Solutions, LLC (FECS), and the sale of its carbon dioxide to EPCO Carbon Dioxide Products, Inc.

Lincolnway Energy's ethanol was sold pursuant to an ethanol marketing agreement between Lincolnway Energy and GPTG that became effective on October 1, 2009. The purchase price payable to Lincolnway Energy is GPTG's contract selling price for the ethanol in question, less various costs and a fee to GPTG. The ethanol marketing agreement includes a minimum purchase price. Title and all risk of loss and damage to all ethanol commences at the time the ethanol passes across the inlet flange into the rail cars or trucks of the GPTG carrier at the Lincolnway Energy plant.

Lincolnway Energy's output of distiller's grains is sold to Hawkeye Gold, LLC under a Distiller's Grains Marketing Agreement that became effective on October 1, 2007. Lincolnway Energy pays Hawkeye Gold, LLC a marketing fee for dried distiller's grains equal to the greater of 2% of the FOB plant price for the dried distiller's grains in question or a per-ton fee of $1.30 for the dried distiller's grains. The marketing fee for wet distiller's grains is the greater of 3% of the FOB plant price for the wet distiller's grains in question or a per-ton fee of $1.00 for the wet distiller's grains. The Distiller's Grains Marketing Agreement can be terminated by Lincolnway Energy or Hawkeye Gold, LLC on 90 days written notice.

Lincolnway Energy has extracted corn oil from the syrup that is generated in the production of ethanol since April, 2008. FECS has purchased all of Lincolnway Energy's output of corn oil for resale by FECS since April, 2008, and currently pursuant to an agreement that became effective on October 13, 2008. Lincolnway Energy pays FECS a marketing and technical assistance fee of 5% of the FOB sales price of the corn oil. The agreement has an initial term of 36 months, commencing from October 13, 2008, and can renew for successive 36 month terms unless Lincolnway Energy or FECS elects to terminate the agreement at the end of the then current 36 month term.

Lincolnway Energy entered into agreements on April 16, 2010 with EPCO Carbon Dioxide Products, Inc. pursuant to which EPCO constructed a plant on Lincolnway Energy's site to collect the carbon dioxide which is produced as part of the ethanol production process and to convert that raw carbon dioxide into liquid carbon dioxide gas. EPCO also markets and sells the liquid carbon dioxide under those agreements. The EPCO plant became fully operational in August 2010. The purchase price payable by EPCO for the carbon dioxide provided by Lincolnway Energy is based upon EPCO's shipped tons of liquid carbon dioxide. The agreement set a fixed price per shipped ton for an initial period, and the current purchase price is the greater of the fixed per shipped ton price specified in the agreement or the margin price, as that term is defined in the agreement. EPCO has also agreed to a take or pay obligation for each year under the Agreement of the greater of 180 shipped tons per day or 70% of the annual liquid CO2 production capacity of the EPCO plant at fully capacity. The term of the marketing agreement with EPCO is ten years from the first date on which liquid carbon dioxide was produced at the EPCO plant, which occurred during August, 2010, unless the agreement is earlier terminated for any of the other reasons set out in the agreement.

Lincolnway Energy is dependent upon its agreements for the marketing and sale of its products, in particular ethanol and distillers' grains, and Lincolnway Energy's loss of those agreements could have material adverse effects on Lincolnway Energy.


Air Quality Permit

As part of the process of settling allegations of the Iowa Environmental Protection Commission regarding emissions limit exceedences (which were settled in April, 2010) and to otherwise comply with air emissions requirements, Lincolnway Energy filed an application with the Iowa Department of Natural Resources on August 28, 2008 for Lincolnway Energy to obtain a new air quality permit under the 250 ton rules which were adopted in late 2007. Lincolnway Energy received its new operating air permit under the revised 250 ton rules on July 8, 2011.  The new permit does have more testing mandates, and Lincolnway Energy will be subject to higher ongoing compliance and operating costs to show compliance under the new air quality permit. Up to this issuance date, the Iowa Department of Natural Resources had issued a variance to Lincolnway Energy's present operating permit to allow Lincolnway Energy to operate at the higher production level requested within the new permit.  








28



Comparison of Fiscal Years Ended September 30, 2011 and 2010
 
Statements of Operations Data:
2011
 
2010
 
Amount
 
%
 
Amount
 
%
Revenues
$
173,951,126

 
100.0

 
$
114,373,268

 
100.0

Cost of goods sold
169,817,362

 
97.6

 
106,744,081

 
93.3

Gross profit
4,133,764

 
2.4

 
7,629,187

 
6.7

General and administrative expense
2,649,796

 
1.5

 
2,440,390

 
2.1

Operating income
1,483,968

 
0.9

 
5,188,797

 
4.6

Interest expense
(593,461
)
 
(0.3
)
 
(851,358
)
 
(0.7
)
Other income-interest
9,542

 

 
25,019

 

Net income
$
900,049

 
0.6

 
$
4,362,458

 
3.9

 
Revenues from operations for the fiscal year ended September 30, 2011 were approximately $174.0 million, consisting of $138.5 million of ethanol sales (net of hedging activity) (80%), $31.7 million in distiller's grains sales (18%) and $3.8 million of corn oil, syrup and CO2 sales (2%).  Revenues increased in fiscal year 2011 by approximately 52.1%, when compared to the fiscal year 2010. Lincolnway Energy sold approximately 57.0 million gallons of ethanol at an average gross price of $2.45 per gallon, 143,760 tons of dried distillers grains at an average gross price of $215.26 per ton, and 11,706 tons of wet distillers grains at an average gross price of $65.76 per ton during the fiscal year ended September 30, 2011.  Lincolnway Energy also sold approximately 3,835 tons of corn oil at an average gross price of $892.00 per ton during the 2011 fiscal year.  The increase in revenues for the fiscal year ended September 30, 2011 resulted from a 3.4% increase in ethanol sales volume and a 42.4% increase in price for ethanol as compared to the previous fiscal year. Management believes the ethanol price increase is a result of higher corn and energy prices along with increased exports to Europe, Canada and Brazil which positively impacted ethanol demand during the 2011 fiscal year.  The revenues for the year ended September 30, 2011 include combined unrealized and realized net loss on derivative ethanol contracts of $1.1 million compared to a $1.4 million loss for the year ended September 30, 2010.

The average price Lincolnway Energy received for its dried distiller's grains increased to $215.26 per ton in fiscal year 2011, from $145.38 per ton in fiscal year 2010.    Management believes the increase in the price for distiller's grains is a result of the increase in the price of corn and increased domestic and export demand for dried distillers grains. Distiller grains are typically impacted by increases in corn prices as distillers grains are primarily used as an animal feed substitute for corn. Management anticipates continued strong demand for distillers grains due to higher corn prices.

Lincolnway Energy anticipates that its results of operations for the remainder of calendar year 2011 and for 2012 will continue to be affected by a surplus of ethanol and volatility in the commodity markets.

Lincolnway Energy's cost of goods sold for the fiscal year ended September 30, 2011 totaled approximately $169.8 million, which was an increase of 59.1% when compared to fiscal year 2010.  The increase in cost of goods sold for the 2011 fiscal year is primarily due to a 76.6% increase in the average cost of corn per bushel for fiscal year 2011 and a 3% increase in ethanol production for the 2011.  Cost of goods sold major components are: corn costs, energy costs, ingredient costs, production labor, repairs and maintenance, process depreciation, and ethanol and distiller's grain freight expense and marketing fees.


Corn costs excluding hedging activity for the fiscal year ended September 30, 2011 totaled approximately $126.0 million, compared to $70.4 million for fiscal year 2010. Approximately 20.0 million bushels of corn was ground during fiscal year 2011 at an average cost of $6.34 per bushel, compared to 19.7 million bushels at an average cost of $3.59 for fiscal year 2010. The increase in bushels ground was due to an increase in production during fiscal year 2011. The increase in corn price is partially attributed to an increase in corn demand that leads to tight corn supply and the rise of energy prices. Ethanol yields have improved in the fiscal year 2011 because of the quality of the corn crop harvested in 2011 compared to 2010. Corn hedging activity includes a combined unrealized and realized net loss of $3.0 million from derivative instruments compared to a $1.5 million combined unrealized and realized net gain for fiscal year 2010.  Corn costs, including the combined unrealized and realized net loss from derivative instruments, represented 76.1% of cost of goods sold for the fiscal year ended September 30, 2011, compared to 64.9% of costs of goods sold for fiscal year 2010.



29



Lincolnway Energy anticipates continued volatility in Lincolnway Energy's corn costs due to the timing of the change in value of the derivative instruments relative to the cost and use of the corn being hedged.

Energy costs for the fiscal year ended September 30, 2011 totaled approximately $9.6 million or 5.7% of cost of goods sold, compared to $8.8 million, or 8.2% of cost of goods sold, for the 2010 fiscal year.  Energy costs consist of coal costs, electricity and propane costs.  For the fiscal year ended September 30, 2011, Lincolnway Energy purchased approximately 102,029 tons of coal at an approximate total cost of $7.0 million compared to approximately 98,500 tons at an approximate cost of $6.0 million for fiscal year 2010. Electricity and propane costs amounted to approximately $2.4 million, a decrease of $.2 million from fiscal year 2010 and approximately $.3 million of sodium bicarbonate, sand and lime cost for fiscal year 2011 that is added to the combustor with the coal. The increase in energy cost is due to a price increase for coal and the increase in production gallons for the fiscal year 2011.

Ingredient costs for the fiscal year ended September 30, 2011 totaled approximately $7.1 million or 4% of cost of goods sold, compared to $5.1 million, or 4.8% of cost of goods sold, for the 2010 fiscal year.  Ingredient costs consist of denaturant, enzymes, fermentation and process chemicals. Denaturant costs (natural gasoline) increased $.9 million for the fiscal year ended September 30, 2011 compared to fiscal year 2010.  Denaturant cost have increased significantly from an average cost per gallon of $1.87 for the 2010 period, compared to $2.30 for the 2011 period. Enzymes, fermentation and process chemicals cost also increased by $1.1 million for the 2011 period compared to the 2010 period. The increase is a result of an increase in production gallons and also the price of chemicals were higher for the fiscal year 2011 compared to fiscal year 2010.

Production labor, repairs and maintenance and other plant costs totaled approximately $5.6 million, or 3.3% of cost of goods sold, for the fiscal year ended September 30, 2011, compared to $5.3 million, or 4.9% of cost of goods sold, for fiscal year 2010. The increase in cost is due to increased labor costs and higher repair and maintenance and plant cost due to increased production and the wear and tear on the plant.

Depreciation totaled approximately $7.5 million, or 4.4% of cost of goods sold, for the fiscal year ended September 30, 2011, compared to $7.6 million, or 7% of cost of goods sold, for fiscal year 2010.

Ethanol, distiller's grain and corn oil freight expense and marketing fees totaled approximately $10.6 million, or 6.2% of cost of goods sold, during the fiscal year ended September 30, 2011, compared to $10.4 million, or 9.8% of cost of goods sold, for fiscal year 2010.  The increase is due to an increase in sales of ethanol, distillers grain and corn oil for fiscal year 2011 compared to 2010.

General and administrative expenses totaled approximately $2.7 million during the fiscal year ended September 30, 2011, compared to $2.4 million for fiscal year 2010. The $.3 million increase is due to an increase in legal fees for the patent litigation and air permit appeal.

Other income and expense totaled approximately $.6 million net expense during the fiscal year ended September 30, 2011, compared to $.8 million net expense for fiscal year 2010. The decrease in net expense is due to a decrease in interest expense compared to 2010.








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30



Comparison of Fiscal Years Ended September 30, 2010 and 2009

Statements of Operations Data:
2010
 
2009
 
Amount
 
%
 
Amount
 
%
Revenues
$
114,373,268

 
100.0

 
$
110,223,531

 
100.0

Cost of goods sold
106,744,081

 
93.3

 
113,576,938

 
103.0

Gross profit(loss)
7,629,187

 
6.7

 
(3,353,407
)
 
(3.0
)
General and administrative expense
2,440,390

 
2.1

 
2,366,638

 
2.1

Operating income(loss)
5,188,797

 
4.6

 
(5,720,045
)
 
(5.1
)
Interest expense
(851,358
)
 
(0.7
)
 
(860,303
)
 
(0.8
)
Other income-interest and grant
25,019

 

 
165,007

 
0.1

Net income(loss)
$
4,362,458

 
3.9

 
$
(6,415,341
)
 
(5.8
)

Revenues from operations for the fiscal year ended September 30, 2010 were approximately $114.4 million, consisting of $93.2 million of ethanol sales (net of hedging activity) (81%), $19.4 million in distiller's grains sales (17%) and $1.7 million of corn oil, syrup and CO2 sales (2%).  Revenues increased in fiscal year 2010 by approximately 4%, when compared to the fiscal year 2009. Lincolnway Energy sold approximately 55.1 million gallons of ethanol at an average gross price of $1.72 per gallon, 129,958 tons of dried distillers grains at an average gross price of $145.38 per ton, and 19,892 tons of wet distillers grains at an average gross price of $27.19 per ton during the fiscal year ended September 30, 2010.  Lincolnway Energy also sold approximately 2,913 tons of corn oil at an average gross price of $508.00 per ton during the 2010 fiscal year.  The increase in revenues for the fiscal year ended September 30, 2010 resulted from a 4.4% increase in ethanol sales volume and a 3.0% increase in price for ethanol as compared to the previous fiscal year. The increase in sales volume was due to a maintenance shutdown that lasted longer than expected in the previous fiscal year and also plant improvements that were made in fiscal year ended September 30, 2010 that increased the production rate throughout the fiscal year.  The revenues for the year ended September 30, 2010 include a combined unrealized and realized net loss on derivative ethanol contracts of $1.4 million compared to a $10,440 gain for the year ended September 30, 2009.

The average price Lincolnway Energy received for its dried distiller's grains decreased to $145.38 per ton in fiscal year 2010, from $154.74 per ton in fiscal year 2009.  Management believed the decrease in the price for distiller's grains was a result of the decrease in the price of corn.   

Lincolnway Energy's cost of goods sold for the fiscal year ended September 30, 2010 totaled approximately $106.7 million, which was a decrease of 6% when compared to fiscal year 2009.  The decrease in cost of goods sold for the 2010 fiscal year was primarily due to a 3% decrease in the average cost of corn per bushel for fiscal year 2010.  Cost of goods sold major components are: corn costs, energy costs, ingredient costs, production labor, repairs and maintenance, process depreciation, and ethanol and distiller's grain freight expense and marketing fees.

Corn costs excluding hedging activity for the fiscal year ended September 30, 2010 totaled approximately $70.4 million, compared to $70.4 million for fiscal year 2009. Approximately 19.7 million bushels of corn was ground during fiscal year 2010 at an average cost of $3.59 per bushel, compared to 18.8 million bushels at an average cost of $3.70 for fiscal year 2009. The increase in bushels ground was due to an increase in production during fiscal year 2010. Corn hedging activity includes a combined unrealized and realized net gain of $1.5 million from derivative instruments compared to a $3.9 million combined unrealized and realized net loss for fiscal year 2009.  Corn costs, including the combined unrealized and realized net loss from derivative instruments, represented 64.9% of cost of goods sold for the fiscal year ended September 30, 2010, compared to 64.6% of costs of goods sold for fiscal year 2009.

Energy costs for the fiscal year ended September 30, 2010 totaled approximately $8.8 million or 8% of cost of goods sold, compared to $8.1 million, or 7% of cost of goods sold, for the 2009 fiscal year.  Energy costs consist of coal costs, electricity and propane costs.  For the fiscal year ended September 30, 2010, Lincolnway Energy purchased approximately 98,500 tons of coal at an approximate total cost of $6.0 million compared to approximately 95,000 tons at an approximate cost of $5.6 million for fiscal year 2009. Electricity and propane costs amounted to approximately $2.6 million, an increase of $.3 million from fiscal year 2009 and approximately $.3 million of sodium bicarbonate, sand and lime cost for fiscal year 2010 that is added to the combustor with the coal. The increase in energy cost was due to a price increase for coal and electricity and the increase in production gallons for the fiscal year 2010.

31




Ingredient costs for the fiscal year ended September 30, 2010 totaled approximately $5.0 million or 5% of cost of goods sold, compared to $5.3 million, or 5% of cost of goods sold, for the 2009 fiscal year.  Ingredient costs consist of denaturant, enzymes and process chemicals. Denaturant cost (natural gasoline) increased $.5 million for the fiscal year ended September 30, 2010 compared to fiscal year 2009.  Denaturant cost have increased significantly from an average cost per gallon of $1.38 for the 2009 period, compared to $1.87 for the 2010 period. The increase was offset by a decrease in process chemical costs of $.8 million for the 2010 period. The decrease was a result of chemical improvements that required less usage of process chemicals and also the price of a few process chemicals were lower for the fiscal year 2010 compared to fiscal year 2009.

Production labor, repairs and maintenance and other plant costs totaled approximately $5.3 million, or 4.9% of cost of goods sold, for the fiscal year ended September 30, 2010, compared to $4.8 million, or 4.2% of cost of goods sold, for fiscal year 2009. The increase in cost was due to increased labor costs and higher repair and maintenance and plant cost due to increased production and the wear and tear on the plant.

Depreciation totaled approximately $7.6 million, or 7% of cost of goods sold, for the fiscal year ended September 30, 2010, compared to $7.7 million, or 7% of cost of goods sold, for fiscal year 2009.

Ethanol, distiller's grain and corn oil freight expense and marketing fees totaled approximately $10.4 million, or 9.8% of cost of goods sold, during the fiscal year ended September 30, 2010, compared to $13.8 million, or 12% of cost of goods sold, for fiscal year 2009.  The decrease is in part due to changing ethanol marketers in the 2010 fiscal year.  The current ethanol marketer prices a majority of the ethanol contracts at an FOB price to Nevada, Iowa.  The freight is built into the price of ethanol rather than broken out as a separate cost.  The prior ethanol marketer sold a large percentage of ethanol on a delivered basis and the freight cost was separate.

General and administrative expenses totaled approximately $2.4 million during the fiscal year ended September 30, 2010, compared to $2.4 million for fiscal year 2009.

Other income and expense totaled approximately $.8 million net expense during the fiscal year ended September 30, 2010, compared to $.7 million net expense for fiscal year 2009. The increase in net expense is due to a decrease in other income for the 2010 fiscal year.

Risks, Trends and Factors that May Affect Future Operating Results

The operations and profitability of Lincolnway Energy are highly dependent on the prices of the key commodities utilized and sold as part of the production process.  These include corn, ethanol, and distillers’ grain co-products.  Since the correlation of prices between these commodities is not perfect, and is often very volatile, Lincolnway Energy is at risk of diminishing returns in periods of rising corn prices and decreasing ethanol prices.  The prices of these commodities is determined by a variety of factors, including growing season weather, governmental policies, political change, international trade, and macroeconomic trends.  Lincolnway Energy attempts to mitigate or hedge some of these risks through the use of various pricing mechanisms including cash contracts, futures contracts, options on futures, and derivative instruments.

Corn

Corn values have remained volatile throughout most of the 2011 fiscal year, with cash corn in Lincolnway Energy’s geography at an approximate low of $5.15 and an approximate high of $7.38 per bushel.  On November 9, 2011 the U.S Department of Agriculture (USDA) lowered its forecast of this years corn crop by 1%, to 12.31 billion bushels. The yield forecast is 146.7 per acre, the lowest since 2003/2004. The crop is mostly harvested and the definitive number is expected to be released in a January report. Despite the lower projected yields and tighter ending stocks for U.S corn the corn price has stayed relatively stable to lower.

Ethanol

The strong demand for ethanol, generated by high crude oil prices, has made the latter part of 2011 a profitable time for ethanol producers. When the Volumetric Ethanol Excise Tax Credit (VEETC) expires on December 31, 2011, ethanol producers could see tighter margins as a result of this. January ethanol futures are currently running approximately 46 cents lower than the average price for November ethanol futures. Ethanol plants will produce more than 14 billion gallons of ethanol in 2012. The surplus will go mostly to Brazil, which has become an ethanol importer after problems with production of sugar cane that is the feedstock for its ethanol. The Renewable Fuel Standard will raise the ethanol mandate to 36 billion gallons by 2022. Of the 36 billion gallons, 16 billion gallons must be met by non-corn biofuels.

32




Other/Regulatory/Governmental
 
Ethanol production in the United States has benefited by various tax incentives.  The most significant of these tax incentives is the federal Volumetric Ethanol Excise Tax Credit (VEETC).  VEETC provides a volumetric ethanol excise tax credit of 45¢ per gallon of ethanol blended with gasoline.  It appears that this credit will not be extended into 2012  The loss of this tax credit could have materially adverse effects on the ethanol industry. Another bill that is currently in front of Congress is an ethanol agreement that would extend and expand an existing tax credit for fuel stations to install blender pumps. The credit would be modified to allow for blends between E15 and E85, and the entire cost of the blender pump would qualify for the credit- not just the E85 portion of the equipment. The agreement would also extend the Small Ethanol Producer Tax Credit through 2012, at a lower rate. Finally the plan extends the production tax credit for cellulosic ethanol.

All the above changes in governmental policy and supply and demand factors are an ongoing risk factor for the ethanol industry and for Lincolnway Energy.

Critical Accounting Estimates and Accounting Policies

Lincolnway Energy's financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which Lincolnway Energy operates.  This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes.  These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements.  Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported.  Management believes the following policies are both important to the portrayal of Lincolnway Energy's financial condition and results of operations and require subjective or complex judgments; therefore, management considers the following to be critical accounting policies.

Off-Balance Sheet Arrangements

Lincolnway Energy currently does not have any off-balance sheet arrangements.

Revenue Recognition

Revenue from the sale of Lincolnway Energy's ethanol and distiller's grains is recognized at the time title and all risks of ownership transfer to the customers.  This generally occurs upon the loading of the product.  For ethanol, title passes from Lincolnway Energy at the time the product crosses the loading flange in either a railcar or truck. For distiller's grains, title passes upon the loading of distiller's grains into trucks.  For railcar shipments, this takes place when the railcar is filled and the marketer receives written notice that the railcars have been loaded and are available for billing.  Shipping and handling costs incurred by Lincolnway Energy for the sale of ethanol and distiller's grain are included in costs of goods sold.

Lincolnway Energy's ethanol was sold pursuant to an ethanol marketing agreement between Lincolnway Energy and RPMG until approximately September 30, 2009, at which time Lincolnway Energy began selling its ethanol production to Green Plains Trade Group LLC, as is discussed above in the "Overview" section of this Item.  The purchase price payable to Lincolnway Energy under its agreement with Green Plains is Green Plains' contract selling price for the ethanol in question, less various costs and a fee to Green Plains, but the agreement includes a minimum purchase price.


Lincolnway Energy's distiller's grain production is sold to Hawkeye Gold, LLC.  Lincolnway Energy pays Hawkeye Gold, LLC a marketing fee for dried distiller's grains equal to the greater of 2% of the FOB plant price for the dried distiller's grain or a per-ton fee of $1.30 for the dried distiller's grain.  The marketing fee for wet distiller's grains is the greater of 3% of the FOB plant price for the wet distiller's grains or a per-ton fee of $1.00 for the wet distiller's grains.

Lincolnway Energy's corn oil production is sold to FEC Solutions, LLC. For corn oil, title passes upon the loading of the corn oil into the trucks. The purchase price payable by FECS for each shipment of corn oil is the FOB sales price less a marketing and technical assistance fee in an amount equal to 5% of the FOB sales price.




33



Lincolnway Energy's CO2 production is sold to EPCO Carbon Dioxide Products, Inc. For CO2, title passes at the point at which the carbon dioxide pipe from Lincolnway Energy's plant joins the corresponding pipe from the EPCO plant.  The purchase price payable by EPCO for the carbon dioxide provided by Lincolnway Energy during each calendar month is based upon EPCO's shipped tons of liquid carbon dioxide.  Under the agreement, EPCO agrees to purchase, during each contract year, a minimum of the greater of 180 shipped tons per day or 70% of the annual liquid carbon dioxide production capacity of the EPCO plant at full capacity, with that capacity to be determined in accordance with the testing processes set out in the agreement.  The "take or pay" obligation is trued up at the end of each contract year, and the purchase price for any "take or pay" tons will be the average per shipped ton purchase price paid by EPCO during the contract year.  Lincolnway Energy began selling CO2 to EPCO in August 1, 2010.

Derivative Instruments

Lincolnway Energy enters into derivative contracts to hedge its exposure to price risk related to forecasted corn needs, forward corn purchase contracts and ethanol sales.   Lincolnway Energy does not typically enter into derivative instruments other than for hedging purposes.  All the derivative contracts are recognized on the September 30, 2011,2010 and 2009 balance sheets at fair value.  Although Lincolnway Energy believes Lincolnway Energy's derivative positions are economic hedges, none has been designated as a hedge for accounting purposes.  Accordingly, any realized or unrealized gain or loss related to these derivative instruments is recorded in the statement of operations as a component of cost of goods sold in the case of corn contracts and as a component of revenue in the case of ethanol sales.

The effects on operating income from derivatives is as follows for the years ending September 30, 2011,2010 and 2009:

 
2011
 
2010
 
2009
Increase (decrease) in revenue due to derivatives related to ethanol sales:
 
 
 
 
 
Realized
$
(2,655,034
)
 
$
45,434

 
$
10,440

Unrealized
1,528,367

 
(1,483,997
)
 

Total effect on revenue
(1,126,667
)
 
(1,438,563
)
 
10,440

 
 
 
 
 
 
(Increase) decrease in cost of goods sold due to derivatives related to corn costs:
 

 
 

 
 
 
 
 
 
 
 
Realized
(2,946,138
)
 
604,475

 
(3,783,088
)
Unrealized
(44,125
)
 
849,475

 
(72,350
)
Total effect on cost of goods sold
(2,990,263
)
 
1,453,950

 
(3,855,438
)
Total (decrease) increase to operating income due to derivative activities
$
(4,116,930
)
 
$
15,387

 
$
(3,844,998
)

Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed "normal purchases and normal sales", and therefore are not marked to market in Lincolnway Energy's financial statements, but are subject to a lower of cost or market assessment.

34





Liquidity and Capital Resources

On September 30, 2011, Lincolnway Energy had $34,135 in cash and equivalents and $9.0 million available under a committed loan agreement.  Lincolnway Energy’s business is highly impacted by commodity prices, including prices for corn, ethanol and distillers grains.  There are times that Lincolnway Energy may operate at negative operating margins.

The following table shows cash flows for the fiscal years ended September 30, 2011 and 2010:

 
Year ended September 30,
 
2011
 
2010
Net cash provided by operating activities
$
5,354,786

 
$
8,811,200

Net cash (used in) investing activities
(2,883,108
)
 
(847,730
)
Net cash (used in) financing activities
(5,295,653
)
 
(10,930,307
)

For the fiscal year ended September 30, 2011, cash provided by operating activities was $5.4 million, compared to cash provided by operating activities of $8.8 million for the fiscal year ended September 30, 2010. The $3.4 million decrease is primarily due to a decrease in net income for fiscal year 2011 of $3.4 million.

Cash flows from investing activities reflect the impact of property and equipment acquired for the ethanol plant.  Net cash used in investing activities increased by $2.0 million for the fiscal year ended September 30, 2011, when compared to the fiscal year ended September 30, 2010.  The increase is primarily due to an increase of capital expenditures for the fiscal year 2011. The rail spur addition makes up approximately $2.5 million of the capital expenditures for the fiscal year 2011.

Cash flows from financing activities include transactions and events whereby cash is obtained or paid back to or from depositors, creditors or investors.  Net cash used in financing activities decreased by $5.6 million for the fiscal year ended September 30, 2011, when compared to the fiscal year ended September 30, 2010.  The decrease is due to no distribution payments being made in fiscal year 2011 to Lincolnway Energy members and a decrease of $3.5 million of additional payments made on long-term borrowing compared to the 2010 fiscal year.

  Lincolnway Energy anticipates keeping cash balances at a low but acceptable level that will meet covenants.  If Lincolnway Energy should get in a negative cash position, Lincolnway Energy will having access to its $10 million line of credit.

As of September 30, 2011, Lincolnway Energy was in compliance with all covenants in its loan agreements with Co-Bank.

The following table shows cash flows for the fiscal years ended September 30, 2010 and 2009:

 
Year ended September 30,
 
2010
 
2009
Net cash provided by operating activities
$
8,811,200

 
$
1,695,816

Net cash (used in) investing activities
(847,730
)
 
(755,053
)
Net cash (used in) financing activities
(10,930,307
)
 
(3,826,864
)

For the fiscal year ended September 30, 2010, cash provided by operating activities was $8.8 million, compared to cash provided by operating activities of $1.7 million for the fiscal year ended September 30, 2009. The $7.1 million increase is primarily due to an increase in net income for fiscal year 2010 of $10.8 million offset by $3.8 million resulting from a net increase in working capital components for the fiscal year ended September 30, 2010.

Cash flows from investing activities reflect the impact of property and equipment acquired for the ethanol plant. Net cash used in investing activities increased by $.1 million for the fiscal year ended September 30, 2010, when compared to the fiscal year ended September 30, 2009. The increase is primarily due to an increase of capital expenditures for the fiscal year 2010.



35



Cash flows from financing activities include transactions and events whereby cash is obtained or paid back to or from depositors, creditors or investors. Net cash used in financing activities increased by $7.1 million for the fiscal year ended September 30, 2010, when compared to the fiscal year ended September 30, 2009. The increase is due to an increase in distribution payments of $2.1 million to the members and an increase of $5.0 million of additional payments made on long-term borrowing compared to the 2009 fiscal year.


Loans and Agreements

Lincolnway Energy has a construction and term loan with Co-Bank.  The interest rate under the term loan is a variable interest rate based on the one-month LIBOR index rate plus 3.30%. The interest rate will be reset automatically without notice to Lincolnway Energy, on the first "US Banking Day" of each succeeding week, and each change shall be applicable to all outstanding balances as of that date.  The loan initially required 30 principal payments of $1,250,000 per quarter.  The quarterly payments commenced in December 2006 and will continue through March 2013.  The borrowings under the loan are collateralized by substantially all of Lincolnway Energy's assets.

The loan requires the maintenance of certain financial and nonfinancial covenants.  As of September 30, 2011, Lincolnway Energy was in compliance with all loan covenants.

As of September 30, 2011, Lincolnway Energy has made principal payments of $37,500,000 since the inception of the loan, which under the terms of the agreement have been applied to scheduled payments in order of their maturity. Lincolnway Energy’s next scheduled payment under this agreement is due in December 2012.

Lincolnway Energy also has a $10,000,000 construction/revolving term credit facility with Co-Bank.  The interest rate under the term loan is a variable interest rate based on the one-month LIBOR index rate plus 3.30%. The interest rate will be reset automatically without notice to Lincolnway Energy, on the first "US Banking Day" of each succeeding week, and each change shall be applicable to all outstanding balances as of that date.  Borrowings are subject to borrowing base restrictions as defined in the agreement.  The credit facility requires the maintenance of certain financial and nonfinancial covenants.  The borrowings under the agreement are collateralized by substantially all of Lincolnway Energy's assets.  The construction/revolving term credit facility has a commitment fee on the average daily unused portion of the commitment at a rate of ½ of 1% per annum, payable monthly.  There was a $1.0 million balance outstanding on this credit facility as of September 30, 2011, that was paid off in October 2011.

Lincolnway Energy executed a mortgage and security interest in favor of Co-Bank creating a first lien on substantially all of its assets, including the real estate and ethanol plant and all personal property located on its property for the loan and credit agreements discussed above.

Lincolnway Energy also had subordinated debt financing which included a subordinated note of $1,250,000 payable to Fagen, Inc., with an interest rate of 4%, and a $1,216,781 note payable to Fagen, Inc., with an interest rate of 5% per annum.  On August 26, 2011, Fagen, Inc. allowed Lincolnway Energy to pay the $1,216,781 note in full before it maturity. On November 10, 2011, a settlement agreement was signed between Lincolnway Energy and Fagen, Inc., to settle disputes related to the liability with the State of Iowa alleged air emission violations against Lincolnway Energy. The settlement agreement reduced the $1,250,000 promissory note payable to Fagen, Inc., by $270,000, leaving a balance of $980,000. On November 14, 2011, Lincolnway Energy was required to repay $300,000 of the note plus accrued interest and on December 14, 2011, Lincolnway Energy was required to make the remaining payment of $680,000 plus accrued interest.

Lincolnway Energy also entered into a $500,000 loan agreement with the Iowa Department of Transportation in February 2005.  Under the agreement, the loan proceeds were disbursed upon submission of paid invoices and interest at 2.11% per annum began to accrue on January 1, 2007.  Payments began on July 1, 2007.  Lincolnway Energy also has a $300,000 loan agreement and a $100,000 forgivable loan agreement with the Iowa Department of Economic Development.  The $300,000 loan does not impose any interest, and the $100,000 loan is forgivable upon the completion of Lincolnway Energy's ethanol plant and the production of at least 50 million gallons of ethanol before the project completion date of October 31, 2008.  The Iowa Department of Economic Development determined those conditions to forgiveness of the $100,000 loan were met, and the loan was forgiven on January 22, 2009.  On October 5, 2011, Lincolnway Energy made the final payment of $152,500 of the Economic Development $300,000 loan agreement and $287,930 is the remaining loan balance on the Iowa Department of Transportation agreement.






36




Lincolnway Energy entered into a lease agreement with First Union Rail to lease 90 hopper rail cars for the purpose of transporting distiller’s grain.  The five-year term of the lease commenced March 2006 and ended March 2011.  On March 26, 2011 the Company extended this lease with a rider. The rider calls for monthly payments of $56,700 plus applicable taxes.  There was also an additional usage rental of 2.5 cents per mile for each car that exceeds 30,000 miles.  The amendment that was made to the lease agreement on June 19, 2007, allowed Lincolnway Energy to purchase a certificate of deposit for $351,000 in lieu of the letter of credit that was required as partial security for Lincolnway Energy's obligation under the lease.  Lincolnway Energy has classified this certificate of deposit as restricted cash in other assets. The lease term on the rider is for three years commencing March 2011 and expiring March 2014.
 
Lincolnway Energy terminated its ethanol marketing agreement with RPMG, Inc. effective October 1, 2009, and as part of that process, Lincolnway Energy was assigned a railcar lease between RPMG, Inc. and Trinity Industries Leasing Company.  The lease includes 100 tank rail cars used for transporting ethanol.  The lease calls for monthly payments of $52,500 plus applicable taxes, beginning October 1, 2009.  There is also an additional usage rental of 3 cents per mile for each car that exceeds 35,000 miles.  The lease has a scheduled maturity date of September 2016.
 
On February 2, 2010, Lincolnway Energy entered into a lease agreement with an Trinity Industries Leasing Company to lease an additional 30 ethanol tank rail cars.  The one-year term of the lease ended on February 2011.  On March 8, 2011 Lincolnway Energy extended this lease with two riders for 15 railcars each. Each rider calls for monthly payments of $9,750 plus applicable taxes. There was also an additional usage rental of 3 cents per mile for each car that exceeds 30,000 miles.  The lease term on the riders is for three years commencing March 2011 and expiring March 2014.

Lincolnway Energy entered into an agreement with J.B. Holland Construction, Inc. on October 15, 2010 to perform the dirt work for the additional rail spur that Lincolnway Energy is adding to its existing railroad track. The dirt work was completed during August, 2011. Lincolnway Energy entered into a contract with Central States Railroad Services, Inc. on June 30, 2011 for the construction of the rail spur, and construction began during August, 2011. The addition of the rail spur will allow Lincolnway Energy to ship unit trains on the Union Pacific Railroad mainline, which is intended to allow Lincolnway Energy to obtain the savings in shipment costs and other efficiencies that generally come through the use of unit trains. Lincolnway Energy estimates that the additional rail spur project will cost approximately $3.4 million in the aggregate.

Lincolnway Energy entered into a Purchase and Sale Agreement with DuPont Danisco Cellulosic Ethanol, LLC ("DDCE") on June 23, 2011 pursuant to which DDCE would, subject to the satisfaction of the various contingencies set out in the Agreement, purchase certain real estate from Lincolnway Energy for the purpose of DDCE constructing a cellulosic or advanced biofuels plant on the real estate. The contingencies under the agreement were satisfied, and the closing of the sale and purchase of the real estate occurred on October 5, 2011. The real estate purchased by DDCE was approximately 59.05 acres and is located to the southwest of the real estate on which Lincolnway Energy's ethanol plant is located. The purchase price paid by DDCE under the agreement was $20,000 per acre, resulting in an aggregate purchase price to Lincolnway Energy of $1,181,000.

One of the contingencies under the Purchase and Sale Agreement with DDCE was that Lincolnway Energy and DDCE needed to enter into a rail loadout services agreement, or if a rail loadout services agreement was not entered into, an easement and track usage agreement. The general purpose of those agreements was to structure how DDCE would have access to Lincolnway Energy's rail facilities. The referenced contingency was met by Lincolnway Energy and DDCE entering into a Load Out Services Agreement. The Load Out Services Agreement provides, in general, that DDCE will construct an aboveground pipeline from DDCE's plant to a holding tank on Lincolnway Energy's property, and that Lincolnway Energy will load out DDCE's product at Lincolnway Energy's rail or truck facilities. The Load Out Services Agreement sets forth the various fees and other amounts that DDCE will pay to Lincolnway Energy for those services, as well as allocating various costs and expenses between Lincolnway Energy and DDCE. The Load Out Services Agreement provides that if it is terminated, then Lincolnway Energy will grant DDCE an easement for the purpose of DDCE constructing its own rail tracks, and that Lincolnway Energy and DDCE will also at that time enter into a track usage agreement which will address how Lincolnway Energy and DDCE will jointly use certain tracks of Lincolnway Energy and other related matters. The initial term of the Load Out Services Agreement is ten years from the date of the Load Out Services Agreement, which was October 4, 2011. DDCE currently contemplates commencing construction of its plant in the third quarter of 2012, with an estimated start-up date of the first calendar quarter of 2014.








37





Contractual Obligations Table

In addition to long-term debt obligations, Lincolnway Energy has certain other contractual cash obligations and commitments.  The following tables provide information regarding Lincolnway Energy's contractual obligations and commitments as of September 30, 2011:
 
 
 
 
 
 
Payment Due By Period
 
 
 
 
 
 
Less than
 
Two to
 
Four to
 
More than
Contractual Obligations
 
Total
 
One Year
 
Three Years
 
Five Years
 
Five Years
Long-Term Debt Obligations
 
$
4,190,430

 
$
1,452,409

 
$
1,603,017

 
$
1,107,433

 
$
27,571

Interest Obligation of Long-Term Debt 1
 
94,722

 
66,532

 
23,887

 
4,012

 
291

Operating Lease Obligations
 
5,513,000

 
1,591,000

 
2,659,000

 
1,263,000

 

Purchase Obligations
 
 

 
 

 
 

 
 

 
 

Coal Supplier Commitment
 
6,142,550

 
6,142,550

 

 

 

Corn Supplier Commitment
 
4,444,830

 
4,444,830

 

 

 

Anhydrous Ammonia Commitment
 
279,000

 
279,000

 

 

 

Denaturant Commitment
 
448,920

 
448,920

 

 

 

Total
 
$
21,113,452

 
$
14,425,241

 
$
4,285,904

 
$
2,374,445

 
$
27,862

1 Co-Bank interest rate is variable with the assumption of 3.5%.
 

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

In addition to risks inherent in Lincolnway Energy's operation, Lincolnway Energy is exposed to various market risks.  The primary market risks arise as a result of possible changes in interest rates and certain commodity prices.

Interest Rate Risk

Lincolnway Energy has various outstanding loan agreements and promissory notes which expose Lincolnway Energy to market risk related to changes in the interest rate imposed under those loan agreements and promissory notes.

Lincolnway Energy has loan agreements and/or promissory notes with the following entities, and with the principal balance and interest rates indicated:

 
 
Principal Balance
 
 
Lender
 
As of September 30, 2011
 
Rate
Co-Bank - construction term loan
 
$
1,500,000

 
3.54
%
Co-Bank - revolving term loan
 
1,000,000

 
3.54
%
IA Department Economic Development
 
152,500

 
%
IA Department of Transportation
 
287,930

 
2
%
Fagen, Inc
 
1,250,000

 
4
%
 
 
$
4,190,430

 
 


The interest rate under the IA. Department of Transportation loan agreement and the Fagen, Inc. promissory note are fixed at the interest rates specified above.  The Co-Bank interest rate is a variable interest rate loan which will be based on the one-month LIBOR index rate plus 3.30%. The 3.54% is the rate as of September 30, 2011. As of the date of the filing of this report, the Co-Bank - revolving term loan, IA Department Economic Development loan and the Fagen, Inc. promissory note are paid in full and have $0 principal balance remaining. For more information on the payments see Item 7 - Loans and Agreements.
 


38




Commodity Price Risk
 
Lincolnway Energy is also exposed to market risk with respect to the price of ethanol, Lincolnway Energy's principal product, and the price and availability of corn, the principal commodity used by Lincolnway Energy to produce ethanol, and coal. The other primary product of Lincolnway Energy is distiller's grains, and Lincolnway Energy is also subject to market risk with respect to the price for distillers grains. The prices for ethanol, distillers' grains, corn and coal are volatile, and Lincolnway Energy will experience market conditions where the prices Lincolnway Energy receives for its ethanol and distillers' grains are declining, but the price Lincolnway Energy pays for its corn, coal and other inputs is increasing. Lincolnway Energy's results will therefore vary substantially over time, and include the possibility of losses, which could be substantial.

In general, rising ethanol and distillers grains prices result in higher profit margins, and therefore represent favorable market conditions. Lincolnway Energy is, however, subject to various material risks related to its production of ethanol and distillers' grains and the price for ethanol and distillers' grains. For example, ethanol and distillers grains prices are influenced by various factors beyond the control of Lincolnway Energy's management, including the supply and demand for gasoline, the availability of substitutes and the effect of laws and regulations.

In general, rising corn prices result in lower profit margins and, accordingly, represent unfavorable market conditions. Lincolnway Energy will generally not be able to pass along increased corn costs to its ethanol customers. Lincolnway Energy is subject to various material risks related to the availability and price of corn, many of which are beyond the control of Lincolnway Energy. For example, the availability and price of corn is subject to wide fluctuations due to various unpredictable factors which are beyond the control of Lincolnway Energy's management, including weather conditions, crop yields, farmer planting decisions, governmental policies with respect to agriculture and local, regional, national and international trade, demand and supply. If Lincolnway Energy's corn costs were to increase $.10 cents per bushel from one year to the next, the impact on cost of goods sold would be approximately $1.98 million for the year.

Lincolnway Energy's average corn costs for the fiscal years ended September 30, 2011, 2010 and 2009 were, respectively, approximately $6.34 per bushel, $3.59 per bushel and $3.70 per bushel.

During the fiscal year ended September 30, 2011, corn prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $4.65per bushel in October 2010 to a high of $7.87 per bushel in June 2011. The corn prices based on the Chicago Mercantile Exchange daily futures data during the fiscal year ended September 30, 2010 ranged from a low of $3.25 per bushel to a high of $5.29 per bushel.

The average price Lincolnway Energy received for its ethanol during the fiscal year ended September 30, 2011 was approximately $2.45 per gallon, as compared to $1.72 per gallon and $1.67 during, respectively, the fiscal years ended September 30, 2010 and 2009.

During the fiscal year ended September 30, 2011, ethanol prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $1.90 per gallon in September 2010 to a high of $3.07 per gallon in July 2011. The ethanol price based on the Chicago Mercantile Exchange daily futures data during the fiscal year ended September 30, 2010, ranged from a low of $1.495 per gallon in July 2010, to a high of $2.365 in November 2010.

Lincolnway Energy may from time to time take various cash, futures, options or other positions with respect to its corn and ethanol needs in an attempt to minimize or reduce Lincolnway Energy's price risks related to corn and ethanol. Those activities are, however, also subject to various material risks, including that price movements in the cash and futures corn and ethanol markets are highly volatile and influenced by many factors and occurrences that are beyond the control of Lincolnway Energy.












39



Although Lincolnway Energy intends that its futures and option positions accomplish an economic hedge against Lincolnway Energy's future purchases of corn or future sales of ethanol, Lincolnway Energy has chosen not to use hedge accounting for those positions, which would match the gain or loss on the positions to the specific commodity purchase being hedged. Lincolnway Energy is instead using fair value accounting for the positions, which generally means that as the current market price of the positions changes, the realized or unrealized gains and losses are immediately recognized in Lincolnway Energy's costs of goods sold in the statement of operations for corn positions or as a component of revenue in the statement of operations for ethanol positions. The immediate recognition of gains and losses on those positions can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the positions relative to the cost and use of the commodity being hedged. For example, Lincolnway Energy's corn position gain and (loss) that was included in its earnings for the fiscal year ended September 30, 2011 was a loss of $2,990,263, as opposed to a gain of $1,453,950 for the fiscal year ended September 30, 2010, and as opposed to a loss of $3,855,438 for the fiscal year ended September 30, 2009. Lincolnway Energy's ethanol position gain and (loss) that was included in its earnings for the fiscal year ended September 30, 2011 was a loss of $1,126,667 , a loss of $1,438,563 for the fiscal year ended September 30, 2010, and as opposed to a gain of $10,440 for the fiscal year ended September 30, 2009.

The extent to which Lincolnway Energy may enter into arrangements with respect to its ethanol or corn during the year may vary substantially from time to time based upon a number of factors, including supply and demand factors affecting the needs of customers to purchase ethanol or suppliers to sell Lincolnway Energy raw materials on a fixed price basis, and Lincolnway Energy's views as to future market trends, seasonal factors and the cost of future contracts.    

Another important raw material for the production of Lincolnway Energy's ethanol is coal. Lincolnway Energy's cost per ton for coal under its current coal supply agreement is subject to various fixed and periodic adjustments based on factors which are outside of the control of Lincolnway Energy's management. The factors include changes in certain inflation type indices, increases in transportation costs and the quality of the coal. Lincolnway Energy's coal costs will therefore vary, and the variations could be material. Coal costs represented approximately 4% of Lincolnway Energy's total cost of goods sold for the fiscal year ended September 30, 2011, compared to, respectively, 6% and 5% for the 2010 and 2009 fiscal years.

On June 30, 2011, Lincolnway Energy received a letter from Williams Bulk Transfer declaring a force majeure regarding Williams Bulk Transfer's obligation to deliver coal based upon the flooding of the Missouri River in Iowa, Nebraska and Missouri and the possible extended delivery routes and delays in delivery. Other sources of coal delivery, such as rail shipments, are possible but are not within the control of Williams Bulk Transfer or Lincolnway Energy. Williams Bulk Transfer did not provide an expected duration for the force majeure. As of December 1, 2011, the force majeure has expired and all deliveries are back to normal.



[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
























40




Item 8.    Financial Statements and Supplementary Data.
 
Contents

Report of Independent Registered Public Accounting Firm
 
 
Financial Statements
 
 
 
Balance Sheets
Statements of Operations
Statements of Members’ Equity
Statements of Cash Flows
Notes to Financial Statements

41



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Members
Lincolnway Energy, LLC

We have audited the accompanying balance sheets of Lincolnway Energy, LLC as of September 30, 2011 and 2010, and the related statements of operations, members' equity, and cash flows for each of the three years in the period ended September 30, 2011.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the  financial statements referred to above present fairly, in all material respects, the financial position of Lincolnway Energy, LLC as of September 30 , 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended September 30 , 2011, in conformity with U.S. generally accepted accounting principles.

/s/ McGladrey & Pullen, LLP

Des Moines, Iowa

December 22, 2011

42



Lincolnway Energy, LLC

Balance Sheets
September 30, 2011 and 2010

 
2011
 
2010
ASSETS (Note 4)
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
34,135

 
$
2,858,110

Due from broker
227,670

 
2,305,695

Derivative financial instruments (Notes 8 and 9)
292,375

 

Trade and other accounts receivable (Note 7)
8,041,523

 
5,880,043

Inventories (Note 3)
6,350,544

 
3,951,079

Prepaid expenses and other
328,881

 
298,637

Total current assets
15,275,128

 
15,293,564

 
 
 
 
PROPERTY AND EQUIPMENT
 

 
 

Land and land improvements
7,633,650

 
7,580,868

Buildings and improvements
1,604,305

 
1,604,305

Plant and process equipment
76,014,786

 
75,463,973

Construction in progress
2,562,694

 
191,764

Office furniture and equipment
407,725

 
411,177

 
88,223,160

 
85,252,087

Accumulated depreciation
(43,529,798
)
 
(35,430,641
)
 
44,693,362

 
49,821,446

OTHER ASSETS
 

 
 

Restricted cash (Note 5)
351,000

 
351,000

Financing costs, net of amortization of  $252,070 and $209,165
219,891

 
262,797

Deposit
476,437

 

Investments
182,970

 
170,093

 
1,230,298

 
783,890

 
$
61,198,788

 
$
65,898,900


See Notes to Financial Statements.

43



 
2011
 
2010
LIABILITIES AND MEMBERS’ EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
1,359,836

 
$
1,088,299

Accounts payable, related party (Note 6)
1,179,981

 
460,958

Current maturities of long-term debt (Note 4)
1,452,409

 
76,373

Accrued expenses
879,232

 
982,432

Derivative financial instruments (Notes 8 and 9)

 
1,191,867

Total current liabilities
4,871,458

 
3,799,929

 
 
 
 
NONCURRENT LIABILITIES
 

 
 

Long-term debt, less current maturities (Note 4)
2,738,021

 
9,409,711

Other
450,000

 
450,000

Total noncurrent liabilities
3,188,021

 
9,859,711

 
 
 
 
COMMITMENTS AND CONTINGENCY (Notes 5, 7 and 11)


 


 
 
 
 
MEMBERS’ EQUITY
 

 
 

Member contributions, 42,049 units issued and outstanding
38,990,105

 
38,990,105

Retained earnings
14,149,204

 
13,249,155

 
53,139,309

 
52,239,260

 
$
61,198,788

 
$
65,898,900


44



Lincolnway Energy, LLC

Statements of Operations
Years Ended September 30, 2011, 2010 and 2009

 
2011
 
2010
 
2009
Revenues (Notes 2 and 7)
173,951,126

 
114,373,268

 
110,223,531

 
 
 
 
 
 
Cost of goods sold (Notes 6 and 7)
169,817,362

 
106,744,081

 
113,576,938

 
 
 
 
 
 
Gross profit (loss)
4,133,764

 
7,629,187

 
(3,353,407
)
 
 
 
 
 
 
General and administrative expenses
2,649,796

 
2,440,390

 
2,366,638

 
 
 
 
 
 
Operating income (loss)
1,483,968

 
5,188,797

 
(5,720,045
)
 
 
 
 
 
 
Other income (expense):
 

 
 

 
 

Interest income
9,542

 
25,019

 
39,743

Interest expense
(593,461
)
 
(851,358
)
 
(860,303
)
Other

 

 
125,264

 
(583,919
)
 
(826,339
)
 
(695,296
)
 
 
 
 
 
 
Net income (loss)
$
900,049

 
$
4,362,458

 
$
(6,415,341
)
 
 
 
 
 
 
Weighted average units outstanding
42,049

 
42,049

 
42,049

 
 
 
 
 
 
Net income (loss)  per unit - basic and diluted
$
21.40

 
$
103.75

 
$
(152.57
)

See Notes to Financial Statements.

45



Lincolnway Energy, LLC

Statements of Members' Equity
Years Ended September 30, 2011, 2010 and 2009

 
Member
Contributions
 
Retained
Earnings
 
Total
Balance, September 30, 2008
$
38,990,105

 
$
17,404,488

 
$
56,394,593

Net loss

 
(6,415,341
)
 
(6,415,341
)
Balance, September 30, 2009
38,990,105

 
10,989,147

 
49,979,252

Distributions ($50 per unit)

 
(2,102,450
)
 
(2,102,450
)
       Net income

 
4,362,458

 
4,362,458

Balance, September 30, 2010
38,990,105

 
13,249,155

 
52,239,260

Net income

 
900,049

 
900,049

Balance, September 30, 2011
$
38,990,105

 
$
14,149,204

 
$
53,139,309


See Notes to Financial Statements.

46



Lincolnway Energy, LLC

Statements of Cash Flows
Years Ended September 30, 2011, 2010 and 2009

 
2011
 
2010
 
2009
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
Net income  (loss)
$
900,049

 
$
4,362,458

 
$
(6,415,341
)
Adjustments to reconcile net income (loss)  to net cash provided by operating activities:
 

 
 

 
 

Depreciation and amortization
8,232,529

 
8,378,554

 
8,367,309

Loss on disposal of property and equipment
62,696

 
573

 
3,599

Forgiven loan

 

 
(100,000
)
Changes in working capital components:
 
 
 
 
 
Due from broker
2,078,025

 
(1,740,419
)
 
7,360,928

Trade and other accounts receivable
(2,161,480
)
 
(2,107,860
)
 
(146,589
)
Inventories
(2,399,465
)
 
(1,465,707
)
 
1,508,650

Prepaid expenses and other
(30,244
)
 
(101,590
)
 
(113,282
)
Deposits
(476,437
)
 
151,036

 
312,958

Accounts payable
86,760

 
173,278

 
(1,254,071
)
Accounts payable, related party
719,023

 
162,425

 
(811,079
)
Accrued expenses
(172,428
)
 
31,435

 
370,316

Accrued loss on firm commitments

 

 
(1,065,000
)
Derivative financial instruments
(1,484,242
)
 
967,017

 
(6,440,655
)
Noncurrent other liabilities

 

 
118,073

Net cash provided by  operating  activities
5,354,786

 
8,811,200

 
1,695,816

 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

 
 

Purchase of property and equipment
(2,870,231
)
 
(823,612
)
 
(611,078
)
Purchase of investments
(12,877
)
 
(24,118
)
 
(143,975
)
Net cash (used in) investing activities
(2,883,108
)
 
(847,730
)
 
(755,053
)
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

 
 

Member distributions

 
(2,102,450
)
 

Proceeds from long-term borrowings
1,000,000

 

 

Payments on long-term borrowings
(6,295,653
)
 
(8,827,857
)
 
(3,826,864
)
Net cash (used in) financing activities
(5,295,653
)
 
(10,930,307
)
 
(3,826,864
)
Net (decrease) in cash and cash equivalents
(2,823,975
)
 
(2,966,837
)
 
(2,886,101
)
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS
 

 
 

 
 

Beginning
2,858,110

 
5,824,947

 
8,711,048

Ending
$
34,135

 
$
2,858,110

 
$
5,824,947

(Continued)
 

 
 

 
 






47





Lincolnway Energy, LLC

Statements of Cash Flows (Continued)
Years Ended September 30, 2011, 2010 and 2009

 
2011
 
2010
 
2009
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
 
 
Cash paid for interest including capitalized interest 2011 $42,073; 2010 none; 2009 none
$
645,013

 
$
838,191

 
$
1,052,559

 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NONCASH
 

 
 

 
 

INVESTING AND FINANCING ACTIVITIES
 

 
 

 
 

Construction in progress included in accounts payable
$
184,776

 
$
37,805

 
$

Construction in progress included in accrued expenses
$
69,228

 
$
2,688

 
$


See Notes to  Financial Statements.

48



Lincolnway Energy, LLC
 
Notes to Financial Statements
 
Note 1.    Nature of Business and Significant Accounting Policies
 
Principal business activity:  Lincolnway Energy, LLC (the Company), located in Nevada, Iowa, was formed in May 2004 to pool investors to build a 50 million gallon annual production dry mill corn-based ethanol plant.  The Company began making sales on May 30, 2006 and became operational during the quarter ended June 30, 2006. The Company is directly influenced by commodity markets and the agricultural and energy industries and, accordingly, its results of operations and financial condition may be significantly affected by cyclical market trends and the regulatory, political and economic conditions in these industries.

A summary of significant accounting policies follows:

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 amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Concentration of credit risk:  The Company’s cash balances are maintained in bank deposit accounts which at times may exceed federally insured limits.  The Company has not experienced any losses in such accounts.

Cash and cash equivalents:  For the purposes of reporting the statement of cash flows, the Company includes as cash equivalents all cash accounts and highly liquid debt instruments which are not subject to withdrawal restrictions or penalties.  Certificates of deposit are considered investments as all have been purchased with maturities in excess of ninety days.  Although the Company maintains its cash accounts in one bank, the Company believes it is not exposed to any significant credit risk on cash and cash equivalents.  The Company has repurchase agreements with one bank, which totaled approximately $171,578 at September 30, 2011.  In accordance with the terms of the repurchase agreements, the Company does not take possession of the related securities.  The Company’s agreements also contain provisions to ensure that the market value of the underlying assets remain sufficient to protect the Company in the event of default by the banks by requiring that the underlying securities have a total market value of at least 100% of the bank’s total obligations under the agreements.

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.  A receivable is considered past due if any portion of the receivable is outstanding more than 90 days.

Inventories:  Inventories are stated at the lower of cost or market using the first-in, first-out method.  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 construction and revolving loans discussed in Note 4 are recorded at cost and include expenditures directly related to securing debt financing.  The Company is amortizing these costs using the effective interest method over the term of the agreement.  The financing costs are included in interest expense on the statement of operations.

Property and equipment:  Property and equipment is stated at cost.  Construction in progress is comprised of costs related to the projects that are not completed.  Depreciation is computed using the straight-line method over the following estimated useful lives:

 
Years
Land improvements
20
Buildings and improvements
40
Plant and process equipment
5 – 20
Office furniture and equipment
3 – 7

Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized.  


49



Investments:  The Company has investments in financial service cooperatives.  These investments are carried at cost including allocated retained earnings of the cooperatives.

Derivative financial instruments:  The Company enters into derivative contracts to hedge the Company’s exposure to price risk related to forecasted corn needs, forward corn purchase contracts and ethanol sales.  The Company does not typically enter into derivative instruments other than for hedging purposes.  All the derivative contracts are recognized on the balance sheet at their fair market value.  Although the Company believes its derivative positions are economic hedges, none have been designated as a hedge for accounting purposes.   Accordingly, any realized or unrealized gain or loss related to corn derivatives is recorded in the statement of operations as a component of cost of goods sold.  Any realized or unrealized gain or loss related to ethanol derivative instruments is recorded in the statement of operations as a component of revenue.

Deposit:  The Internal Revenue Service (under Section 7519) requires partnerships that elect a fiscal year over a calendar year to make a deposit each year.  The deposit is 25% of annual taxable net income, multiplied by the tax rate of 36% for the reporting fiscal year.

Revenue recognition:  Revenue from the sale of the Company’s ethanol and distillers grains is recognized at the time title and all risks of ownership transfer to the customers.  This generally occurs upon the loading of the product.  For ethanol, title passes at the time the product crosses the loading flange in either a railcar or truck.  For distiller’s grain, title passes upon the loading into trucks.  For railcar shipments, this takes place when the railcar is filled and the marketer receives written notice that they have been loaded and are available for billing.  Shipping and handling costs incurred by the Company for the sale of ethanol and distiller’s grain are included in costs of goods sold. Commissions for the marketing and sale of ethanol and distiller grains are included in costs of goods sold.

Revenue by product is as follows:
(Excludes hedging activity)

(In thousands)
 
2011
 
2010
 
2009
Ethanol
 
$
139,536

 
$
94,612

 
$
88,155

Distiller's Grain
 
31,716

 
19,434

 
20,730

Other
 
3,826

 
1,766

 
1,328


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 Company’s 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 Company's material tax positions and determined there were no uncertain tax positions that require adjustment to the financial statements. The Company does not currently anticipate significant changes in its uncertain tax positions over the next 12 months. Generally, the Company remains subject to income tax examinations by U.S. federal or state tax authorities for fiscal years 2008 and thereafter.

Earnings per unit:  Basic and diluted earnings per unit have been computed on the basis of the weighted average number of units outstanding during each period presented.

Fair value of financial instruments:  The carrying amounts of cash and cash equivalents, derivative financial instruments, trade accounts receivable, accounts payable and accrued expenses approximate fair value.  The carrying amount of long-term debt approximates fair value because the interest rates are based on current rates offered to the Company for debt with similar terms and maturities.

 
Note 2.    Members' Equity
 
The Company was formed on May 19, 2004.  It was initially capitalized by the issuance of 1,924 membership units totaling $962,000 to the founding members of the Company.  The Company has one class of membership units.  A majority of the Board of Directors owns a membership interest in the Company.  The Company is authorized to issue up to 45,608 membership units without member approval.




50



Income and losses are allocated to all members based on their pro rata ownership interest. All unit transfers are effective the last day of the month.    Units may be issued or transferred only to persons eligible to be members of the Company and only in compliance with the provisions of the operating agreement.

The Company is organized as an Iowa limited liability company. Members' liability is limited as specified in the Company's operating agreement and pursuant to the Iowa Limited Liability Company Act. The duration of the Company shall be perpetual unless dissolved as provided in the operating agreement.
 

Note 3.    Inventories
 
Inventories consist of the following as of September 30, 2011 and 2010:

 
2011
 
2010
Raw materials, including corn, coal, chemicals and supplies
$
3,956,604

 
$
2,496,681

Work in process
1,303,654

 
796,409

Ethanol and distillers grain
1,090,286

 
657,989

Total
$
6,350,544

 
$
3,951,079

 


Note 4.    Long-Term Debt
 
Long-term debt consists of the following as of September 30, 2011 and 2010:

 
2011
 
2010
Construction term loan.  (A)
$
1,500,000

 
$
6,500,000

 
 
 
 
Construction/revolving term loan.  (C)
1,000,000

 

 
 
 
 
Note payable to contractor, interest-only quarterly payments at 5%
 

 
 

due through maturity date of November 2014, secured by real
 

 
 

estate and subordinate to financial institution debt commitments. (B )

 
1,216,781

 
 
 
 
Note payable to contractor, unsecured, interest-only quarterly
 

 
 

payments at 4% due through maturity date of December 2011
1,250,000

 
1,250,000

 
 
 
 
Note payable to Iowa Department of Economic Development.  (D)
152,500

 
182,500

 
 
 
 
Note payable to Iowa Department of Transportation.  (E)
287,930

 
336,803

 
4,190,430

 
9,486,084

Less current maturities
(1,452,409
)
 
(76,373
)
 
$
2,738,021

 
$
9,409,711









51



Maturities of long-term debt as of September 30, 2011 are as follows:

Years ending September 30:
 
2012
$
1,452,409

2013
1,550,968

2014
52,049

2015
53,153

2016
1,054,280

Thereafter
27,571

 
$
4,190,430

 
(A)
The Company has a construction and term loan with a financial institution.  Borrowings under the term loan include a variable interest rate based on the one-month LIBOR index rate plus 3.30%.  The rate will be reset automatically without notice to the Company, on the first “US Banking Day” of each succeeding week, and each change shall be applicable to all outstanding balances as of that date.  The agreement requires 30 principal payments of $1,250,000 per quarter commencing in December 2006 through March 2013.  The agreement requires the maintenance of certain financial and nonfinancial covenants.  Borrowings under this agreement are collateralized by substantially all of the Company’s assets.  As of September 30, 2011 the Company has made principal payments of $37,500,000, since the inception of the loan, which under the terms of the agreement have been applied to scheduled payments in order of their maturity.  The Company’s next schedule payment under this agreement is due in December 2012.

(B)
The Company had a $1,216,781 subordinate note payable dated November 17, 2004 to an unrelated third party.  Quarterly interest payments began on March 31, 2007.  On August 26, 2011, the third party allowed the Company to pay the note in full before its maturity.
   
(C)
The Company has a $10,000,000 construction/revolving term credit facility with a financial institution which expires on September 1, 2016.  Borrowings under the credit facility agreement include a variable interest rate based on the one-month LIBOR index rate plus 3.30%.  The rate will be reset automatically without notice to the Company, on the first “US Banking Day” of each succeeding week, and each change shall be applicable to all outstanding balances as of that date.  Borrowings are subject to borrowing base restrictions as defined in the agreement.  The credit facility and revolving credit agreement require the maintenance of certain financial and nonfinancial covenants.  Borrowings under this agreement are collateralized by substantially all of the Company’s assets.  There was a $1,000,000 balance outstanding as of September 30, 2011.

(D)
The Company also has a $300,000 loan agreement with the Iowa Department of Economic Development (IDED).  The $300,000 loan is noninterest-bearing and due in monthly payments of $2,500 beginning December 2006 and a final payment of $152,500 due November 2011.  Borrowings under this agreement are collateralized by substantially all of the Company’s assets and subordinate to the above financial institution debt and construction and revolving loan/credit agreements included in (A) and (C).  On October 5, 2011, the final payment of $152,500 was made by the Company.

(E)
The Company entered into a $500,000 loan agreement with the Iowa Department of Transportation (IDOT) in February 2005.  The proceeds were disbursed upon submission of paid invoices.  Interest at 2.11% began accruing on January 1, 2007.  Principal payments will be due semiannually through July 2016.  The loan is secured by all rail track material constructed as part of the plan construction.  The debt is subordinate to the above $39,000,000 financial institution debt and construction and revolving loan/credit agreements included in (A) and (C).
 

Note 5.    Lease Commitments
 
The Company entered into a lease agreement with an unrelated third party to lease 90 hopper rail cars for the purpose of transporting distiller’s grain.  The five-year term of the lease commenced March 2006 and ended March 2011.  On March 26, 2011 the Company extended this lease with a rider. The rider calls for monthly payments of $56,700 plus applicable taxes.  There was also an additional usage rental of 2.5 cents per mile for each car that exceeds 30,000 miles.  The amendment that was made to the lease agreement on June 19, 2007, allowed the Company to purchase a certificate of deposit for $351,000 in lieu of the letter of credit that was required as partial security for the Company’s obligation under the lease.  The Company has classified this certificate of deposit as restricted cash in other assets. The lease term on the rider is for three years commencing March 2011 and expiring March 2014.

52



 In conjunction with a change in the Company’s ethanol marketer, on September 21, 2009, the Company was assigned a lease that was previously between the Company’s previous ethanol marketer and an unrelated third party.  The lease includes 100 tank rail cars for the purpose of transporting ethanol.  The lease calls for monthly payments of $52,500 plus applicable taxes, beginning October 1, 2009.  There is also an additional usage rental of 3 cents per mile for each car that exceeds 35,000 miles.  The lease has an expiration date of September 2016.
 
On February 2, 2010, the Company entered into a lease agreement with an unrelated third party to lease an additional 30 ethanol tank rail cars.  The one-year term of the lease ended on February 2011.  On March 8, 2011 the Company extended this lease with two riders for 15 railcars each. Each rider calls for monthly payments of $9,750 plus applicable taxes. There was also an additional usage rental of 3 cents per mile for each car that exceeds 30,000 miles.  The lease term on the riders is for three years commencing March 2011 and expiring March 2014.
 
 The Company also leases office equipment and other equipment under operating leases that will expire at various dates through March 2015.

Approximate minimum lease payments under these operating leases for future years are as follows:

Years ending Sept 30:
 
2012
$
1,591,000

2013
1,589,000

2014
1,070,000

2015
633,000

2016
630,000

 
$
5,513,000


Rent expense under the above operating leases totaled approximately, $1,745,000, $1,597,000 and $741,000 for the years ended September 30, 2011, 2010 and 2009, respectively.
 
Note 6.    Related-Party Transactions
 
The Company has an agreement with the Heart of Iowa Coop (HOIC), dba Key Cooperative, a member of the Company, to provide 100% of the requirement of corn for use in the operation of the ethanol plant.  The agreement became effective when the Company began accepting corn for the use at the ethanol plant in May 2006 and will continue for a period of 20 years.  The Company pays a handling fee of $.0675 per bushel of corn.  If the Company chooses to buy corn that is not elevated by HOIC, and is inside a 60-mile radius of Nevada, Iowa, the Company will be required to pay HOIC $.04 per bushel of corn, outside a 60-mile radius, $.03 per bushel of corn.  The agreement may be terminated before the end of the term by providing six months’ notice of termination and paying the other party $2,000,000, reduced by $50,000 for each completed year of the agreement.  The amount is payable over four years with interest at the prime rate on the date of termination.  The Company purchased corn totaling $127,764,206, $71,804,446 and $69,259,682 for the years ended September 30, 2011, 2010 and 2009, respectively.  As of September 30, 2011, the Company has several corn cash forward contracts with HOIC amounting to 723,317 bushels, for a commitment of approximately $4,444,830 and several basis forward contracts representing 600,000 bushels of corn.  The contracts mature on various dates through December 2011.  The Company also has made some miscellaneous purchases from HOIC (fuel costs) amounting to $84,739, $96,392 and $84,255 for the years ended September 30, 2011, 2010 and 2009, respectively. As of September 30, 2011 and 2010 the amount due to HOIC is $1,179,981 and $460,226, respectively.

The Company is also purchasing propane from Prairie Land Cooperative, a member of the Company. In September 2011, Prairie Land Cooperative merged with Innovative Ag Services Co (IAS). They are now doing business under the name of IAS.  Total purchases for the years ended September 30, 2011, 2010 and 2009 were $16,402, $21,714 and $860,884, respectively.
 

Note 7.    Commitments and Major Customer
 
The Company had an agreement with an unrelated entity and major customer for marketing, selling, and distributing all of the ethanol produced by the Company.  Under such pooling arrangements, the Company paid the entity $.01 (one cent) per gallon for each gallon of ethanol sold.    Marketing expense for the years ended September 30, 2011, 2010 and 2009 were none, none and $528,215, respectively, under this agreement. Revenues with this customer were none, none, and $88,155,144 for the years ended September 30, 2011, 2010 and 2009, respectively.  

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On September 25, 2009, the Company entered into a new agreement with an unrelated entity.  The agreement became effective on October 1, 2009.  The unrelated entity is responsible for marketing and purchasing all of the ethanol produced by the company.  For the years ended September 30, 2011 and 2010, the Company has expensed $712,258 and $695,945, under this agreement for marketing fees, respectively.  Revenues with this customer were $139,535,766 and $94,611,865 for the years ended September 30, 2011 and 2010, respectively.  Trade accounts receivable of $ 6,129,247 and $4,550,445 was due from the customer as of September 30, 2011 and 2010, respectively.  As of September 30, 2011, the Company has ethanol sales commitments with the unrelated entity of 3,485,000 gallons for an approximate total sales commitment of $8,997,000.

 The Company has entered into an agreement with an unrelated entity for marketing, selling and distributing the distiller’s grains as of October 1, 2007.   For the years ended September 30, 2011, 2010 and 2009, the Company has expensed marketing fees of $535,226, $295,353 and $337,760, respectively, under this agreement.  Revenues with this customer were $31,715,564, $19,434,064 and $20,729,951 for the years ended September 30, 2011, 2010 and 2009, respectively.  Trade accounts receivable of $1,083,695 and $922,754 was due from the customer as of September 30, 2011 and 2010, respectively.  As of September 30, 2011, the Company has distiller’s grains sales commitments with the unrelated entity of 8,244 tons for a total sales commitment of $1,588,199.
 
The Company has an agreement with an unrelated party to provide the coal supply for the ethanol plant.  The agreement includes the purchase of coal at a cost per ton and a transportation cost per ton as defined in the agreement.  The cost is subject to price adjustments on a monthly basis.  If the Company fails to purchase the minimum number of tons of coal for the calendar year , the Company shall pay an amount per ton multiplied by the difference of the minimum requirement and actual quantity purchased.  That agreement expired as of January 1, 2008.   On October 1, 2007 the Company entered into an amended agreement to the original cost supply agreement.  The term of the agreement has been extended from the original expiration date to January 1, 2013.  The same minimum purchase commitment is required from the Company as the previous agreement.  The calendar years , 2011 and 2012 estimated purchase commitments total $212,150 and $5,930,400.  For the years ended September 30, 2011, 2010 and 2009, the Company has purchased coal of $7,001,676, $5,989,438 and $5,580,495 respectively.

The Company has entered into two variable contracts with a supplier of denaturant.  One variable contract is for a minimum purchase of 72,000 gallons at $2.30 per net gallon. The term of the contract is from September 1, 2011 through December 31, 2011.   The estimated future purchase commitment on this contract is approximately $165,600. The second variable contract is for a minimum purchase of 144,000 gallons at the average of the OPIS Conway In-Well Natural Gasoline High and Low prices on the date of loading plus $0.1175 per net gallon. The term of the contract is from September 1, 2011 through December 31, 2011.   The estimated future purchase commitment on this contract is approximately $283,320.

The Company has entered into a fixed contract with a supplier of anhydrous ammonia. The contract is for a minimum purchase of 360 tons at the rate of $775 per delivered ton. The term of the contract is from October 1, 2011 through December 31, 2011. The minimum future purchase commitment is $279,000.

On June 30, 2011, the Company entered into an agreement with an unrelated entity to perform the rail construction for the additional rail spur that is being added to the Company's existing track. The total future purchase commitment is $639,393.

 

Note 8.    Risk Management
 
The Company’s activities expose it to a variety of market risks, including the effects of changes in commodity prices.  These financial exposures are monitored and managed by the Company as an integral part of its overall risk management program.  The Company’s risk management program focuses on the unpredictability of commodity markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.


The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market fluctuations.  The Company’s specific goal is to protect the Company from large moves in the commodity costs.





54



To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange-traded futures and options contracts to minimize its net position of merchandisable agricultural commodity inventories and forward purchases and sales contracts.  Exchange traded futures and options contracts are designated as non-hedge derivatives and are valued at market price with changes in market price recorded in operating income through cost of goods sold for corn derivatives and through revenue for ethanol derivatives.
 
The effects on operating income from derivative activities is as follows for the years ending September 30, are as follows:

 
2011
 
2010
 
2009
Increase (decrease) in revenue due to derivatives related to ethanol sales:
 
 
 
 
 
Realized
$
(2,655,034
)
 
$
45,434

 
$
10,440

Unrealized
1,528,367

 
(1,483,997
)
 

Total effect on revenue
(1,126,667
)
 
(1,438,563
)
 
10,440

 
 
 
 
 
 
(Increase) decrease in cost of goods sold due to derivatives related to corn costs:
 

 
 

 
 

Realized
(2,946,138
)
 
604,475

 
(3,783,088
)
Unrealized
(44,125
)
 
849,475

 
(72,350
)
Total effect on cost of goods sold
(2,990,263
)
 
1,453,950

 
(3,855,438
)
 
 
 
 
 
 
Total (decrease) increase  to operating income due to derivative activities
$
(4,116,930
)
 
$
15,387

 
$
(3,844,998
)

Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed “normal purchases and normal sales”, and therefore are not marked to market in the Company’s financial statements, but are subject to a lower of cost or market assessment.   
 

Note 9.    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 utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market-corroborated, or generally unobservable inputs.  The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  Based on the observability of the 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 Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2Valuations for assets and liabilities traded in less active dealer or broker markets.  Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.

Level 3Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
 
A description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.  These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value.
 

55



Derivative financial instruments:  Commodity futures and exchange-traded commodity options contracts are reported at fair value utilizing Level 1 inputs.  For these contracts, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes and live trading levels from the CBOT and NYMEX markets.  The fair value measurements consider observable data that may include dealer quotes and live trading levels from the over-the-counter markets.

The following table summarizes the financial liabilities measured at fair value on a recurring basis as of September 30, 2011 and 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 
2011
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets, derivative financial instruments
$
292,375

 
$
292,375

 
$

 
$

 
 
 
 
 
 
 
 
 
2010
 
Total