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EXCEL - IDEA: XBRL DOCUMENT - Granite Falls Energy, LLCFinancial_Report.xls
EX-32.2 - CERTIFICATION - Granite Falls Energy, LLCa322-certification103111.htm
EX-32.1 - CERTIFICATION - Granite Falls Energy, LLCa321-certification103111.htm
EX-31.2 - CERTIFICATION - Granite Falls Energy, LLCa312-certification103111.htm
EX-31.1 - CERTIFICATION - Granite Falls Energy, LLCa311-certification103111.htm
EX-10.34 - AGREEMENT - Granite Falls Energy, LLCa1034amendedemploymentcont.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
x
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
 
For the fiscal year ended October 31, 2011
 
 
 
OR
 
 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
 
For the transition period from               to               .
 
 
 
COMMISSION FILE NUMBER 000-51277
 
GRANITE FALLS ENERGY, LLC
(Exact name of registrant as specified in its charter)
 
Minnesota
 
41-1997390
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
15045 Highway 23 SE, Granite Falls, MN 56241-0216
(Address of principal executive offices)
 
(320) 564-3100
(Registrant's telephone number, including area code)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes     x No

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes     o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer o
Accelerated Filer  o
Non-Accelerated Filer x
Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes     x No

The aggregate market value of the Company’s Units held by non-affiliates is not able to be calculated. The Company is a limited liability company whose outstanding common equity, consisting of its Units, is subject to significant restrictions on transfer under its Member Control Agreement. No public market for common equity of Granite Falls Energy, LLC is established and it is unlikely in the foreseeable future that a public market for its common equity will develop.

As of January 30, 2012, there were 30,606 membership units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant has incorporated by reference into Part III of this Annual Report on Form 10-K portions of its definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Annual Report (October 31, 2011). This proxy statement is referred to in this report as the 2012 Proxy Statement.




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INDEX

 
Page Number
 
 


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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:


Changes in the availability and price of corn and natural gas;
Changes in our business strategy, capital improvements or development plans;
Our ability to profitably operate the ethanol plant and maintain a positive spread between the selling price of our products and our raw materials costs;
Results of our hedging transactions and other risk management strategies;
Decreases in the market prices of ethanol and distillers grains;
Ethanol supply exceeding demand; and corresponding ethanol price reductions;
Changes in the environmental regulations that apply to our plant operations and changes in our ability to comply with such regulations;
Changes in plant production capacity or technical difficulties in operating the plant;
Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;
Lack of transport, storage and blending infrastructure preventing ethanol from reaching high demand markets;
Changes in federal and/or state laws;
Changes and advances in ethanol production technology;
Effects of mergers, consolidations or contractions in the ethanol industry;
Competition from alternative fuel additives;
The development of infrastructure related to the sale and distribution of ethanol;
Our inelastic demand for corn, as it is the only available feedstock for our plant;
Our ability to retain key employees and maintain labor relations; and
Volatile commodity and financial markets.
    
The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We do not undertake any duty to update forward-looking statements after the date they are made or to conform forward-looking statements to actual results or to changes in circumstances or expectations. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or any persons acting on our behalf. We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.  You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect.  We qualify all of our forward-looking statements by these cautionary statements.

AVAILABLE INFORMATION
 
Information about us is also available at our website at www.granitefallsenergy.com, under “SEC Compliance,” which includes links to reports we have filed with the Securities and Exchange Commission, including annual, quarterly and current reports. The contents of our website are not incorporated by reference in this Annual Report on Form 10-K. The Securities and Exchange Commission also maintains an Internet site (http://www.sec.gov) through which the public can access our reports.


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PART I

ITEM 1.    BUSINESS

Business Development

Granite Falls Energy, LLC (“Granite Falls” or the “Company”) is a Minnesota limited liability company formed on December 29, 2000. We are currently producing fuel-grade ethanol, distillers grains and crude corn oil for sale. Our plant has an approximate annual production capacity of 60 million gallons of denatured ethanol.

Our operating results are largely driven by the prices at which we sell our ethanol, distillers grains, and corn oil as well as the other costs related to production. The price of ethanol has historically fluctuated with the price of petroleum-based products such as unleaded gasoline, heating oil and crude oil. The price of distillers grains has historically been influenced by the price of corn as a substitute livestock feed. We expect these price relationships to continue for the foreseeable future. Our largest costs of production are corn, natural gas, depreciation and manufacturing chemicals. Our cost of corn is largely impacted by geopolitical supply and demand factors and the outcome of our risk management strategies. Prices for natural gas, manufacturing chemicals and denaturant are tied directly to the overall energy sector, crude oil and unleaded gasoline.

During the second quarter of fiscal 2011, we obtained an amendment to our environmental permits allowing us to produce up to 70 million gallons of undenatured ethanol on a twelve month rolling sum basis. We intend to continue working toward increasing production to take advantage of the underutilized capacity of our plant as long as we believe it is profitable to do so. 

On August 26, 2011, we repaid our outstanding note payable to the City of Granite Falls in the amount of approximately $187,000. Granite Falls Energy had been making scheduled payments on this loan since February 2006 and was scheduled to have the the loan repaid in June 2014. Granite Falls Energy decided to repay the loan early and is now free of all long term debt obligations.

In November 2010, we declared a cash distribution of $300 per unit or $9,196,800 for unit holders of record as of November 23, 2010. The distribution was paid on December 15, 2010. In October 2011, we declared an additional cash distribution of $300 per unit or $9,196,800 for unit holders of record as of October 27, 2011. The distribution was paid on December 15, 2011.

As of the date of this report, we have 37 full time employees. Ten of these employees are involved primarily in management and administration. The remaining employees are involved primarily in plant operations. We do not currently anticipate any significant change in the number of employees at our plant.

Financial Information

Please refer to “Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations” for information about our revenue, profit and loss measurements and total assets and liabilities and “Item 8 - Financial Statements and Supplementary Data” for our financial statements and supplementary data.

Principal Products

The principal products we produce are ethanol, distillers grains and corn oil.

Ethanol

Ethanol is ethyl alcohol, a fuel component made primarily from corn and various other grains, which can be used as: (i) an octane enhancer in fuels; (ii) an oxygenated fuel additive for the purpose of reducing ozone and carbon monoxide vehicle emissions; and (iii) a non-petroleum-based gasoline substitute. More than 99% of all ethanol produced in the United States is used in its primary form for blending with unleaded gasoline and other fuel products. The principal purchasers of ethanol are generally wholesale gasoline marketers or blenders. The principal markets for our ethanol are petroleum terminals in the continental United States.

Approximately 83.0% of our revenue, net of derivative activity, was derived from the sale of ethanol during our fiscal year ended October 31, 2011. Ethanol sales accounted for approximately 85.0% and 83.0% of our revenue, net of derivative activity, for the fiscal years ended October 31, 2010 and 2009, respectively.


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Distillers Grains

A principal co-product of the ethanol production process is distillers grains, a high protein, high-energy animal feed supplement primarily marketed to the dairy, swine, poultry and beef industries. Distillers grains contain by-pass protein that is superior to other protein supplements such as cottonseed meal and soybean meal. By-pass proteins are more digestible to the animal, thus generating greater lactation in milk cows and greater weight gain in beef cattle and swine. Distillers grains can also be included in the rations of breeder hens and laying hens which can potentially contain up to 20% and 15% percent distillers grains, respectively.

Approximately 14.5% of our revenue was derived from the sale of distillers grains during our fiscal year ended October 31, 2011. Distillers grains sales accounted for approximately 13.0% and 16.0% of our revenue for the fiscal years ended October 31, 2010 and 2009, respectively.

Corn Oil

In May 2008 the corn oil extraction equipment we installed at our plant became operational. Corn oil is used primarily as a biodiesel feedstock and as a supplement for animal feed. Corn oil sales accounted for approximately 2.5% of our revenues during our fiscal years ended October 31, 2011 and 2010 and 1% for our fiscal year ended October 31, 2009.

Principal Product Markets

As described below in “Distribution of Principal Products”, we market and distribute all of our ethanol and all of our distillers grains shipped by rail through professional third party marketers. Our ethanol and distillers grains marketers make all decisions with regard to where our products are marketed. Our ethanol and distillers grains are primarily sold in the domestic market. As distillers grains become more accepted as an animal feed substitute throughout the world, distillers grains exporting may increase.

We expect our ethanol and distillers grains marketers to explore all markets for our products, including export markets. However, due to high transportation costs, and the fact that we are not located near a major international shipping port, we expect our products to continue to be marketed primarily domestically.

Distribution of Principal Products

Our ethanol plant is located near Granite Falls, Minnesota in Chippewa County. We selected the Granite Falls site because of its accessibility to road and rail transportation and its proximity to grain supplies. It is served by the TC&W Railway which provides connection to the Canadian Pacific and Burlington Northern Santa Fe Railroads. Our site is in close proximity to major highways that connect to major population centers such as Minneapolis, Minnesota; Chicago, Illinois; and Detroit, Michigan.

Ethanol Distribution

Eco-Energy, Inc. (“Eco-Energy”) is our ethanol marketer. Pursuant to the agreement we have with Eco-Energy, they have agreed to market the entire ethanol output of our ethanol plant and to arrange for the transportation of ethanol; however, we are responsible for securing all of the rail cars necessary for the transportation of ethanol by rail. We pay Eco-Energy a certain percentage of the FOB plant price in consideration of Eco-Energy's services.

Distillers Grains Distribution

On December 10, 2010 we executed a new distillers grains marketing agreement with Renewable Products Marketing Group, LLC (“RPMG”). The effective date of this marketing agreement with RPMG was February 1, 2011. Pursuant to this new agreement RPMG now markets all the distillers grains produced at our plant.

During fiscal 2010, CHS, Inc. (“CHS”) marketed our distillers grains throughout the continental United States. CHS marketed all of the distillers grains that were shipped by rail from our plant. The remainder of our distillers grains product was transported by truck and we had the discretion to designate the portion of the trucked distillers grains marketed by CHS. Granite Falls independently marketed the remainder of its distillers grains, which were shipped from the plant by truck to livestock producers, exporters and other marketers. Our distillers grains must meet minimum quality feed trade standards.


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Corn Oil Distribution

RPMG is also our corn oil marketer. Currently, RPMG markets our corn oil which is used primarily as a biodiesel feedstock and as a supplement for animal feed. Our corn oil is transported by truck to end users located primarily in the upper Midwest.

New Products and Services

We did not introduce any new services during our fiscal year ended October 31, 2011.

Sources and Availability of Raw Materials

Corn Supply

To produce approximately 60 million gallons of undenatured ethanol per year our ethanol plant needs approximately 20 million bushels of corn per year, or approximately 60,000 bushels per day, as the feedstock for its dry milling process. The grain supply for our plant is obtained from the Farmers Cooperative Elevator Company ("FCE"), our exclusive grain procurement agent. We will be forced to seek alternative corn suppliers if the FCE cannot meet our needs.

On January 12, 2012, the United States Department of Agriculture (“USDA”) released its Crop Production report, which estimated the 2011 grain corn crop at 12.36 billion bushels. The January 12, 2012 estimate of the 2011 corn crop is approximately 1.0% below the USDA's estimate of the 2010 corn crop of 12.45 billion bushels. Corn prices can be volatile as a result of a number of factors, the most important of which are weather, current and anticipated stocks, domestic and export prices and supports and the government's current and anticipated agricultural policy. The price of corn was volatile during our 2011 fiscal year and we anticipate that it will continue to be volatile in the future. Increases in the price of corn significantly increase our cost of goods sold. If these increases in cost of goods sold are not offset by corresponding increases in the prices we receive from the sale of our products, these increases in cost of goods sold can have a significant negative impact on our financial performance.

Although the area surrounding the plant produces a significant amount of corn and we do not anticipate encountering problems sourcing corn, a shortage of corn could develop, particularly if there were an extended drought or other production problem.  Poor weather can be a major factor in increasing corn prices. We can mitigate fluctuations in the corn and ethanol markets by locking in a favorable margin through the use of hedging activities, including forward contracts. We recognize that we are not always presented with an opportunity to lock in a favorable margin and that our plant's profitability may be negatively impacted during periods of high grain prices.

Utilities

Natural Gas. Natural gas is a significant input to our manufacturing process.  We estimate our natural gas usage at approximately 120,000 million British thermal units (“mmBTU”) per month.  We use natural gas to dry our distillers grains product to moisture contents at which it can be stored for long periods and transported greater distances. Our dried distillers grains can then be marketed to broader livestock markets, including poultry and swine markets in the continental United States, and can be shipped to international markets.

We pay Center Point Energy/Minnegasco a per unit fee to move the natural gas through the pipeline and have guaranteed to move a minimum of 1,400,000 mmBTU annually through December 31, 2015, which is the ending date of the agreement.

We also have an agreement with U.S. Energy Services, Inc. On our behalf, U.S. Energy Services procures contracts with various natural gas vendors to supply the natural gas necessary to operate the plant. We determined that sourcing our natural gas from a variety of vendors is more cost-efficient than using an exclusive supplier.

Electricity. Our plant requires a continuous supply of 4.5 megawatts of electricity. We have an agreement with Minnesota Valley Electric Cooperative ("MVEC") to supply electricity to our plant. Under this agreement, we pay MVEC a monthly base fee plus regular energy and demand charges for electricity delivered to our plant.

Water. We currently obtain the water necessary to operate our plant from the Minnesota River. In addition to an intake structure in the Minnesota River and a water pipeline to the plant from the Minnesota River, we have two ground water wells that provide a redundant supply of water to our plant. We also have a water treatment facility to pre-treat the river water we use for operations. The water pipeline and water treatment equipment became operational in February 2007 and the Minnesota River is our primary source of water. In connection with our efforts to obtain permits to increase production at our facility we have

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implemented a water recycling program that allows our plant to meet certain zero liquid discharge criteria. Recycling our waste water has allowed us to reduce water usage from a rate of 4.0 gallons of water per gallon of ethanol produced to 2.2 gallons of water per gallon of ethanol produced, a 45.0% reduction in water usage.

Xcel Energy is the owner of a dam on the Minnesota River located downstream from our water intake structure. We have been notified that Xcel Energy intends to remove that dam during the summer of 2012. In the event Xcel Energy does proceed with the dam removal, we expect that the water level around our intake structure will be lowered by approximately 15 feet. This change in the pool level would require us to invest capital to upgrade our intake structure to draw water from the Minnesota River. We are encouraging the City of Granite Falls and counties of Yellow Medicine and Chippewa to take public ownership of the dam and to preserve the current pool level for the benefit of area residents, local business, and Granite Falls Energy.

Patents, Trademarks, Licenses, Franchises and Concessions

We do not currently hold any patents, trademarks, franchises or concessions. We were granted a license by ICM to use certain ethanol production technology necessary to operate our ethanol plant. The cost of the license granted by ICM was included in the amount we paid to Fagen, Inc. to design and build our ethanol plant.

Seasonality of Ethanol Sales

We experience some seasonality of demand for our ethanol. Since ethanol is predominantly blended with conventional gasoline for use in automobiles, ethanol demand tends to shift in relation to gasoline demand. As a result, we experience some seasonality of demand for ethanol in the summer months related to increased driving. In addition, we experience some increased ethanol demand during holiday seasons related to increased gasoline demand.

Working Capital

We primarily use our working capital for purchases of raw materials necessary to operate the ethanol plant. The Company has a Loan Agreement with Minnwest Bank M.V. of Marshall, MN (the “Bank”). Under the Loan Agreement, the Company has a revolving line of credit with a maximum of $6,000,000 available which is secured by substantially all of our assets. As of October 31, 2011, the Company has outstanding letters of credit in the amount of approximately $436,000. These letters of credit reduce the amount available under the revolving line of credit to approximately $5,564,000. The interest rate on the revolving line of credit is at 0.25 percentage points above the prime rate as reported by the Wall Street Journal, with a minimum rate of 4.5%. At October 31, 2011, the Company had no outstanding balance on this line of credit

Dependence on One or a Few Major Customers

As discussed above, we have an exclusive ethanol marketing agreement with Eco-Energy; and agreements with RPMG to market our distillers grains and corn oil. We rely on Eco-Energy and RPMG for the sale and distribution of all of our products. Therefore, we are highly dependent on Eco-Energy and RPMG for the successful marketing of our products. Any loss of Eco-Energy or RPMG as our marketing agent for our ethanol, distillers grains, or corn oil could have a negative impact on our revenues.

Competition

We are in direct competition with numerous ethanol producers, many of whom have greater resources than we do. While management believes we are a lower cost producer of ethanol, larger ethanol producers may be able to take advantages of economies of scale due to their larger size and increased bargaining power with both customers and raw material suppliers. Following the significant growth in the ethanol industry during 2005 and 2006, the ethanol industry has grown at a much slower pace. As of January 3, 2012, the Renewable Fuels Association estimates that there are 209 ethanol production facilities in the United States with capacity to produce approximately 14.7 billion gallons of ethanol and another 9 plants under expansion or construction with capacity to produce an additional 261 million gallons. However, the RFA estimates that approximately 3.4% of the ethanol production capacity in the United States was not operating as of January 3, 2012. The ethanol industry is continuing to experience a consolidation where a few larger ethanol producers are increasing their production capacities and are controlling a larger portion of United States ethanol production. The largest ethanol producers include Archer Daniels Midland, Green Plains Renewable Energy, POET, and Valero Renewable Fuels, each of which are capable of producing significantly more ethanol than we produce.


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The following table identifies the largest ethanol producers in the United States along with their production capacities.

U.S. FUEL ETHANOL PRODUCTION CAPACITY BY TOP PRODUCERS
Producers of Approximately 400 million gallons per year (mmgy) or more

Company
Current Capacity
(mmgy)
Archer Daniels Midland
1,750.0

POET Biorefining
1,629.0

Valero Renewable Fuels
1,130.0

Green Plains Renewable Energy
740.0

Aventine Renewable Energy, LLC
460.0


Updated: January 3, 2012

 Ethanol is a commodity product where competition in the industry is predominantly based on price. Larger ethanol producers may be able to realize economies of scale in their operations that we are unable to realize. This could put us at a competitive disadvantage to other ethanol producers.

In 2008, Valero Renewable Fuels, which is a subsidiary of a major gasoline refining company, purchased several ethanol plants from the VeraSun Energy bankruptcy auction. Currently, Valero Renewable Fuels owns 10 ethanol plants with capacity to produce approximately 1.1 billion gallons of ethanol annually. This makes Valero Renewable Fuels one of the largest ethanol producers in the United States. Further, since the parent company of Valero Renewable Fuels is a gasoline blender, Valero Renewable Fuels has an established customer for the ethanol it produces which may allow Valero Renewable Fuels to be more competitive in the ethanol industry than we are able. At times when ethanol demand may be lower, it is unlikely that Valero Renewable Fuels will have difficulty selling the ethanol it produces due to the fact that it is a subsidiary of a company that is required to blend a significant amount of ethanol. While Valero is currently the largest oil company which has purchased ethanol production capacity, other large oil companies may follow the lead of Valero in the future. Should other large oil companies become involved in the ethanol industry, it may be increasingly difficult for us to compete. While we believe that we are a lower cost producer of ethanol, increased competition in the ethanol industry may make it more difficult for us to operate the ethanol plant profitably.

We anticipate increased competition from renewable fuels that do not use corn as the feedstock. Many of the current ethanol production incentives are designed to encourage the production of renewable fuels using raw materials other than corn. One type of ethanol production feedstock that is being explored is cellulose. Cellulose is the main component of plant cell walls and is the most common organic compound on earth. Cellulose is found in wood chips, corn stalks, rice straw, amongst other common plants. Cellulosic ethanol is ethanol produced from cellulose. Currently, cellulosic ethanol production technology is not sufficiently advanced to produce cellulosic ethanol on a commercial scale. However, due to government incentives designed to encourage innovation in the production of cellulosic ethanol, we anticipate that commercially viable cellulosic ethanol technology will be developed in the future. Several companies and researchers have commenced pilot projects to study the feasibility of commercially producing cellulosic ethanol. If this technology can be profitably employed on a commercial scale, it could potentially lead to ethanol that is less expensive to produce than corn based ethanol, especially when corn prices are high. Cellulosic ethanol may also capture more government subsidies and assistance than corn based ethanol. This could decrease demand for our product or result in competitive disadvantages for our ethanol production process.

    A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids, electric cars or clean burning gaseous fuels. Like ethanol, the emerging fuel cell industry offers a technological option to address worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. Fuel cells have emerged as a potential alternative to certain existing power sources because of their higher efficiency, reduced noise and lower emissions. Fuel cell industry participants are currently targeting the transportation, stationary power and portable power markets in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions. If the fuel cell industry continues to expand and gain broad acceptance and becomes readily available to consumers for motor vehicle use, we may not be able to compete effectively. This additional competition could reduce the demand for ethanol, which would negatively impact our profitability.


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Research and Development

We are continually working to develop new methods of operating the ethanol plant more efficiently. We continue to conduct research and development activities in order to realize these efficiency improvements.

Governmental Regulation and Federal Ethanol Supports

Federal Ethanol Supports

The ethanol industry is dependent on several economic incentives to produce ethanol, including federal tax incentives and ethanol use mandates. One significant federal ethanol support is the Federal Renewable Fuels Standard (the “RFS”). The RFS requires that in each year, a certain amount of renewable fuels must be used in the United States. The RFS is a national program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective. The RFS requirement increases incrementally each year until the United States is required to use 36 billion gallons of renewable fuels by 2022. Starting in 2009, the RFS required that a portion of the RFS must be met by certain “advanced” renewable fuels. These advanced renewable fuels include ethanol that is not made from corn, such as cellulosic ethanol and biomass based biodiesel. The use of these advanced renewable fuels increases each year as a percentage of the total renewable fuels required to be used in the United States.

In February 2010, the EPA issued new regulations governing the RFS. These new regulations have been called RFS2. The most controversial part of RFS2 involves what is commonly referred to as the lifecycle analysis of green house gas emissions. Specifically, the EPA adopted rules to determine which renewable fuels provided sufficient reductions in green house gases, compared to conventional gasoline, to qualify under the RFS program. RFS2 establishes a tiered approach, where regular renewable fuels are required to accomplish a 20% green house gas reduction compared to gasoline, advanced biofuels and biomass-based biodiesel must accomplish a 50% reduction in green house gases, and cellulosic biofuels must accomplish a 60% reduction in green house gases. Any fuels that fail to meet this standard cannot be used by fuel blenders to satisfy their obligations under the RFS program. The scientific method of calculating these green house gas reductions has been a contentious issue. Many in the ethanol industry were concerned that corn based ethanol would not meet the 20% green house gas reduction requirement based on certain parts of the environmental impact model that many in the ethanol industry believed was scientifically suspect. However, RFS2 as adopted by the EPA provides that corn-based ethanol from modern ethanol production processes does meet the definition of a renewable fuel under the RFS program. Our ethanol plant was grandfathered into the RFS due to the fact that it was constructed prior to the effective date of the lifecycle green house gas requirement and is not required to prove compliance with the lifecycle green house gas reductions. In addition to the lifecycle green house gas reductions, many in the ethanol industry are concerned that certain provisions of RFS2 as adopted may disproportionately benefit ethanol produced from sugarcane. This could make sugarcane based ethanol, which is primarily produced in Brazil, more competitive in the United States ethanol market. If this were to occur, it could reduce demand for the ethanol that we produce.
 
Many in the ethanol industry believe that it will be difficult to meet the RFS requirement in future years without an increase in the percentage of ethanol that can be blended with gasoline for use in standard (non-flex fuel) vehicles. Most ethanol that is used in the United States is sold in a blend called E10. E10 is a blend of 10% ethanol and 90% gasoline. E10 is approved for use in all standard vehicles. Estimates indicate that gasoline demand in the United States is approximately 135 billion gallons per year. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 13.5 billion gallons per year. This is commonly referred to as the “blend wall,” which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. This is a theoretical limit because it is believed that it would not be possible to blend ethanol into every gallon of gasoline that is being used in the United States and it discounts the possibility of additional ethanol used in higher percentage blends such as E85 used in flex fuel vehicles. Many in the ethanol industry believe that we will reach this blend wall in 2012, since the RFS requirement for 2012 is 15 billion gallons, much of which will come from ethanol. The RFS requires that 36 billion gallons of renewable fuels must be used each year by 2022, which equates to approximately 27% renewable fuels used per gallon of gasoline sold. In order to meet the RFS mandate and expand demand for ethanol, management believes higher percentage blends of ethanol must be utilized in standard vehicles.

The RFS for 2011 was approximately 14 billion gallons, of which corn based ethanol could be used to satisfy approximately 12 billion gallons. The RFS for 2012 is approximately 15.2 billion gallons, of which corn based ethanol can be used to satisfy approximately 13.2 billion gallons. Current ethanol production capacity exceeds the 2012 RFS requirement which can be satisfied by corn based ethanol.

The United States Environmental Protection Agency has allowed the use of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model year 2007 and later. Management believes that many gasoline retailers will refuse to provide E15 due to the fact that not all standard vehicles will be allowed to use E15 and due to the

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labeling requirements the EPA may impose.  The EPA is considering instituting labeling requirements associated with E15 which may unfairly discourage consumers from purchasing E15.  As a result, the approval of E15 may not significantly increase demand for ethanol.  In addition to E15, the ethanol industry is pushing the use of an intermediate blend of 12% ethanol and 88% gasoline called E12.  Management believes that E12 may be more beneficial to the ethanol industry than E15 because many believe that E12 could be approved for use in all standard vehicles.  Management believes this will make it easier for retailers to supply E12 compared to E15, unless E15 is approved for use in all standard vehicles. 

Historically, the ethanol industry has depended on the Volumetric Ethanol Excise Tax Credit (“VEETC”). VEETC provides a volumetric ethanol excise tax credit of 45 cents per gallon of ethanol blended with gasoline. VEETC expired as of December 31, 2011. The expiration of this tax credit may have a negative impact on the price of ethanol and demand for ethanol in the market due to reduced discretionary blending of ethanol. Discretionary blending is when gasoline blenders use ethanol to reduce the cost of blended gasoline.

Management believes that the expiration of VEETC may effectuate a short term reduction in the demand for ethanol during the first two or three months of calendar year 2012. This may be a result of blenders having blended a disproportionate number of gallons of ethanol at the end of 2011 to take advantage of the VEETC which may curtail demand in early 2012 as those gallons make their way through the blended fuel supply chain. However, due to the RFS, we anticipate that in the longer term the demand for ethanol will continue to mirror the RFS requirement. If the RFS is reduced or eliminated, the decrease in demand for ethanol related to the elimination of VEETC may be more substantial.

Effect of Governmental Regulation

The government's regulation of the environment changes constantly. We are subject to extensive air, water and other environmental regulations and we have been required to obtain a number of environmental permits to construct, expand and operate the plant. It is possible that more stringent federal or state environmental rules or regulations could be adopted, which could increase our operating costs and expenses. It also is possible that federal or state environmental rules or regulations could be adopted that could have an adverse effect on the use of ethanol. Plant operations are governed by the Occupational Safety and Health Administration (“OSHA”). OSHA regulations may change such that the costs of operating the plant may increase. Any of these regulatory factors may result in higher costs or other adverse conditions effecting our operations, cash flows and financial performance.

United States ethanol production is currently benefited by a 54 cent per gallon tariff imposed on ethanol imported into the United States. The 54 cent per gallon tariff expired December 31, 2011. This could lead to the importation of ethanol produced in other countries, especially in areas of the United States that are easily accessible by international shipping ports. Ethanol imported from other countries may be a less expensive alternative to domestically produced ethanol and may affect our ability to sell our ethanol profitably.

Environmental Permitting

We are subject to extensive air, water and other environmental regulations and we have been required to obtain a number of environmental permits to construct and operate the plant. As such, any changes that are made to the plant or its operations must be reviewed to determine if amended permits need to be obtained in order to implement these changes.

In June 2009, we submitted an application package to the MPCA to allow the facility to operate at a production rate of 70 million gallons per year of undenatured ethanol. The application submittal required numerous documents covering all aspects of the facility including: Environmental Assessment Worksheet (“EAW”), air modeling, Air Permit, NPDES/SDS permit, Aboveground Storage Tank (“AST”) permit, Construction Stormwater permit, and various other support documentation. The renewal application for the NPDES/SDS permit was also incorporated into this package and resubmitted for MPCA consideration. In the second quarter of fiscal 2011, we obtained an amendment to our environmental permits allowing us to produce up to 70 million gallons of undenatured ethanol on a twelve month rolling sum basis.
 
We currently have obtained all of the necessary permits to operate the plant at its permitted rate. In the fiscal year ended October 31, 2011, we incurred costs and expenses of approximately $63,000 complying with environmental laws, including the cost of pursuing permit amendments. Any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources in complying with such regulations.


10




Employees
    
As of the date of this report, we have 37 full time employees. Ten of these employees are involved primarily in management and administration. The remaining employees are involved primarily in plant operations. We do not currently anticipate any significant change in the number of employees at our plant.

Financial Information about Geographic Areas

All of our operations are domiciled in the United States. All of the products sold to our customers for fiscal years 2011, 2010 and 2009 were produced in the United States and all of our long-lived assets are domiciled in the United States. We have engaged third-party professional marketers who decide where our products are marketed and we have no control over the marketing decisions made by our third-party professional marketers. These third-party marketers may decide to sell our products in countries other than the United States. However, we anticipate that our products will primarily be sold in the United States.

Item 1A. Risk Factors

You should carefully read and consider the risks and uncertainties below and the other information contained in this report.  The risks and uncertainties described below are not the only ones we may face.  The following risks, together with additional risks and uncertainties not currently known to us or that we currently deem immaterial could impair our financial condition and results of operation.

The Federal Volumetric Ethanol Excise Tax Credit (“VEETC”) expired on December 31, 2011 and its absence could negatively impact our profitability. The ethanol industry has historically been benefited by VEETC which is a federal excise tax credit of 45 cents per gallon of ethanol blended with gasoline. This excise tax credit expired on December 31, 2011. It is unclear exactly how the absence of this tax credit will affect the ethanol market but it could negatively impact the price we receive for our ethanol and could negatively impact our profitability.

The Secondary Tariff on Imported Ethanol was eliminated in December 2011, and its absence could negatively impact our profitability. The secondary tariff on imported ethanol was allowed to expire in December 2011. Accordingly, it is possible that we could see an increase in ethanol produced in foreign countries being marketed in the Untied States which could negatively impact our profitability. The secondary tariff on imported ethanol was a 54 cent per gallon tariff on ethanol imports from certain foreign countries. If market prices make importing ethanol to the United States profitable for foreign producers, we could see an influx of imported ethanol on the domestic ethanol market which could have a significant negative impact on domestic ethanol prices and our profitability.

Increases in the price of corn may reduce our profitability. Our results of operations and financial condition are significantly affected by the price and supply of corn. Changes in the price and supply of corn are subject to and determined by market forces over which we have little control. Ethanol production requires substantial amounts of corn. Generally, higher corn prices will produce lower profit margins and, therefore, negatively affect our financial performance. If a period of high corn prices were to be sustained for some time, such pricing may reduce our ability to generate income because of the higher cost of operating our plant. This may make ethanol production unprofitable. We may not be able to offset any increase in the price of corn by increasing the price of our products. If we cannot offset increases in the price of corn, our financial performance may be materially and adversely affected.

Risks Relating to Our Business

Increases in the price of corn or natural gas would reduce our profitability.  Our primary source of revenue is from the sale of ethanol, distillers grains and corn oil. Our results of operations and financial condition are significantly affected by the cost and supply of corn and natural gas. Changes in the price and supply of corn and natural gas are subject to and determined by market forces over which we have no control including weather and general economic factors.

Ethanol production requires substantial amounts of corn. Generally, higher corn prices will produce lower profit margins and, therefore, negatively affect our financial performance. If a period of high corn prices were to be sustained for some time, such pricing may reduce our ability to operate profitably because of the higher cost of operating our plant. We may not be able to offset any increase in the price of corn by increasing the price of our products. If we cannot offset increases in the price of corn, our financial performance may be negatively affected.

The prices for and availability of natural gas are subject to volatile market conditions.  These market conditions often are affected by factors beyond our control such as higher prices as a result of colder than average weather conditions or natural disasters,

11




overall economic conditions and foreign and domestic governmental regulations and relations.  Significant disruptions in the supply of natural gas could impair our ability to manufacture ethanol and more significantly, distillers grains for our customers.  Furthermore, increases in natural gas prices or changes in our natural gas costs relative to natural gas costs paid by competitors may adversely affect our results of operations and financial condition. We seek to minimize the risks from fluctuations in the prices of corn and natural gas through the use of hedging instruments.  However, these hedging transactions also involve risks to our business.  See “Risks Relating to Our Business - We engage in hedging transactions which involve risks that could harm our business.” If we were to experience relatively higher corn and natural gas costs compared to the selling prices of our products for an extended period of time, the value of our units may be reduced.
 
Declines in the price of ethanol or distillers grains would significantly reduce our revenues. The sales prices of ethanol and distillers grains can be volatile as a result of a number of factors such as overall supply and demand, the price of gasoline and corn prices, levels of government support, and the availability and price of competing products. We are dependent on a favorable spread between the price we receive for our ethanol and distillers grains and the price we pay for corn and natural gas. Any lowering of ethanol and distillers grains prices, especially if it is associated with increases in corn and natural gas prices, may affect our ability to operate profitably. We anticipate the price of ethanol and distillers grains to continue to be volatile in our 2012 fiscal year as a result of the net effect of changes in the price of gasoline and corn prices and increased ethanol supply offset by increased ethanol demand. Declines in the prices we receive for our ethanol and distillers grains will lead to decreased revenues and may result in our inability to operate the ethanol plant profitably for an extended period of time which could decrease the value of our units.

The prices of ethanol and distillers grains may decline as a result of antidumping and antisubsidy investigations being conducted by foreign countries with respect to ethanol and distillers grains originating in the United Sates. An increasing amount of our industry's products are being exported. If producers and exporters of ethanol and distillers grains are subjected to trade barriers when selling products to foreign customers there may be a reduction in the price of these products in the United States. Declines in the price we receive for our products will lead to decreased revenues and may result in our inability to operate the ethanol plant profitably.

We engage in hedging transactions which involve risks that could harm our business.  We are exposed to market risk from changes in commodity prices.  Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process.  We seek to minimize the risks from fluctuations in the prices of corn, natural gas and ethanol through the use of hedging instruments.  The effectiveness of our hedging strategies is dependent on the price of corn, natural gas and ethanol and our ability to sell sufficient products to use all of the corn and natural gas for which we have futures contracts.  Our hedging activities may not successfully reduce the risk caused by price fluctuation which may leave us vulnerable to high corn and natural gas prices, as well as low ethanol prices.

Our business is not diversified.  Our success depends largely on our ability to profitably operate our ethanol plant. We do not have any other lines of business or other sources of revenue if we are unable to operate our ethanol plant and manufacture ethanol and distillers grains.  If economic or political factors adversely affect the market for ethanol and distillers grains, we have no other line of business to fall back on. Our business would also be significantly harmed if the ethanol plant could not operate at full capacity for any extended period of time.
  
We depend on our management and key employees, and the loss of these relationships could negatively impact our ability to operate profitably. We are highly dependent on our management team to operate our ethanol plant. We may not be able to replace these individuals should they decide to cease their employment with us, or if they become unavailable for any other reason. Any loss of these officers and key employees may prevent us from operating the ethanol plant profitably and could decrease the value of our units.
 
Risks Related to Ethanol Industry

Decreasing gasoline prices may negatively impact the selling price of ethanol which could reduce our ability to operate profitably. The price of ethanol tends to change partially in relation to the price of gasoline. Decreases in the price of ethanol reduce our revenue. Our profitability depends on a favorable spread between our corn and natural gas costs and the price we receive for our ethanol. If ethanol prices fall during times when corn and/or natural gas prices are high, we may not be able to operate our ethanol plant profitably.

We operate in an intensely competitive industry and compete with larger, better financed entities which could impact our ability to operate profitably.  There is significant competition among ethanol producers. There are numerous producer-owned and privately-owned ethanol plants planned and operating throughout the Midwest and elsewhere in the United States.  We also face competition from outside of the United States. The passage of the Energy Policy Act of 2005 included a renewable fuels

12




mandate. The RFS was increased in December 2007 to 36 billion gallons by 2022. Further, some states have passed renewable fuel mandates. All of these increases in ethanol demand have encouraged companies to enter the ethanol industry.  The largest ethanol producers include Archer Daniels Midland, Green Plains Renewable Energy, POET, and Valero Renewable Fuels, all of which are each capable of producing significantly more ethanol than we produce. Further, many believe that there will be consolidation occurring in the ethanol industry in the near future which will likely lead to a few companies who control a significant portion of the ethanol production market. We may not be able to compete with these larger entities. These larger ethanol producers may be able to affect the ethanol market in ways that are not beneficial to us which could negatively impact our financial performance. 
 
Competition from the advancement of alternative fuels may lessen the demand for ethanol.  Alternative fuels, gasoline oxygenates and ethanol production methods are continually under development. A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids or clean burning gaseous fuels. Like ethanol, these emerging technologies offer an option to address worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. Fuel cells have emerged as a potential alternative to certain existing power sources because of their higher efficiency, reduced noise and lower emissions. Fuel cell industry participants are currently targeting the transportation, stationary power and portable power markets in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions. If these alternative technologies continue to expand and gain broad acceptance and become readily available to consumers for motor vehicle use, we may not be able to compete effectively. This additional competition could reduce the demand for ethanol, resulting in lower ethanol prices that might adversely affect our results of operations and financial condition.
 
Consumer resistance to the use of ethanol based on the belief that ethanol is expensive, adds to air pollution, harms engines and/or takes more energy to produce than it contributes may affect the demand for ethanol.  Certain individuals believe that the use of ethanol will have a negative impact on gasoline prices at the pump. Many also believe that ethanol adds to air pollution and harms car and truck engines. Still other consumers believe that the process of producing ethanol actually uses more fossil energy, such as oil and natural gas, than the amount of energy that is produced. These consumer beliefs could potentially be wide-spread and may be increasing as a result of recent efforts to increase the allowable percentage of ethanol that may be blended for use in conventional automobiles. If consumers choose not to buy ethanol based on these beliefs, it would affect the demand for the ethanol we produce which could negatively affect our profitability and financial condition.

Risks Related to Regulation and Governmental Action

Changes in environmental regulations or violations of the regulations could be expensive and reduce our profitability.  We are subject to extensive air, water supply, water discharge and other environmental laws and regulations.  In addition, some of these laws require our plant to operate under a number of environmental permits which must be renewed from time to time. These laws, regulations and permits can often require expensive pollution control equipment or operation changes to limit actual or potential impacts to the environment.  A violation of these laws and regulations or permit conditions can result in substantial fines, damages, criminal sanctions, permit revocations, permit non-renewals, capital expenditures and/or plant shutdowns.  In the future, we may be subject to legal actions brought by environmental advocacy groups and other parties for actual or alleged violations of environmental laws or our permits.  Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to spend considerable resources in order to comply with future environmental regulations. The expense of compliance could be significant enough to reduce our profitability and negatively affect our financial condition.

ITEM 2. PROPERTIES.

Our ethanol plant is located on a 56-acre site located approximately three miles east of Granite Falls, Minnesota in Chippewa County at the junction of Highways 212 and 23. The plant's address is 15045 Highway 23 SE, Granite Falls, Minnesota. We produce all of our ethanol, distillers grains and corn oil at this site. The ethanol plant has capacity to produce approximately 60 million gallons of ethanol per year. The ethanol plant consists of the following buildings and equipment:

A river water intake structure in the Minnesota River and a water pipeline to the plant from the Minnesota River to provide our primary water supply and two groundwater wells that provide a redundant water supply;
A Cold Lime Softening Water Treatment System for pre-treating the plant's water supply;
A processing building, which contains processing equipment, laboratories, control room, maintenance area and offices;
A grain receiving and shipping building, which contains corn storage silos, distillers grains storage and associated equipment;
A fermentation area comprised principally of four fermentation tanks;
Corn oil extraction equipment;
A mechanical building, which contains the boiler, thermal oxidizer and distillers grains dryers; and


13




An administrative building, along with furniture and fixtures, office equipment and computer and telephone systems.

The site also contains improvements such as rail tracks and a rail spur, landscaping, drainage systems and paved access roads. Our plant was placed in service in November 2005 and is in excellent condition and is capable of functioning at 100 percent of its production capacity. Subsequent to the fiscal year ended October 31, 2011, we entered into contracts to purchase certain real estate in exchange for an aggregate commitment of approximately $3,400,000.

All of our tangible and intangible property, real and personal, serves as the collateral for our $6,000,000 revolving line of credit with Minnwest Bank M.V. of Marshall, Minnesota. Our revolving line of credit is discussed in more detail under "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Indebtedness".

ITEM 3.    LEGAL PROCEEDINGS

From time to time in the ordinary course of business, Granite Falls Energy, LLC may be named as a defendant in legal proceedings related to various issues, including workers' compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings.

ITEM 4.    (REMOVED AND RESERVED)

PART II

ITEM 5. MARKET FOR REGISTRANT'S MEMBERSHIP UNITS, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

There is no public trading market for our units.

However, we have established through Alerus Securities a Unit Trading Bulletin Board, a private online matching service, in order to facilitate trading among our members.  The Unit Trading Bulletin Board has been designed to comply with federal tax laws and IRS regulations establishing a “qualified matching service,” as well as state and federal securities laws.  Our Unit Trading Bulletin Board consists of an electronic bulletin board that provides a list of interested buyers with a list of interested sellers, along with their non-firm price quotes.  The Unit Trading Bulletin Board does not automatically affect matches between potential sellers and buyers and it is the sole responsibility of sellers and buyers to contact each other to make a determination as to whether an agreement to transfer units may be reached.  We do not become involved in any purchase or sale negotiations arising from our Unit Trading Bulletin Board and have no role in effecting the transactions beyond approval, as required under our member control agreement, and the issuance of new certificates.  We do not give advice regarding the merits or shortcomings of any particular transaction.  We do not receive, transfer or hold funds or securities as an incident of operating the Unit Trading Bulletin Board.  We do not receive any compensation for creating or maintaining the Unit Trading Bulletin Board.  In advertising our qualified matching service, we do not characterize Granite Falls as being a broker or dealer or an exchange.  We do not use the Unit Trading Bulletin Board to offer to buy or sell securities other than in compliance with the securities laws, including any applicable registration requirements.
 
There are detailed timelines that must be followed under the Unit Trading Bulletin Board Rules and Procedures with respect to offers and sales of membership units.  All transactions must comply with the Unit Trading Bulletin Board Rules, our member control agreement, and are subject to approval by our board of governors. 

As of October 31, 2011, there were approximately 970 holders of record of our membership units.

The following table contains historical information by fiscal quarter for the past two fiscal years regarding the actual unit transactions that were completed by our unit-holders during the periods specified. We believe this most accurately represents the current trading value of the Company's units. The information was compiled by reviewing the completed unit transfers that occurred on our qualified matching service bulletin board during the quarters indicated.


14




Fiscal Quarter
Low Per Unit Price
 
High Per Unit Price
2010 1st 
$850
 
$975
2010 2nd 
$1,000
 
$1,075
2010 3rd 
$1,211
 
$1,375
2010 4th 
$1,200
 
$1,250
2011 1st 
$1,375
 
$1,375
2011 2nd 
$1,326
 
$1,500
2011 3rd 
$1,325
 
$1,425
2011 4th 
$1,350
 
$1,400

As a limited liability company, we are required to restrict the transfers of our membership units in order to preserve our partnership tax status.  Our membership units may not be traded on any established securities market or readily trade on a secondary market (or the substantial equivalent thereof).  All transfers are subject to a determination that the transfer will not cause Granite Falls to be deemed a publicly traded partnership.

DISTRIBUTIONS

Distributions by the Company to our unit holders are in proportion to the number of units held by each unit holder. A unit holder's distribution is determined by multiplying the number of units by distribution per unit declared. Our board of governors has complete discretion over the timing and amount of distributions to our unit holders, however, our member control agreement requires the board of governors to endeavor to make cash distributions at such times and in such amounts as will permit our unit holders to satisfy their income tax liability related to owning our units in a timely fashion. Our expectations with respect to our ability to make future distributions are discussed in greater detail in “MANAGEMENT'S DISCUSSION AND ANALYSIS.

Below is a table representing the cash distributions made to the members of Granite Falls Energy since the company commenced operations in 2005. The Company has distributed $1,370 per unit in cash to members who have held their investment in Granite Falls Energy since its inception.

Date Declared to Members of Record:
Total Distribution
Distribution
Per Unit
Distributed to Members on:
October 27, 2011
$
9,196,800

$
300

December 15, 2011
November 23, 2010
$
9,196,800

$
300

December 15, 2010
November 19, 2009
$
4,598,400

$
150

December 16, 2009
October 19, 2007
$
6,231,200

$
200

November 30, 2007
March 15, 2007
$
3,115,600

$
100

April 2, 2007
July 10, 2006
$
9,999,830

$
320

July 31, 2006

PERFORMANCE GRAPH

The following graph shows a comparison of cumulative total member return since October 1, 2005, calculated on a dividend reinvested basis, for the Company, the NASDAQ Composite Index (the “NASDAQ”) and an index of other companies that have the same SIC code as the Company (the “Industry Index”). The graph assumes $100 was invested in each of the Company's units, the NASDAQ, and the Industry Index on October 1, 2005. Data points on the graph are annual. Note that historic stock price performance is not necessarily indicative of future unit price performance.

Pursuant to the rules and regulations of the Securities and Exchange Commission, the performance graph and the information set forth therein shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.


15





ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial and operating data as of the dates and for the periods indicated. The selected balance sheet financial data as of October 31, 2009, 2008 and 2007 and the selected statement of operations data and other financial data for the years ended October 31, 2008 and 2007 have been derived from our audited financial statements that are not included in this Form 10-K. The selected balance sheet financial data as of October 31, 2011 and 2010 and the selected statement of operations data and other financial data for each of the years in the three year period ended October 31, 2011 have been derived from the audited financial statements included elsewhere in this Form 10-K. You should read the following table in conjunction with Item 7 “Management Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the accompanying notes included elsewhere in this Form 10-K. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following financial data.


16




Statement of Operations Data:
 
2011
 
2010
 
2009
 
2008
 
2007
Revenues
 
$
156,521,489

 
$
95,289,452

 
$
91,282,031

 
$
99,393,373

 
$
94,776,725

Cost Goods Sold
 
142,353,416

 
85,146,261

 
87,464,936

 
102,396,467

 
75,772,701

Lower of Cost or Market Adjustment
 

 

 

 
1,947,000

 

Gross Profit (Loss)
 
14,168,073

 
10,143,191

 
3,817,095

 
(4,950,094
)
 
19,004,024

Operating Expenses
 
2,002,706

 
1,957,742

 
2,045,615

 
2,916,170

 
2,807,130

Operating Income (Loss)
 
12,165,367

 
8,185,449

 
1,771,480

 
(7,866,264
)
 
16,196,894

Other Income (Expense)
 
126,489

 
176,863

 
(685,300
)
 
188,005

 
(265,153
)
Net Income (Loss)
 
$
12,291,856

 
$
8,362,312

 
$
1,086,180

 
$
(7,678,259
)
 
$
15,931,741

Weighted Average Units Outstanding - Basic and Diluted
 
30,656

 
30,656

 
30,781

 
31,156

 
31,156

Net Income (Loss) Per Capital Unit
 
$
400.96

 
$
272.78

 
$
35.29

 
$
(246.45
)
 
$
511.35

Cash Distributions per Capital Unit
 
$
600.00

 
$
150.00

 
$

 
$

 
$
300.00















 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
2011
 
2010
 
2009
 
2008
 
2007
Current Assets
 
$
27,542,361

 
$
23,429,993

 
$
14,015,271

 
$
9,382,784

 
$
15,901,679

Net Property and Equipment
 
35,898,961

 
36,327,497

 
42,425,018

 
48,648,041

 
54,677,788

Other Assets
 

 
10,050

 
32,894

 
35,694

 
38,493

Total Assets
 
$
63,441,322

 
$
59,767,540

 
$
56,473,183

 
$
58,066,519

 
$
70,617,960

Current Liabilities
 
13,680,184

 
3,733,360

 
4,004,077

 
6,108,632

 
10,908,043

Long-Term Debt
 

 
171,298

 
370,136

 
445,097

 
518,868

Members' Equity
 
$
49,761,138

 
$
55,862,882

 
$
52,098,970

 
$
51,512,790

 
$
59,191,049

Book Value Per Capital Unit
 
$
1,623.21

 
$
1,822.25

 
$
1,699.47

 
$
1,653.38

 
$
1,899.83


* See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of our financial results.


17


ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “may,” “will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

Overview

Granite Falls Energy, LLC (“Granite Falls” or the “Company”) is a Minnesota Limited Liability Company formed on December 29, 2000.

We are currently producing fuel-grade ethanol, distillers grains and crude corn oil for sale. Our plant has an approximate annual production capacity of 60 million gallons of denatured ethanol. During the second quarter of fiscal 2011, we obtained an amendment to our environmental permits allowing us to produce up to 70 million gallons of undenatured ethanol on a twelve month rolling sum basis. We intend to continue working toward increasing production to take advantage of the underutilized capacity of our plant as long as we believe it is profitable to do so.  Any plant bottlenecks are assessed and a cost benefit analysis is performed prior to further capital investment. Our recent de-bottlenecking projects include:

Modifications to our CO2 scrubber column equipment;
Modifications to our distillation equipment;
Installation of a Continuous Emissions Monitoring System (CEMS);
Installation of a larger sieve feed pump;
Installation of a fourth mole sieve;
Addition of a second slurry tank and a third liquefaction tank; and    
Addition of a third hammer mill.

Our operating results are largely driven by the prices at which we sell our ethanol, distillers grains, and corn oil as well as the other costs related to production. The price of ethanol has historically fluctuated with the price of petroleum-based products such as unleaded gasoline, heating oil and crude oil. The price of distillers grains has historically been influenced by the price of corn as a substitute livestock feed. We expect these price relationships to continue for the foreseeable future, although recent volatility in the commodities markets makes historical price relationships less reliable. Our largest costs of production are corn, natural gas, depreciation and manufacturing chemicals. Our cost of corn is largely impacted by geopolitical supply and demand factors and the outcome of our risk management strategies. Prices for natural gas, manufacturing chemicals and denaturant are tied directly to the overall energy sector, crude oil and unleaded gasoline.
 
As of the date of this report, we have 37 full time employees. Ten of these employees are involved primarily in management and administration. The remaining employees are involved primarily in plant operations. We do not currently anticipate any significant change in the number of employees at our plant.

Results of Operations for the Fiscal Year Ended October 31, 2011 and 2010
 
The following table shows the results of our operations and the approximate percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our audited statements of operations for the fiscal years ended October 31, 2011 and 2010:

18


 
2011
 
2010
Income Statement Data
Amount
 
%
 
Amount
 
%
Revenue
$
156,521,489

 
100.0
%
 
$
95,289,452

 
100.0
%
Cost of Goods Sold
142,353,416

 
90.9
%
 
85,146,261

 
89.4
%
Gross Profit
14,168,073

 
9.1
%
 
10,143,191

 
10.6
%
Operating Expenses
2,002,706

 
1.3
%
 
1,957,742

 
2.1
%
Operating Income
12,165,367

 
7.8
%
 
8,185,449

 
8.6
%
Other Income, net
126,489

 
0.1
%
 
176,863

 
0.2
%
Net Income
$
12,291,856

 
7.9
%
 
$
8,362,312

 
8.8
%

Revenues

Our revenues from operations come from three primary sources: sales of fuel ethanol, sales of distillers grains and sales of corn oil.
 
The following table shows the sources of our revenue for the fiscal year ended October 31, 2011:
Revenue Sources
Amount
 
Percentage of
Total Revenues
 
 
 
 
Ethanol sales
$
129,936,624

 
83.0

%
Distillers grains sales
22,745,766

 
14.5

%
Corn oil sales
3,843,725

 
2.5

%
Ethanol derivative activity losses
(4,626
)
 

%
    Total Revenues
$
156,521,489

 
100.0

%

The following table shows the sources of our revenue for the fiscal year ended October 31, 2010:
Revenue Sources
Amount
 
Percentage of
Total Revenues
 
 
 
 
Ethanol sales
$
81,317,691

 
85.0

%
Distillers grains sales
12,250,393

 
12.5

%
Corn oil sales
1,721,368

 
2.5

%
Ethanol derivative activity losses

 

%
    Total Revenues
$
95,289,452

 
100.0

%

Revenues

We experienced a significant increase in our revenues for our 2011 fiscal year compared to our 2010 fiscal year. Management attributes this increase in revenues primarily to the higher average prices we received for our products during fiscal year 2011 compared to fiscal year 2010 and to a lesser extent an increase in the production of our products. Our volume of ethanol sold in 2011 was approximately 7.5% higher than the volume sold in 2010. For our 2011 fiscal year, ethanol sales comprised approximately 83.0% of our revenue, distillers grains comprised approximately 14.5% of our revenue and corn oil sales comprised approximately 2.5% of our revenue. For our 2010 fiscal year, ethanol sales comprised approximately 85% of our revenue, distillers grains comprised approximately 12.5% of our revenue and corn oil sales comprised approximately 2.5% of our revenue.

Ethanol

The average price we received for our ethanol increased by approximately 48.0% during our 2011 fiscal year compared to our 2010 fiscal year. Management attributes this increase in the average price we received per gallon of ethanol with higher petroleum prices and increased ethanol exports during our 2011 fiscal year.


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Management anticipates that ethanol prices could be volatile during our 2012 fiscal year. Management anticipates industry wide ethanol production in 2012 will be comparable to that of 2011, provided the ethanol industry can maintain current ethanol prices. However, in the event ethanol prices decrease significantly, the industry may be forced to reduce ethanol production if operating margins are unfavorable. Further, our operating margins depend on corn prices which can affect the spread between the price we receive for our ethanol and our raw material costs. In times when this spread decreases or becomes negative, we may reduce or terminate ethanol production until these spreads become more favorable.

Distillers Grains

We produce distillers grains for sale in two separate forms, distillers dried grains with solubles (DDGS) and modified/wet distillers grains (MWDG). During our 2011 fiscal year, we produced and sold the same ratio of DDGS to MWDS compared to the previous year. Market factors dictate whether we sell more DDGS versus MWDG. We experienced an increase in the average prices we received for our distillers grains, both DDGS and MWDG, during our 2011 fiscal year compared to the same period of 2010. We experienced an increase of approximately 76.2% in the average price we received for our dried distillers grains during our 2011 fiscal year compared to our 2010 fiscal year and an increase of approximately 45.3% in the average price we received for our modified/wet distillers grains during the same period. This change is the prices we received for our distillers grains is coupled with an increase of approximately 5.5% in the overall volume of distillers grains sold in 2011 compared to 2010.

Management anticipates demand for distillers grains will remain steady, especially if corn prices trend higher during our 2012 fiscal year. Management believes that distillers grains prices could decrease significantly if export demand for distillers grains decreases. This could be especially true in the summer months when distillers grains demand is lower in the United States.

Corn Oil

Separating the corn oil from our distillers grains decreases the total tons of distillers grains that we sell, however, our corn oil has a higher per ton value than our distillers grains. The average price we received per pound of corn oil sold during our 2011 fiscal year was approximately 75.0% greater that the average price received during our 2010 fiscal year. This increase in corn oil prices coupled with an increase of approximately 27.6% in the volume of corn oil sold caused our annual corn oil revenue to increase from approximately $1,720,000 in 2010 to approximately $3,840,000 in 2011.

Management attributes this increase in corn oil prices to increased use of corn oil in biodiesel production and animal feed.  However, management anticipates that corn oil prices may not be sustainable in the future as more corn oil enters the market or if the incentives for biodiesel production are reduced or eliminated.  This could negatively impact our corn oil revenue.

Hedging and Volatility of Sales

We occasionally engage in hedging activities with respect to our ethanol sales. We recognize the gains or losses that result from the changes in the value of these derivative instruments in revenues as the changes occur. As ethanol prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our revenues due to the timing of the changes in value of the derivative instruments relative to the price and volume of the ethanol being hedged. During fiscal 2011, revenue was reduced by approximately $4,600 due to ethanol derivative losses.

Our results of operations for our 2012 fiscal year will continue to be affected by volatility in the commodity markets. If plant operating margins are negative for an extended period of time, management anticipates that this could impact our liquidity. Management believes the industry will need to continue to grow demand and further develop an ethanol distribution system to facilitate additional blending of ethanol and gasoline to offset the increased supply brought to the marketplace by additional production. Going forward, we are optimistic that ethanol demand will continue to grow and ethanol distribution will continue to expand as a result of the positive blend economics that are currently available to the gasoline refiners and blenders.

Cost of Sales

Our two primary costs of producing ethanol, distillers grains and corn oil are corn costs and natural gas costs. We experienced a significant increase in our cost of goods sold for our 2011fiscal year compared to our 2010 fiscal year.

Our costs of goods sold as a percentage of revenues were 90.9% for our fiscal year ended October 31, 2011 compared to 89.4% for the same period of 2010. Our two largest costs of production are corn (83.3% of cost of goods sold for our fiscal year ended October 31, 2011) and natural gas (5.0% of cost of goods sold for our fiscal year ended October 31, 2011). Our cost of goods sold increased to $142,353,416 for our fiscal year ended October 31, 2011 from $85,146,261 in our fiscal year ended October 31, 2010. Our per bushel corn costs increased by approximately 84.6% for the year ended October 31, 2011 as compared

20


to the same period for our 2010 fiscal year. Our increased cost of corn was the primary factor driving up our costs of goods sold. Management anticipates that corn prices will remain high throughout the 2012 fiscal year, especially if domestic corn production is lower than current USDA forecasts. We expect continued volatility in the corn market through 2012 fiscal year.

Corn Costs

We experienced an increase of approximately 96.7% in the total amount we paid for corn for our 2011 fiscal year compared to our 2010 fiscal year. This increase was due primarily to the per bushel price we paid since the volume of corn we used in 2011 was only 6.5% higher than the volume of corn we used in 2010.

Market corn prices increased during our 2011 fiscal year starting in January 2011 and continuing to the beginning of September 2011 when the market experienced a decline in corn prices followed by a stronger corn market during December 2011. Management attributes this increase in corn prices with uncertainty regarding weather factors that resulted in decreased yields in some parts of the United States. Parts of the upper Midwest experienced these lower yields which reduced the amount of corn harvested in the fall of 2011. Management believes that corn prices may continue to increase during the first half of our 2012 fiscal year prompting more producers to plant corn as opposed to soybeans.

Natural Gas Costs

We experienced a decrease in the average price we paid per MMBtu of natural gas during our 2011 fiscal year compared to our 2010 fiscal year. The average price we paid per MMBtu of natural gas during our 2011 fiscal year was approximately 5.7% lower than the average price we paid during our 2010 fiscal year. Management attributes this decrease in our natural gas costs with lower market natural gas prices due to increased natural gas supplies and relatively stable natural gas demand.

Management anticipates that natural gas prices will remain steady during our 2012 fiscal year unless demand significantly increases due to improved global economic conditions. Management anticipates that our natural gas consumption will be comparable to that of our 2011 fiscal year unless our ethanol and distillers grains production increases significantly as our de-bottlenecking efforts allow us to increase production beyond our current ethanol production rate of approximately 60 million gallons of undenatured ethanol per year.

Hedging and Volatility of Purchases

Realized and unrealized gains and losses related to our corn, natural gas, and denaturant derivative instruments resulted in a decrease of approximately $1,275,000 in our cost of goods sold for our 2011 fiscal year compared to a decrease of approximately $2,250,000 in our cost of goods sold for our 2010 fiscal year.  We recognize the gains or losses that result from the changes in the value of our derivative instruments related to corn, natural gas, and denaturant in cost of goods sold as the changes occur.  As corn, natural gas, and denaturant prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance.  We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged. 

Operating Expense

Operating expenses were relatively steady for the fiscal year ended October 31, 2011 totaled approximately $2,000,000 for our fiscal years ended October 31, 2011 and 2010. Our operating expenses as a percentage of revenues were lower for the fiscal year ended October 31, 2011 when compared to the same period ended October 31, 2010. However, this decrease is primarily due to the extreme increase in our revenues and not an actual reduction in operating expenses. We expect that going forward our operating expenses will remain relatively steady.

Operating Income

Our income from operations for our fiscal year ended October 31, 2011 was 7.8% of our revenues compared to income of approximately 8.6% of our revenues for our fiscal year ended October 31, 2010. For our fiscal year ended October 31, 2011, we reported operating income of $12,165,367 and for our fiscal year ended October 31, 2010, we had operating income of $8,185,449. This increase in our operating income is primarily due to the increases in our crush margins and to a lesser extent the increase in the volume of ethanol produced at our facility.


21


Other Income and Expense

We had other income for our fiscal year ended October 31, 2011 of $126,489 compared to other income of $176,863 for our fiscal year ended October 31, 2010.

Included in other income and expense is our interest income and expense. Interest expense for the fiscal year ended October 31, 2011, was less that one tenth of one percent of our revenue and totaled $4,358, compared to $10,704 of interest expense for the year ended October 31, 2010. The interest expense incurred during our fiscal year ended October 31, 2011 is attributable to our low interest loan obtained through a local economic development authority and the upfront one percent fee on our letters of credit. On August 26, 2011, the board of governors decided to repay this loan in the amount of approximately $187,000.

Our interest income was steady for our fiscal year ended October 31, 2011 when compared to the same period ended October 31, 2010.

Results of Operations

Comparison of Fiscal Years Ended October 31, 2010 and 2009
    
 
2010
 
 
 
2009
 
 
Income Statement Data
Amount
 
%
 
Amount
 
%
Revenues
$
95,289,452

 
100.0

 
$
91,282,031

 
100.0
Cost of Goods Sold
85,146,261

 
89.4

 
87,464,936

 
95.8

Gross Profit
10,143,191

 
10.6

 
3,817,095

 
4.2

Operating Expenses
1,957,742

 
2.1

 
2,045,615

 
2.2

Operating Income
8,185,449

 
8.6

 
1,771,480

 
2.0

Other Income (Expense)
176,863

 
0.2

 
(685,300
)
 
(0.8
)
Net Income
$
8,362,312

 
8.8

 
$
1,086,180

 
1.2


The following table shows the sources of our revenue for the year ended October 31, 2010.
Revenue Sources
Amount
 
Percentage of
Total Revenues
Ethanol sales
$
81,317,691

 
85.3

%
Distillers grains sales
 
12,250,393

 
12.9

%
Corn oil sales
 
1,721,368

 
1.8

%
    Total Revenues
$
95,289,452

 
100.00

%
The following table shows the sources of our revenue for the year ended October 31, 2009:
Revenue Sources
Amount
 
Percentage of
Total Revenues
Ethanol sales
$
75,081,066

 
82.3

%
Distillers grains sales
 
14,931,188

 
16.3

%
Corn oil sales
 
1,269,777

 
1.4

%
    Total Revenues
$
91,282,031

 
100.00

%

Revenues

We experienced an increase in our revenues for our 2010 fiscal year compared to our 2009 fiscal year. Management attributes this increase primarily to increases we experienced in the average prices we received for our ethanol and distillers grains during fiscal year 2010 compared to fiscal year 2009. Our volume of ethanol and distillers grains sold in 2010 was comparable to that sold in 2009. For our 2010 fiscal year, ethanol sales comprised approximately 85% of our revenue, distillers grains comprised approximately 13% of our revenue and corn oil sales comprised less than 2% of our revenue. For our 2009 fiscal year, ethanol sales comprised approximately 82% of our revenue, distillers grains comprised approximately 16% of our revenue and corn oil sales comprised less than 1.5% of our revenue.


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Ethanol

The average price we received for our ethanol increased by approximately 8.7% during our 2010 fiscal year compared to our 2009 fiscal year. Management attributes this increase in the average price we received per gallon of ethanol with higher corn prices and increased ethanol exports during our 2010 fiscal year. These increases in ethanol exports and corn prices mostly occurred during our fourth quarter of 2010.

Distillers Grains

We produce distillers grains for sale in two separate forms, distillers dried grains with solubles (DDGS) and modified/wet distillers grains (MWDG). During our 2010 fiscal year, we experienced a slight shift in the mix of distillers grains we sold in the form of DDGS versus MWDG compared to previous years. During our 2010 fiscal year, we sold approximately 97% of our total distillers grains in the form of DDGS and approximately 3% of our total distillers grains in the form of MWDG. During our 2009 fiscal year, we sold approximately 89% of our total distillers grains in the form of DDGS and approximately 11% of our total distillers grains in the form of MWDG. Management attributes this shift in the mix of our distillers grains sales with an increase in export demand for distillers grains during our 2010 fiscal year compared to our 2009 fiscal year. As more of our distillers grains are shipped outside of our local market, we sell more of our distillers grains in the dried form since it is less expensive to ship DDGS and the shelf life of DDGS is much longer than MWDG. Market factors dictate whether we sell more DDGS versus MWDG. We also experienced a decrease in the average prices we received for our distillers grains, both DDGS and MWDG, during our 2010 fiscal year compared to the same period of 2009. We experienced a decrease of approximately 30.4% in the average price we received for our distillers grains during our 2010 fiscal year compared to our 2009 fiscal year.

Corn Oil

Our 2009 fiscal year was the first fiscal year in which we produced and sold corn oil during each fiscal quarter. Separating the corn oil from our distillers grains results in decreased revenue from our distillers grains due to the decrease in the total tons of distillers grains that we sell, thereby decreasing our distillers grains revenue. However, our corn oil has a higher per ton value than our distillers grains. The average price we received per pound of corn oil sold during our 2010 fiscal year was approximately 29% greater compared to our 2009 fiscal year.

During our 2010 fiscal year, we experienced an increase in the total pounds of corn oil we sold of approximately 5% compared to our 2009 fiscal year. We produced more corn oil during our 2010 fiscal year compared to our 2009 fiscal year due to increased functionality of the corn oil extraction equipment.

Cost of Goods Sold and Gross Profit

Our two primary costs of producing ethanol, distillers grains and corn oil are corn costs and natural gas costs. We experienced a decrease in our cost of goods sold for our 2010 fiscal year compared to our 2009 fiscal year.

Corn Costs

Our largest cost associated with the production of ethanol, distillers grains and corn oil is corn costs. We experienced an increase in the total amount we paid for corn of approximately 2% for our 2010 fiscal year compared to our 2009 fiscal year. This was due primarily to the per bushel price we paid since the volume of corn we used in 2010 was comparable to 2009.

Market corn prices increased during our 2010 fiscal year starting in July and continuing into the middle of November 2010. Management attributes this increase in corn prices with uncertainty regarding weather factors that resulted in decreased yields in some parts of the United States. Parts of Iowa experienced these lower yields which reduced the amount of corn harvested in the fall of 2010. This led to fears regarding an imbalance between corn supply and demand, which had a negative impact on corn prices. While corn prices decreased from the middle of November until the end of November, corn prices have since increased significantly. Management believes that the corn market was correcting in November following the corn price increases during the fall of 2010.

Natural Gas Costs

We experienced a significant decrease in the average price we paid per MMBtu of natural gas during our 2010 fiscal year compared to our 2009 fiscal year. The average price we paid per MMBtu of natural gas during our 2010 fiscal year was approximately 30% lower than the average price we paid during our 2009 fiscal year. Management attributes this decrease in our natural gas costs with lower market natural gas prices due to increased natural gas supplies and relatively stable natural gas demand.

23



Hedging

Realized and unrealized gains and losses related to our corn, natural gas, and denaturant derivative instruments resulted in a decrease of approximately $2,233,000 in our cost of goods sold for our 2010 fiscal year compared to an increase of approximately $282,000 in our cost of goods sold for our 2009 fiscal year.  We recognize the gains or losses that result from the changes in the value of our derivative instruments related to corn, natural gas, and denaturant in cost of goods sold as the changes occur. 

Operating Expenses

Operating expenses for the fiscal year ended October 31, 2010 totaled approximately $1,958,000, a decrease from approximately $2,046,000 for the same period of 2009. This decrease in operating expenses is primarily due to increased operating efficiencies and a concerted effort by management and staff to lower our operating expenses.

Other Income (Expense)

We had other income during our 2010 fiscal year compared to other expense during our 2009 fiscal year. We had more interest income during our 2010 fiscal year compared to our 2009 fiscal year due to having more cash on hand during the 2010 period. We experienced an increase in other expense (net) for our 2009 fiscal year primarily as a result of paying approximately $780,000 to Aventine Renewable Energy, Inc. as a termination fee we incurred in connection with the termination of our ethanol marketing agreement during our fiscal quarter ended January 31, 2009.

Changes in Financial Condition for the Fiscal Year Ended October 31, 2011 and 2010

The following table highlights the changes in our financial condition for the fiscal year ended ended October 31, 2011 from our previous fiscal year ended October 31, 2010:

 
October 31, 2011
 
October 31, 2010
Current Assets
$
27,542,361

 
$
23,429,993

Current Liabilities
$
13,680,184

 
$
3,733,360

Long-Term Debt
$

 
$
171,298

Members' Equity
$
49,761,138

 
$
55,862,882


Total assets were approximately $63,441,000 at October 31, 2011 compared to approximately $59,768,000 at October 31, 2010. This increase in total assets is primarily a result of a more inventory on hand for the fiscal year ended of our 2011 fiscal year compared to October 31, 2010. Also included in our total assets this period is approximately $367,000 in construction in progress. This is down from approximately $746,000 at October 31, 2010. Our construction in progress is related to the de-bottlenecking process we are implementing at our plant as we move toward an increased annual run rate. As of the date of this report our de-bottlenecking activities include the addition of a fourth mole sieve, a third hammer mill, a third liquefaction tank and a second slurry tank.

Current assets totaled approximately $27,540,000 at October 31, 2011, which is more than our current assets as of October 31, 2010 which totaled approximately $23,430,000.
    
Total current liabilities increased and totaled approximately $13,680,000 at October 31, 2011 and $3,733,360 at October 31, 2010. This change is primarily due to our distribution payable in the amount of approximately $9,200,000. Long term debt decreased from approximately $171,300 at October 31, 2010 to $0 at October 31, 2011 as we paid off our EDA loan.

Changes in Financial Condition for Fiscal Years Ended October 31, 2010 and 2009

Our current assets were 67% higher at October 31, 2010 compared to October 31, 2009. We had more cash and inventory on hand on October 31, 2010 compared to October 31, 2009. We were accumulating cash in anticipation of paying a distribution to our members after the conclusion of our fiscal year ended October 31, 2010. In November 2010, we declared a distribution of approximately $9,200,000, which was paid out to our members in December 2010.

The asset value of our property and equipment was lower at October 31, 2010 compared to October 31, 2009 as a result of an increase in accumulated depreciation.

24



Our current liabilities were 6.7% lower at October 31, 2010 compared to October 31, 2009. This is primarily due to a reduction in the amount outstanding on derivative instruments.

Our long-term liabilities at October 31, 2010 were approximately $171,000 compared to approximately $370,000 at October 31, 2009, primarily as a result of our scheduled payments on these obligations.

Plant Operations

We are currently producing fuel-grade ethanol, distillers grains and crude corn oil for sale. Our plant has an approximate annual production capacity of 60 million gallons of denatured ethanol. During the second quarter of fiscal 2011, we obtained an amendment to our environmental permits allowing us to produce up to 70 million gallons of undenatured ethanol on a twelve month rolling sum basis. We intend to continue working to increase production to take advantage of the underutilized capacity of our plant.  Any plant bottlenecks are assessed and a cost benefit analysis is performed prior to further capital investment.

Our recent de-bottlenecking projects include:
Modifications to our CO2 scrubber column equipment;
Modifications to our distillation equipment;
Installation of a Continuous Emissions Monitoring System (CEMS);
Installation of a larger sieve feed pump;
Installation of a fourth mole sieve;
Addition of a second slurry tank and a third liquefaction tank; and    
Addition of a third hammer mill.

Each of these projects help our facility to be more efficient, productive and improve the environmental aspects of our process. As of October 31, 2011 we have incurred approximately $4,000,000 in costs associated with our construction projects.
        
We expect to have sufficient cash generated by continuing operations, current lines of credit and cash reserves to cover our usual operating costs, which consist primarily of our corn supply, our natural gas supply, de-bottlenecking projects, staffing expense, office expense, audit and legal compliance, working capital costs and debt service obligations.

Trends and Uncertainties Impacting the Ethanol and Distillers Grains Industries and Our Future Revenues

Our revenues primarily consist of sales of the ethanol and distillers grains we produce; however, we also realize revenue from the sale of corn oil we separate from our distillers syrup. The ethanol industry needs to continue to expand the market for ethanol and distillers grains in order to maintain current price levels.

The following chart shows the general price information released by the USDA in their National Weekly Energy Round-Up Report for ethanol through December 2011.


According to the Renewable Fuels Association (“RFA”), as of January 3, 2012, there were 209 ethanol plants nationwide with the capacity to produce approximately 14.7 billion gallons of ethanol annually. The RFA estimates that plants with an annual production capacity of approximately 14.2 billion gallons are currently operating and that approximately 3.4% of the nameplate production capacity is not currently operational. Management believes the production capacity of the ethanol industry is greater than ethanol demand which may begin to depress ethanol prices. This overcapacity issue may be exacerbated by increased VEETC

25


production from plants that had previously slowed their rate of production or idled altogether due to poor operating margins.

Currently, ethanol is primarily blended with conventional gasoline for use in standard (non-flex fuel) vehicles to create a blend which is 10% ethanol and 90% conventional gasoline. Estimates indicate that approximately 135 billion gallons of gasoline are sold in the United States each year. However, gasoline demand may be shrinking in the United States as a result of the global economic slowdown and improved fuel efficiency. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 13.5 billion gallons. This is commonly referred to as the “blend wall”, which represents a limit where more ethanol cannot be blended into the national gasoline pool. This is a theoretical limit since it is believed it would not be possible to blend ethanol into every gallon of gasoline that is used in the United States and it discounts higher percentage blends of ethanol such as E15 and E85 used in flex fuel vehicles.

The United States ethanol industry is exporting an increasing amount of ethanol. The Company's ethanol marketer recently began to export a portion of its ethanol. The Company recently obtained a Distilled Spirits Permit ("DSP") and the certificate of compliance with the European Union's Renewable Energy Directive ("RED"), both of which are required for the Company's ethanol to be eligible for export at maximum prices. The exportation of domestic ethanol has helped to mitigate the effects of the blend wall and has thereby helped to maintain ethanol price levels. We are excited to be participating in the export market, but would prefer that all of our domestically produced fuel could be utilized by the domestic market. Whether the export market continues to make economic sense for Granite Falls Energy will depend on domestic blend rates as well as global supply and demand for our product.

Trends and Uncertainties Impacting the Corn and Natural Gas Markets and Our Future Cost of Goods Sold

Our costs of our goods sold consist primarily of costs relating to the corn and natural gas supplies necessary to produce ethanol and distillers grains for sale. We grind approximately 1,700,000 bushels of corn each month. For the fiscal year ended October 31, 2011, our average cost of corn, net of hedging activity, was approximately 85.0% higher than our per bushel cost of corn for the same period ended October 31, 2010.

The market price of corn started to increase during January 2011 and has continued to rise through the first of September 2011. Management attributes this increase in corn prices with uncertainty regarding an imbalance between corn supply and demand. Management anticipates that corn prices will continue to be volatile and will be subject to weather factors that may influence corn prices during the 2012 growing season. On January 12, 2012 the USDA forecast domestic corn production to be 12.36 billion bushes, down 1 percent from 2010. If a period of high corn prices were to be sustained for some time, such pricing may reduce our ability to generate income because of the higher cost of operating our plant.

Natural gas is also an important input commodity to our manufacturing process. Our natural gas usage is approximately 120,000 million British thermal units (mmBTU) per month. We continue to work to find ways to limit our natural gas price risk through efficient usage practices, research of new technologies, and pricing and hedging strategies. We use a marketing firm and an energy consultant for our natural gas procurement and will work with them on an ongoing basis to mitigate our exposure to volatile gas prices.

Management anticipates that natural gas prices will be relatively stable in the next several months as a result of ample amount of gas in the supply chain. However, should we experience any natural gas supply disruptions, including disruptions from hurricane activity, we may experience significant increases in natural gas prices.

Compliance with Environmental Laws

We are subject to extensive air, water and other environmental regulations and we have been required to obtain a number of environmental permits to construct and operate the plant. As such, any changes that are made to the plant or its operations must be reviewed to determine if amended permits need to be obtained in order to implement these changes.

Contracting Activity

Farmers Cooperative Elevator Company supplies our corn. Eco-Energy, LLC markets our ethanol and RPMG markets our distillers grains and our corn oil. Each of these contracts is critical to our success and we are very dependent on each of these companies. Accordingly, the financial stability of these partners is critical to the successful operation of our business.

We independently market a small portion of our ethanol production as E-85 to local retailers.


26


Commodity Price Risk Protection

We seek to minimize the risks from fluctuations in the prices of corn, ethanol, denaturant and natural gas through the use of derivative instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although our risk management strategy accomplishes our goal of an economic hedge, we do not use hedge accounting which would match the gain or loss on our hedge positions to the specific commodity contracts being hedged. Instead, we are using fair value accounting for our hedge positions, which means that as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of goods sold. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.

As of October 31, 2011, the fair values of our derivative instruments are reflected as net assets in the amount of $404,050 As of October 31, 2010, we recorded a net asset for our derivative instruments in the amount of $752,500. There are several variables that could affect the extent to which our derivative instruments are impacted by fluctuations in the price of corn, ethanol, denaturant or natural gas. However, it is likely that commodity cash prices will have the greatest impact on the derivative instruments with delivery dates nearest the current cash price. As we move forward, additional protection may be necessary. As the prices of these hedged commodities move in reaction to market trends and information, our statement of operations will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for Granite Falls.

As of October 31, 2011, we had entered into derivative instruments to hedge 2,580,000 bushels of our future corn purchases through March 2012. This includes 500,000 bushels of fixed basis contracts for forward corn purchase commitments through December 2011 and 460,000 bushels of stored corn totaling $2,862,550 with FCE that is included in inventory . These contracts hope to minimize risk from future market price fluctuations ans basis fluctuations.

As of October 31, 2011, we had price protection in place for approximately 56.7% of our natural gas needs through March 2012. As we move forward, we may determine that additional price protection for natural gas purchases is necessary to reduce our susceptibility to price increases. However, we may not be able to secure natural gas for prices less than current market price and we may not recover high costs of production resulting from high natural gas prices, which may raise our costs of production and reduce our net income.

The derivative accounts are reported at fair value. We have categorized the cash flows related to the hedging activities in the same category as the item being hedged. We expect substantially all of our hedge positions outstanding as of October 31, 2011 to be realized and recognized by December 2011.

Critical Accounting Estimates

Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Of the significant accounting policies described in the notes to our financial statements, we believe that the following are the most critical:

Inventory

We value our inventory at the lower of cost or market. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider future corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our use of derivative instruments. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the valuation of the lower of cost or market on inventory to be a critical accounting estimate.

Property, Plant and Equipment

Management’s estimate of the depreciable lives of property, plant, and equipment is based on the estimated useful lives. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment testing for assets requires various estimates and assumptions, including an allocation of cash flows to those assets and, if required, an estimate of the fair value of those assets. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of the useful lives of property and equipment to be a

27


critical accounting estimate.

Liquidity and Capital Resources

The following table shows our cash flows for the fiscal years ended October 31, 2011 and 2010:

 
2011
 
2010
Net cash provided by operating activities
$
11,879,586

 
$
14,079,296

Net cash used in investing activities
(50,020
)
 
(4,320,511
)
Net cash used in financing activities
(9,429,231
)
 
(4,811,066
)

Operating Cash Flows. Cash provided by operating activities was approximately $11,880,000 for the fiscal year ended ended October 31, 2011, which was less than the approximately $14,080,000 provided by operating activities for the fiscal year ended ended October 31, 2010. The difference is primarily attributable to the significant depreciation taken during the period ended October 31, 2010. Currently, our capital needs are being adequately met through cash flows from our operating activities and our currently available credit facilities.

Investing Cash Flows. Cash used in investing activities was approximately $50,000 for the fiscal year ended ended October 31, 2011, compared to cash used in investing activities of $4,320,000 for the fiscal year ended ended October 31, 2010. During the fiscal year ended ended October 31, 2011 we had positive investing cash flow from the maturity of certain short term investments (certificates of deposit) in the amount of $3,500,000. These proceeds were offset by payment for construction in progress in the amount of approximately $3,100,000.

Financing Cash Flows. Cash used in financing activities was approximately $9,430,000 for the fiscal year ended ended October 31, 2011, compared to $4,810,000 for the fiscal year ended ended October 31, 2010. In the fiscal year ended ended October 31, 2011, cash was used to pay a distribution to our members totaling approximately $9,200,000 and to repay the principal balance on our remaining EDA loan.

Indebtedness

Short-Term Debt Sources

The Company has a Loan Agreement with Minnwest Bank M.V. of Marshall, MN (the “Bank”). Under the Loan Agreement, the Company has a revolving line of credit with a maximum of $6,000,000 available which is secured by a first mortgage on substantially all of our assets. As of October 31, 2011, the Company has outstanding letters of credit in the amount of approximately $436,000. These letters of credit reduce the amount available under the revolving line of credit to approximately $5,564,000. The interest rate on the revolving line of credit is at 0.25 percentage points above the prime rate as reported by the Wall Street Journal, with a minimum rate of 4.5%. The minimum interest rate was reduced in April 2011 from 5.0% to 4.5%. At October 31, 2011, the Company had no outstanding balance on this line of credit.

Long-Term Debt Sources

On August 26, 2011, Granite Falls Energy repaid an outstanding note payable to the City of Granite Falls in the amount of approximately $187,000. Granite Falls Energy had been making scheduled payments on this loan since February 2006 and was scheduled to have the the loan repaid in June 2014. Granite Falls Energy decided to repay the loan early and is now free of all long term debt obligations.

Contractual Obligations

The following table provides information regarding the contractual obligations of the Company as of October 31, 2011:

28


 
 
Total
 
Less than One Year
 
One to Three Years
 
Three to Five Years
 
Greater Than Five Years
Operating Lease Obligations (1)
 
$
5,969,426

 
$
1,769,844

 
$
2,777,433

 
$
1,233,829

 
$
188,320

Purchase Commitments (2)
 
$
1,797,600

 
$
1,797,600

 
 
 
 
 
 
Total Contractual Obligations
 
$
7,767,026

 
$
3,567,444

 
$
2,777,433

 
$
1,233,829

 
$
188,320

(1) Operating lease obligations include the Company's rail car lease (Note 8).
(2) Purchase commitments include fixed price utility forward contracts.

Off-Balance Sheet Arrangements.
 
We currently have no off-balance sheet arrangements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn, ethanol and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes pursuant to the requirements of Generally Accepted Accounting Principles ("GAAP").

Interest Rate Risk

We are generally exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from our revolving line of credit and letters of credit with Minnwest Bank. As of October 31, 2011, we did not have an outstanding balance on this revolving line of credit. The specifics of these credit facilities are discussed in greater detail in “Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Short-Term Debt Sources.”

Commodity Price Risk

We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distillers grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.

As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us.
    
A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the fair value of our corn and natural gas prices and average ethanol price as of October 31, 2011, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from October 31, 2011. As of October 31, 2011, approximately 12.9% of our estimated corn usage, 56.7% of our anticipated natural gas usage and 10.2% of our ethanol sales over the next 12 months were subject to fixed price or index contracts where a price has been established with an exchange. The results of this analysis, which may differ from actual results, are as follows:

29




 
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)
Unit of Measure
Adverse Change in Price as of
October 31, 2011

Approximate Adverse Change to Income
Natural Gas
1,080,000

MMBTU
10
%
$
430,000

Ethanol
53,881,000

Gallons
10
%
$
13,039,000

Corn
17,420,000

Bushels
10
%
$
11,323,000


Participation in Captive Reinsurance Company

We participate in a captive reinsurance company (“Captive”). The Captive reinsures losses related to workman's compensation, commercial property and general liability. Premiums are accrued by a charge to income for the period to which the premium relates and is remitted by our insurer to the captive reinsurer. The Captive reinsures losses in excess of a predetermined amount. The Captive insurer has estimated and collected a premium amount in excess of expected losses but less than the aggregate loss limits reinsured by the Captive. We have contributed limited capital surplus to the Captive that is available to fund losses should the actual losses sustained exceed premium funding. So long as the Captive is fully-funded through premiums and capital contributions to the aggregate loss limits reinsured, and the fronting insurers are financially strong, we can not be assessed over the amount of our current contributions.


30




ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Governors
Granite Falls Energy, LLC
Granite Falls, MN

We have audited the accompanying balance sheets of Granite Falls Energy, LLC as of October 31, 2011 and 2010 and the related statements of operations, changes in members’ equity, and cash flows for each of the three fiscal years in the period ended October 31, 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 audit included consideration of internal control 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 Granite Falls Energy, LLC as of October 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three fiscal years in the period ended October 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
 
/s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P.
 
Certified Public Accountants
 
 
Minneapolis, Minnesota
 
January 30, 2012
 



31




GRANITE FALLS ENERGY, LLC
Balance Sheets

 ASSETS
 
October 31, 2011
 
October 31, 2010

 

 

Current Assets
 

 

Cash
 
$
13,064,560

 
$
10,664,225

Short-term investments
 

 
3,500,000

Restricted cash
 
1,503,000

 
901,500

Accounts receivable
 
3,777,547

 
3,164,209

Inventory
 
8,615,411

 
4,330,670

Commodity derivative instruments
 
404,050

 
752,500

Prepaid expenses and other current assets
 
177,793

 
116,889

Total current assets
 
27,542,361

 
23,429,993


 

 

Property, Plant and Equipment
 

 

Land and improvements
 
3,627,973

 
3,496,697

Railroad improvements
 
4,121,148

 
4,121,148

Process equipment and tanks
 
63,592,688

 
59,897,350

Administration building
 
279,734

 
279,734

Office equipment
 
154,072

 
135,912

Rolling stock
 
642,908

 
558,633

Construction in progress
 
366,979

 
746,008

 
 
72,785,502

 
69,235,482

Less accumulated depreciation
 
36,886,541

 
32,907,985

Net property, plant and equipment
 
35,898,961

 
36,327,497


 

 

Other Assets
 

 

Deferred financing costs, net of amortization
 

 
10,050

 
 
 
 
 
Total Assets
 
$
63,441,322

 
$
59,767,540



Notes to Financial Statements are an integral part of this Statement.

32




GRANITE FALLS ENERGY, LLC
Balance Sheets

LIABILITIES AND MEMBERS' EQUITY
 
October 31, 2011
 
October 31, 2010

 

 

Current Liabilities
 

 

Current portion long-term debt
 
$

 
$
61,133

Accounts payable
 
1,591,036

 
1,305,062

Corn payable to FCE - related party
 
2,516,923

 
1,931,226

Accrued liabilities
 
375,425

 
435,939

Distribution payable
 
9,196,800

 

Total current liabilities
 
13,680,184

 
3,733,360


 

 

Long-Term Debt, less current portion
 

 
171,298


 

 

Commitments and Contingencies
 

 


 

 

Members' Equity, 30,656 units authorized, issued and outstanding
 
49,761,138

 
55,862,882


 

 

Total Liabilities and Members’ Equity
 
$
63,441,322

 
$
59,767,540

 
 
 
 
 
 
 
 
 
 

Notes to Financial Statements are an integral part of this Statement.


33


GRANITE FALLS ENERGY, LLC
Statements of Operations

For the fiscal years ended,
October 31, 2011
October 31, 2010
October 31, 2009




 
 
 
 
Revenues
$
156,521,489

$
95,289,452

$
91,282,031





Cost of Goods Sold - primarily related party
142,353,416

85,146,261

87,464,936





Gross Profit
14,168,073

10,143,191

3,817,095





Operating Expenses
2,002,706

1,957,742

2,045,615





Operating Income
12,165,367

8,185,449

1,771,480





Other Income (Expense)



Other income (expense)
37,281

89,890

(618,035
)
Interest income
93,566

97,677

14,886

Interest expense
(4,358
)
(10,704
)
(82,151
)
Total other income (expense), net
126,489

176,863

(685,300
)




Net Income
$
12,291,856

$
8,362,312

$
1,086,180





Weighted Average Units Outstanding - Basic and Diluted
30,656

30,656

30,781

 
 
 
 
Net Income Per Unit - Basic and Diluted
$
400.96

$
272.78

$
35.29

 
 
 
 
Distributions Per Unit
$
600.00

$
150.00

$

 
 
 
 






Notes to Financial Statements are an integral part of this Statement.


34




GRANITE FALLS ENERGY, LLC

Statement of Changes in Members' Equity

Balance - October 31, 2008

$
51,512,790




Repurchase of 500 Membership units at $1,000 per unit, December 2008

(500,000
)



Net income for the year ended October 31, 2009

1,086,180




Balance - October 31, 2009

52,098,970




Member distributions

(4,598,400
)



Net income for the year ended October 31, 2010

8,362,312




Balance - October 31, 2010

55,862,882




Member distributions

(18,393,600
)



Net income for the year ended October 31, 2011

12,291,856




Balance - October 31, 2011

$
49,761,138


Notes to Financial Statements are an integral part of this Statement.


35


GRANITE FALLS ENERGY, LLC
Statements of Cash Flows
For the fiscal years ended,
October 31, 2011
 
October 31, 2010
 
October 31, 2009


 

 

Cash Flows from Operating Activities

 

 

Net income
$
12,291,856

 
$
8,362,312

 
$
1,086,180

Adjustments to reconcile net income to net cash provided by operations:

 

 

Depreciation and amortization
3,988,606

 
6,940,876

 
6,814,057

Change in fair value of derivative instruments
(1,271,242
)
 
(1,889,836
)
 
552,654

Change in operating assets and liabilities

 

 

Restricted cash
(601,500
)
 
209,173

 
(460,673
)
Commodity derivative instruments
1,619,692

 
1,498,772

 
(345,268
)
Accounts receivable
(613,338
)
 
175,809

 
(49,564
)
Inventory
(4,284,741
)
 
(1,479,030
)
 
1,023,684

Prepaid expenses and other current assets
(60,904
)
 
62,733

 
(69,211
)
Accounts payable
871,671

 
141,558

 
1,743,035

Due to broker

 

 
(238,581
)
Accrued liabilities
(60,514
)
 
56,929

 
(1,505,075
)
Net Cash Provided by Operating Activities
11,879,586

 
14,079,296

 
8,551,238



 

 

Cash Flows from Investing Activities

 

 

Proceeds from (payments for) short-term investments
3,500,000

 
(3,500,000
)
 

Payments for capital expenditures
(3,183,041
)
 
(80,415
)
 
(81,071
)
Payments for construction in process
(366,979
)
 
(740,096
)
 
(513,576
)
Proceeds from sale of equipment

 

 
6,413

Net Cash Used in Investing Activities
(50,020
)
 
(4,320,511
)
 
(588,234
)


 

 

Cash Flows from Financing Activities

 

 

Payments on revolving line of credit

 

 
(2,560,500
)
Payments on long-term debt
(232,431
)
 
(212,666
)
 
(73,771
)
Restricted cash

 

 
350,000

Member distributions paid
(9,196,800
)
 
(4,598,400
)
 

Net Cash Used in Financing Activities
(9,429,231
)
 
(4,811,066
)
 
(2,284,271
)


 

 

Net Increase in Cash
2,400,335

 
4,947,719

 
5,678,733



 

 

Cash - Beginning of Period
10,664,225

 
5,716,506

 
37,773



 

 

Cash - End of Period
$
13,064,560

 
$
10,664,225

 
$
5,716,506



 

 

Supplemental Cash Flow Information

 

 

Cash paid during the period for:

 

 

Interest expense
$
6,857

 
$
11,611

 
$
72,955



 

 

Supplemental Disclosure of Noncash Investing and Financing Activities

 

 

Member distributions included in distribution payable
$
9,196,800

 
$

 
$

Transfer of construction in process to fixed assets
$
746,008

 
$
231,916

 
$
368,305

Accounts receivable offset by repurchase of membership units
$

 
$

 
$
500,000


Notes to Financial Statements are an integral part of this Statement.

36

GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2011 and 2010



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying audited financial statements of Granite Falls Energy, LLC have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. As used in this report in Form 10-K, the “Company” represents Granite Falls Energy, LLC (“GFE”).

Nature of Business

Granite Falls Energy, LLC (“GFE” or the “Company”) is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers grains, and crude corn oil near Granite Falls, Minnesota and sells these products throughout the continental United States and on the international market. GFE's plant has an approximate annual production capacity of 60 million gallons. However, until recently the plant was only permitted to produce 49.9 million gallons of undenatured ethanol on a twelve month rolling sum basis. During the second quarter of fiscal 2011, the Company obtained an amendment to its environmental permits allowing the Company to produce up to 70 million gallons of undenatured ethanol on a twelve month rolling sum basis.

Fiscal Reporting Period

The Company has adopted a fiscal year ending October 31 for financial reporting purposes.

Accounting Estimates

Management uses estimates and assumptions in preparing these condensed financial statements in accordance with generally accepted accounting principles in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for the following significant matters, among others: realizability of accounts receivable, valuation of commodity derivatives and inventory, the economic lives of property, plant, and equipment, and the assumptions used in the impairment analysis of long-lived assets. Actual results may differ from previously estimated amounts, and such differences may be material to our condensed financial statements. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made.
  
Cash and Short-Term Investments

The Company maintains it accounts primarily at two financial institutions, of which one is a member of the Company. Certificates of deposit with original maturities over three months were classified as short-term investments. At times throughout the year, the Company's cash and short-term investment balances may exceed amounts insured by the Federal Deposit Insurance Corporation. At October 31, 2011 and 2010 such uninsured funds approximated $13,028,000 and $11,143,000, respectively. The Company does not believe it is exposed to any significant credit risk on its cash balances.

Restricted Cash

The Company has restricted cash balances relating to its revolving line of credit agreement discussed in Note 6 and its margin requirements with the Company's commodity derivative broker based on open commodity contracts discussed in Note 5.

Accounts Receivable

Credit terms are extended to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral.

Accounts receivable are recorded at their estimated net realizable value. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company's credit terms. Accounts considered uncollectible are written off. The Company follows a policy of providing an allowance for doubtful accounts; however, based on historical experience, and its evaluation of the current status of receivables, the Company is of the belief that such accounts will be collectible in all material respects and thus an allowance was not necessary at October 31, 2011 or 2010. It is at least possible this estimate will change in the future.


37

GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2011 and 2010



Inventory

Inventory is stated at the lower of cost or market. Cost for all inventories is determined using the first in first out method (FIFO). Market is based on current replacement values except that it does not exceed net realizable values and it is not less than net realizable values reduced by allowances from normal profit margin. Inventory consists of raw materials, work in process, finished goods, and spare parts. Corn is the primary raw material along with other raw materials. Finished goods consist of ethanol, distillers grains, and corn oil.

Property, Plant, and Equipment

Property, plant, and equipment are stated at cost. Depreciation is provided over the following estimated useful lives by use of the straight-line method.

Asset Description
Years
Land improvements
5-20 years
Buildings
10-30 years
Grain handling equipment
5-15 years
Mechanical equipment
5-15 years
Equipment
5-10 years

Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized.  Construction in progress expenditures will be depreciated using the straight-line method over their estimated useful lives once the assets are placed into service.

Long-Lived Assets

Long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including, but not limited to, discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. No indicators of impairment existed during fiscal 2011 or 2010 that would have triggered impairment testing, and therefore, no impairment expense was recorded during 2011 or 2010.

Deferred Financing Costs

Costs related to the Company's debt financing discussed in Note 7 were capitalized as incurred. The Company amortized these costs over the term of the related debt using the effective interest method. Amortization expense for the fiscal years ended October 31, 2011, 2010 and 2009 totaled $10,050, $22,844, and $2,800, respectively. As discussed in Note 7, the Company paid off the remaining EDA loan during fiscal 2011 and has expensed the remaining unamortized financing costs accordingly.

Revenue Recognition

The Company generally sells ethanol and related products pursuant to marketing agreements. Revenues from the production of ethanol and the related products are recorded when the customer has taken title and assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured. Ethanol and related products are generally shipped free on board (FOB) shipping point. The Company believes there are no ethanol sales, during any given month, which should be considered contingent and recorded as deferred revenue.

In accordance with the Company's agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales price as earned. These fees and commissions are recorded net

38

GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2011 and 2010



of revenues, as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products. Shipping costs paid by the Company to the marketer in the sale of ethanol are not specifically identifiable and, as a result, are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of distillers grains and corn oil are included in cost of goods sold.

Fair Value of Financial Instruments

The Company's accounting for fair value measurements of assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring or nonrecurring basis adhere to the Financial Accounting Standards Board (FASB) fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The Company has adopted guidance for fair value measurement related to nonfinancial items that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).

The three levels of the fair value hierarchy are as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 inputs are unobservable inputs for the asset or liability.

The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in our balance sheets, the Company has elected not to record any other assets or liabilities at fair value. No events occurred during the fiscal years ended October 31, 2011 or 2010 that required adjustment to the recognized balances of assets or liabilities, which are recorded at fair value on a nonrecurring basis.

The carrying value of cash, short-term investments, restricted cash, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short maturity of these instruments. The Company obtains fair value measurements from an independent pricing service for corn, natural gas, and ethanol contracts.  The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade and New York Mercantile Exchange markets.

Derivative Instruments

From time to time the Company enters into derivative transactions to hedge its exposures to commodity price fluctuations. The Company is required to record these derivatives in the balance sheet at fair value.

In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings. If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Changes in the fair value of undesignated derivatives are recorded in earnings.

Additionally, the Company is required to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as “normal purchases or normal sales”. Normal purchases and

39

GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2011 and 2010



normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from accounting and reporting requirements, and therefore, are not marked to market in our financial statements.

In order to reduce the risks caused by market fluctuations, the Company occasionally hedges its anticipated corn, natural gas, and denaturant purchases and ethanol sales by entering into options and futures contracts. These contracts are used with the intention to fix the purchase price of anticipated requirements for corn in the Company's ethanol production activities and the related sales price of ethanol. The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter market conditions. Although the Company believes its commodity derivative positions are economic hedges, none have been formally designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings or losses. The Company does not enter into financial instruments for trading or speculative purposes.

The Company has adopted authoritative guidance related to “Derivatives and Hedging,” and has included the required enhanced quantitative and qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses from derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. See further discussion in Note 5.

Income Taxes

The Company is treated as a partnership for federal and state income tax purposes, and generally does not incur income taxes. Instead its earnings and losses are included in the income tax returns of its members. Therefore, no provision or liability for federal or state income taxes has been included in these financial statements. The Company had no significant uncertain tax positions as of October 31, 2011 or 2010. For years before fiscal 2009, the Company is no longer subject to U.S. Federal or state income tax examinations.

Environmental Liabilities

The Company's operations are subject to environmental laws and regulations adopted by various governmental entities in the jurisdiction in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its location. Accordingly, the Company has adopted policies, practices, and procedures in the areas of pollution control, occupational health, and the production, handling, storage, and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability, which could result from such events. Environmental liabilities are recorded when the liability is probable and the costs can be reasonable estimated. No expense has been recorded for the fiscal year's ended October 31, 2011, 2010, or 2009.

Net Income per Unit

Basic net income per unit is computed by dividing net income by the weighted average number of members' units outstanding during the period. Diluted net income per unit is computed by dividing net income by the weighted average number of members' units and members' unit equivalents outstanding during the period. There were no member unit equivalents outstanding during the periods presented; accordingly, for all periods presented, the calculations of the Company's basic and diluted net income per unit are the same.

2. RISKS AND UNCERTAINTIES

The Company has certain risks and uncertainties that it experiences during volatile market conditions. These volatilities can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distillers grains to customers located in the United States and internationally. Corn for the production process is supplied to our plant primarily from local agricultural producers and from purchases on the open market.  Ethanol sales average approximately 83% of total revenues and corn costs averaged 84% of cost of goods sold.
 
The Company's operating and financial performance is largely driven by the prices at which they sell ethanol and the net expense

40

GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2011 and 2010



of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, and unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. Our largest cost of production is corn.  The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs. The Company follows a risk management program to protect against the price volatility of these commodities.

3. CONCENTRATIONS

The Company has identified certain concentrations that are present in their business operations. The Company's revenue from ethanol sales is derived from a single customer under an ethanol marketing agreement described in Note 13. Sales under that agreement account for approximately 83%, 86%, and 83% of the Company's revenues, net of derivative activity, during fiscal 2011, 2010, and 2009, respectively. Accordingly, a significant portion of the Company's receivables are regularly due from that same customer.

4. INVENTORY

Inventories consist of the following:
 
October 31, 2011
 
October 31, 2010
Raw materials
$
5,323,615

 
$
1,549,762

Spare parts
584,011

 
497,793

Work in process
1,150,239

 
827,299

Finished goods
1,557,546

 
1,455,816

     Totals
$
8,615,411

 
$
4,330,670


The Company performs a lower of cost or market analysis on inventory to determine if the market values of certain inventories are less than their carrying value, which is attributable primarily to decreases in market prices of corn and ethanol. Based on the lower of cost or market analysis, the Company did not record a lower of cost or market charge on certain inventories for the fiscal years ended October 31, 2011, 2010 or 2009.

5.    DERIVATIVE INSTRUMENTS

As of October 31, 2011, the total notional amount of the Company's outstanding corn derivative instruments was approximately 2,580,000 bushels that were entered into to hedge forecasted corn purchases through March 2012. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding as disclosed above.

The following tables provide details regarding the Company's derivative instruments at October 31, 2011, none of which were designated as hedging instruments:

 
Balance Sheet location
 
Assets
 
Liabilities
 
 
 
 
 
 
Corn contracts
Commodity derivative instruments
 
$
404,050

 
$

 
 
 
 
 
 
Totals
 
 
$
404,050

 
$

 
In addition, as of October 31, 2011 the Company maintained approximately $903,000 of restricted cash related to margin requirements for the Company's derivative instrument positions.

As of October 31, 2010, the total notional amount of the Company's outstanding corn derivative instruments was approximately 1,005,000 bushels that were entered into to hedge forecasted corn purchases through November 2010. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding as disclosed above.


41

GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2011 and 2010



The following tables provide details regarding the Company's derivative instruments at October 31, 2010, none of which were designated as hedging instruments:

 
 
Balance Sheet location
 
Assets
 
Liabilities
 
 
 
 
 
 
Corn contracts
Derivative instruments
 
$
752,500

 
$

 
 
 
 
 
 
Totals
 
 
$
752,500

 
$

 
In addition, as of October 31, 2010 the Company maintained $301,500 of restricted cash related to margin requirements for the Company's commodity derivative instrument positions.
 
The following tables provide details regarding the gains and (losses) from Company's derivative instruments in statements of operations, none of which are designated as hedging instruments:
 
 
Statement of
 
Fiscal Years Ended October 31,
 
 
Operations location
 
2011
 
2010
 
2009
 
 
 
 
 
 
 
 
 
Ethanol contracts
 
Revenue
 
$
(4,626
)
 
$
(343,448
)
 
$
(270,169
)
Corn contracts
 
Cost of Goods Sold
 
1,280,413
 
 
2,339,286

 
(190,425
)
Natural gas contracts
 
Cost of Goods Sold
 
(4,545
)
 
(113,710
)
 
(274,914
)
Denaturant contracts
 
Cost of Goods Sold
 
 
 
7,708

 
182,854

 
 
 
 
 
 
 
 
 
Total gain (loss)
 
 
 
$
1,271,242
 
 
$
1,889,836

 
$
(552,654
)

6.    REVOLVING LINE OF CREDIT

The Company has a Loan Agreement with a bank. Under the Loan Agreement, the Company has a revolving line of credit with a maximum of $6,000,000 available through April 2012 and is secured by substantially all of the Company's assets. The interest rate on the revolving line of credit is at 0.25 percentage points above the prime rate as reported by the Wall Street Journal, with a minimum rate of 4.5% and 5.0% at October 31, 2011 and 2010, respectively. The interest rate on the revolving line of credit at October 31, 2011 and 2010 was 4.5% and 5.0%, respectively, the minimum rate under the terms of the agreement. At October 31, 2011 and 2010, the Company had no outstanding balance on this line of credit. The Company is required to maintain a savings account balance with the Bank totaling 10% of the maximum amount available on the line of credit to serve as collateral on this line of credit.  At both October 31, 2011 and 2010, this amount totaled $600,000 and is included in restricted cash.

At October 31, 2011, the Company also had letters of credit totaling $435,928 with the bank as part of a credit requirement of Northern Natural Gas. These letters of credit reduce the amount available under the revolving line of credit to approximately $5,564,000.

7.    LONG-TERM DEBT

Long-term debt consists of the following:
 
October 31, 2011
 
October 31, 2010
Economic Development Authority (“EDA”) Loans:
 
 
 
City of Granite Fall/Minnesota Investment Fund
$

 
$
232,431

Less: Current Maturities

 
(61,133
)
 
 
 
 
              Total Long-Term Debt
$

 
$
171,298



42

GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2011 and 2010



EDA Loans:

On February 1, 2006, the Company signed a Loan Agreement with the City of Granite Falls, MN (“EDA Loan Agreement”) for amounts to be borrowed from several state and regional economic development authorities. The original amounts for the City of Granite Falls / Minnesota Investment Fund (“MIF”) are as follows:

Original Amount:
 
$500,000
Interest Rate:
 
1%
Principal and Interest Payments:
 
Semi-Annual
Initial Maturity Date:
 
June 15, 2014

Amounts borrowed under the EDA Loan Agreements were secured by a second mortgage on all of the assets of the Company. On August 26, 2011, the MIF loan was paid in full and there were no prepayment penalties assessed.

8. LEASES

The Company has a lease agreement with a leasing company for 75 hopper cars to assist with the transport of distiller's grains by rail. In November 2010, the original lease was renewed for an additional five-year period. Based on final manufacturing and interest costs, the Company will pay the leasing company $620 per month plus $0.03 per mile traveled in excess of 36,000 miles per year. Rent expense for these leases was $553,000, $604,000 and $604,000 for the fiscal years ended October 31, 2011, 2010 and 2009, respectively.

At October 31, 2011, the Company had lease agreements with three leasing companies for 147 rail car leases for the transportation of the Company's ethanol with various maturity dates through October 2017. The rail car lease payments are due monthly in the aggregate amount of approximately $89,000. Rent expense for these leases was $1,171,000, $1,058,000 and $721,000 for the fiscal years ended October 31, 2011, 2010 and 2009, respectively.

In March 2011, the Company amended an existing lease for an additional 30 rail cars for the transportation of the Company's ethanol. The lease term is for five years. The rail car lease payments are due monthly in the aggregate amount of approximately $16,350 ($545 per car).

At October 31, 2011, the Company had the following minimum commitments, which at inception had non-cancelable terms of more than one year:
 
Periods Ending October 31,
 
2012
 
$
1,769,844

2013
1,525,314
 
2014
1,252,119
 
2015
978,339
 
2016
255,490
 
Thereafter
188,320
 
Total minimum lease commitments
 
$
5,969,426



43

GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2011 and 2010



9. FAIR VALUE

The following table provides information on those derivative assets measured at fair value on a recurring basis at October 31, 2011:

 



Carrying Amount in Balance Sheet
October 31, 2011




Fair Value
October 31, 2011
Fair Value Measurement Using
Quoted Prices in Active Markets
(Level 1)
Significant Other Observable Inputs
(Level 2)

Significant unobservable inputs
(Level 3)
Financial Assets:
 
 
 
 
 
Derivative Instruments
$
404,050

$
404,050

$
404,050

$

$


The following table provides information on those derivative assets measured at fair value on a recurring basis at October 31, 2010:

 



Carrying Amount in Balance Sheet
October 31, 2010




Fair Value
October 31, 2010
Fair Value Measurement Using
Quoted Prices in Active Markets
(Level 1)
Significant Other Observable Inputs
(Level 2)

Significant unobservable inputs
(Level 3)
Financial Assets:
 
 
 
 
 
Derivative Instruments
$
752,500

$
752,500

$
752,500

$

$


We determine the fair value of commodity derivative instruments by obtaining 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 Chicago Board of Trade market and New York Mercantile Exchange.

10. MEMBERS' EQUITY

The Company has one class of membership units. The units have no par value and have identical rights, obligations and privileges. Income and losses are allocated to all members based upon their respective percentage of units held. As of October 31, 2011, 2010 and 2009, the Company had 30,656 membership units authorized, issued, and outstanding.

In December 2008, the Company redeemed 500 membership units totaling $500,000 from its former ethanol marketer.

In November 2009, the Board of Governors declared a cash distribution of $150 per unit or $4,598,400 for unit holders of record as of November 19, 2009. The distribution was paid on December 16, 2009.

In November 2010, the Board of Governors declared a cash distribution of $300 per unit or $9,196,800 for unit holders of record as of November 23, 2010. The distribution was paid on December 15, 2010.

In October 2011, the Board of Governors declared a cash distribution of $300 per unit or $9,196,800 for unit holders of record as of October 27, 2011. The distribution was paid on December 15, 2011.

In December 2011 the Board of Governors exercised its discretion to redeem 50 membership units totaling $66,250 from an investor due to a unique restriction on transfers situation.

11. EMPLOYEE BENEFIT PLANS

The Company has a defined contribution plan available to all of its qualified employees. The Company contributes a match of 50% of the participant's salary deferral up to a maximum of 3% of the employee's salary. Company contributions totaled approximately $46,000, $44,000, and $41,000 for the fiscal years ended October 31, 2011, 2010, and 2009, respectively.

44

GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2011 and 2010



12. INCOME TAXES

The differences between the financial statement basis and tax basis of assets are based on the following:

 
October 31, 2011
 
October 31, 2010
 
 
 
 
Financial statement basis of assets
$
63,441,322

 
$
59,767,540

Organization & start-up costs capitalized for tax purposes, net
821,605

 
893,886

Tax depreciation greater than book depreciation
(27,702,345
)
 
(24,936,468
)
Unrealized derivatives gains
(404,050
)
 
(752,500
)
Capitalized inventory
20,000

 
12,200

 
 

 
 

Income tax basis of assets
$
36,176,532

 
$
34,984,658

 
 
 
 

There were no differences between the financial statement basis and tax basis of the Company's liabilities.

13. COMMITMENTS AND CONTINGENCIES

Corn Storage and Grain Handling Agreement and Purchase Commitments

The Company has a corn storage and grain handling agreement with Farmers Cooperative Elevator (FCE), a member. Under the agreement, the Company agrees to purchase all of the corn needed for the operation of the plant FCE. The price of the corn purchased will be the bid price FCE establishes for the plant plus a set fee of per bushel.

At October 31, 2011, the Company had basis contracts for forward corn purchase commitments with FCE for 500,000 bushels for delivery in December 2011. At October 31, 2011, the Company had 460,000 bushels of stored corn totaling $2,862,550 with FCE that is included in inventory.

The Company purchased approximately $123,676,000 of corn from the member during fiscal 2011, of which approximately $2,517,000 is included in corn payable at October 31, 2011. The Company purchased approximately $63,089,000 of corn from the member during fiscal 2010, of which approximately $1,931,000 is included in corn payable at October 31, 2010. The Company purchased approximately $60,390,000 of corn from the member during fiscal 2009.

Ethanol Marketing Agreement

Granite Falls currently has an Ethanol Marketing Agreement (“Eco Agreement”) with Eco-Energy, Inc. (“Eco-Energy”). Pursuant to the Eco Agreement, Eco-Energy agrees to purchase the entire ethanol output of GFE's ethanol plant and to arrange for the transportation of ethanol; however, GFE is responsible for securing all of the rail cars necessary for the transport of ethanol by rail. GFE will pay Eco-Energy a certain percentage of the FOB plant price in consideration of Eco-Energy's services. The contract had an initial term of one year, and will continue to remain in effect until terminated by either party at its unqualified option, by providing written notice of not less than 90 days to the other party.

Ethanol marketing fees and commissions totaled approximately $1,006,000, $825,000, and 622,000 for the fiscal years ended October 31, 2011, 2010 and 2009 respectively, and are included net within revenues.

Ethanol Contracts

At October 31, 2011, the Company had forward contracts to sell approximately $15,667,000 of ethanol for various delivery periods from November 2011 through December 2011 which approximates 61% of its anticipated ethanol sales during that period.

At October 31, 2010, the Company had forward contracts to sell approximately $12,250,000 of ethanol for various delivery periods from November 2010 through December 2010.


45

GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2011 and 2010



Distillers Grain Marketing Agreement

During fiscal 2010, the Company had a marketing agreement with a related company, CHS, Inc., for the purpose of marketing and selling all the distillers grains the Company elected to ship by rail from the plant. On October 29, 2010, the Company served a 90 day termination notice to CHS in accordance with the Marketing Agreement with an effective date of January 29, 2011. In December 2010, the Company entered into a new Marketing Agreement with RPMG, an unrelated party, for the purpose of marketing and selling all distillers grains produced by the Company. The contract commenced on February 1, 2011 with an initial term of one year, and will continue to remain in effect until terminated by either party at its unqualified option, by providing written notice of not less than 90 days to the other party. Distillers grain commissions totaled approximately $460,000, $210,000 and $160,000 for the fiscal years ended October 31, 2011, 2010 and 2009 respectively, and are included net within revenues.

At October 31, 2011, the Company had forward contracts to sell approximately $4,624,000 of distillers grains for various delivery periods from November 2011 through January 2012 which approximates 65% of its anticipated distillers grain sales during that period.

At October 31, 2010, the Company had forward contracts to sell approximately $1,153,000 of distillers grains for various delivery periods from November 2010 through June 2011.

Natural Gas Contracts

At October 31, 2011, the Company had forward contracts to purchase $1,797,600 of natural gas at prices with delivery periods from November 2011 through March 2012 which approximates 57% of its anticipated natural gas purchases during that period.

At October 31, 2010, the Company had forward contracts to purchase $1,842,000 of natural gas at prices with delivery periods from November 2010 through March 2011.
    
Contract for Natural Gas Pipeline to Plant

The Company has an agreement with an unrelated company for the construction of and maintenance of 9.5 miles of natural gas pipeline that will serve the plant. The agreement requires the Company receive a minimum of 1,400,000 DT of natural gas annually through the term of the agreement. The Company is charged a fee based on the amount of natural gas delivered through the pipeline.

This agreement will continue in effect until December 31, 2015 at which time it will automatically renew for consecutive terms of one year. A twelve month prior written notice is required to be given by either party to terminate this agreement.

Commitment to Purchase Real Estate

Subsequent to the fiscal year ended October 31, 2011, the Company entered into contracts to purchase certain real estate in exchange for an aggregate commitment of approximately $3,400,000.

14.  LEGAL PROCEEDINGS  

From time to time in the ordinary course of business, the Company may be named as a defendant in legal proceedings related to various issues, including without limitation, workers' compensation claims, tort claims, or contractual disputes.  We are not currently a party to any material pending legal proceedings and we are not currently aware of any such proceedings contemplated by governmental authorities.


46

GRANITE FALLS ENERGY, LLC
Notes to Financial Statements
October 31, 2011 and 2010



15. QUARTERLY FINANCIAL DATA (UNAUDITED)
 
Summary quarterly results are as follows:

 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Fiscal year ended October 31, 2011
 
 
 
 
 
 
 
  Revenues
$
30,716,346

 
$
34,537,750

 
$
45,414,923

 
$
45,852,470

  Gross profit
3,533,733

 
3,704,535

 
2,068,381

 
4,861,424

  Operating income
2,975,612

 
3,245,729

 
1,550,481

 
4,393,545

  Net income
3,011,596

 
3,270,110

 
1,586,882

 
4,423,268

  Basic and diluted earnings per unit
98.24

 
106.67

 
51.76

 
144.29


 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Fiscal year ended October 31, 2010
 
 
 
 
 
 

 
 

  Revenues
 
$
23,424,562

 
$
22,237,999

 
$
23,632,382

23,632,382

$
25,994,509

  Gross profit
 
2,346,940

 
1,730,098

 
1,386,818

 
4,679,335

  Operating income
 
1,837,999

 
1,267,328

 
919,429

 
4,160,693

  Net income
 
1,927,176

 
1,298,247

 
939,019

 
4,197,870

  Basic and diluted earnings per unit
 
62.86

 
42.35

 
30.63

 
136.94


 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Fiscal year ended October 31, 2009
 
 
 
 
 
 
 
 
  Revenues
 
$
20,782,742

 
$
21,529,863

 
$
25,829,076

 
$
23,140,350

  Gross profit (loss)
 
(289,074
)
 
(559,732
)
 
1,929,793

 
2,736,655

  Operating income (loss)
 
(810,049
)
 
(1,078,241
)
 
1,395,798

 
2,263,972

  Net income (loss)
 
(1,506,486
)
 
(1,071,243
)
 
1,395,123

 
2,268,786

  Basic and diluted earnings (loss) per unit
 
(48.36
)
 
(34.94
)
 
45.51

 
74.01


The above quarterly financial data is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of th