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EX-32.1 - SECTION 1350 CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER - Lincolnway Energy, LLCexhibit321.htm
EX-31.2 - RULE 13A-14(A)CERTIFICATION OF CHIEF FINANCIAL OFFICER - Lincolnway Energy, LLCexhibit312.htm
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EX-31.1 - RULE 13A-14(A)CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER - Lincolnway Energy, LLCexhibit311.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
March 31, 2012
 
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: 000-51764
 
LINCOLNWAY ENERGY, LLC
(Exact name of registrant as specified in its charter)
 
Iowa
20-1118105
(State or other jurisdiction of incorporation)
(I.R.S. Employer Identification No.)
 
 
59511 W. Lincoln Highway, Nevada, Iowa
50201
(Address of principal executive offices)
(Zip Code)
515-232-1010
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

 
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.
þ  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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ   Yes     o  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o
Accelerated filer  o
 
 
 
 
Non-accelerated filer þ
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 þ No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 42,049 membership units outstanding at May 1, 2012.



LINCOLNWAY ENERGY, LLC
FORM 10-Q
For the Quarter Ended March 31, 2012

INDEX

 
 
 
Page
 
 
 
 
Part I.
Financial Information
 
 
 
 
 
 
Item 1.
Unaudited Financial Statements
 
 
 
 
 
 
 
a)   Balance Sheets
 
 
b)   Statements of Operations
 
 
c)   Statements of Cash Flows
 
 
d)   Notes to Unaudited Financial Statements
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
Item 4.
Controls and Procedures
 
 
 
 
Part II.
Other Information
 
 
 
 
 
 
 
Item 1.
Legal Proceedings
 
Item 1A.
Risk Factors
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
Defaults Upon Senior Securities
 
Item 5.
Other Information
 
Item 6.
Exhibits
 
 
 
 
Signatures
 
 
 
 
 
 
Exhibits Filed With This Report
 
 
Rule 13a-14(a) Certification of President and Chief Executive Officer
E-1
 
Rule 13a-14(a) Certification of Chief Financial Officer
E-2
 
Section 1350 Certification of President and Chief Executive Officer
E-3
 
Section 1350 Certification of Chief Financial Officer
E-4




PART I - FINANCIAL INFORMATION

Item 1.    Unaudited Financial Statements.


Lincolnway Energy, LLC

Balance Sheets
 
March 31, 2012
 
September 30, 2011
 
(Unaudited)
 
 
ASSETS (Note 4)
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
1,606,156

 
$
34,135

Due from broker
32,666

 
227,670

Derivative financial instruments (Note 8)
30,008

 
292,375

Trade and other accounts receivable (Note 6)
6,620,149

 
8,041,523

Inventories (Note 3)
8,240,416

 
6,350,544

Prepaid expenses and other
292,693

 
328,881

Total current assets
16,822,088

 
15,275,128

 
 
 
 
PROPERTY AND EQUIPMENT
 

 
 

Land and land improvements
6,949,062

 
7,633,650

Buildings and improvements
1,604,305

 
1,604,305

Plant and process equipment
79,479,786

 
76,014,786

Office furniture and equipment
409,485

 
407,725

Construction in progress
81,875

 
2,562,694

 
88,524,513

 
88,223,160

Accumulated depreciation
(47,404,172
)
 
(43,529,798
)
 
41,120,341

 
44,693,362

 
 
 
 
OTHER ASSETS
 

 
 

Restricted cash
351,000

 
351,000

Financing costs, net of amortization of $279,557 and $252,070
192,405

 
219,891

Deposits
298,350

 
476,437

Investments
190,488

 
182,970

 
1,032,243

 
1,230,298

 
 
 
 
 
$
58,974,672

 
$
61,198,788


See Notes to Unaudited  Financial Statements.
 









Lincolnway Energy, LLC

Balance Sheets (continued)

 
March 31, 2012
 
September 30, 2011
 
(Unaudited)
 
 
LIABILITIES AND MEMBERS' EQUITY
 
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
1,202,536

 
$
1,359,836

Accounts payable, related party (Note 5)
944,016

 
1,179,981

Current maturities of long-term debt (Note 4)
1,550,436

 
1,452,409

Accrued expenses
1,730,300

 
879,232

Total current liabilities
5,427,288

 
4,871,458

 
 
 
 
NONCURRENT LIABILITIES
 
 
 
Long-term debt, less current maturities (Note 4)
212,671

 
2,738,021

Other
450,000

 
450,000

Total noncurrent liabilities
662,671

 
3,188,021

 
 
 
 
COMMITMENTS AND CONTINGENCY (Notes 6 and 9)

 

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

 
38,990,105

Retained earnings
13,894,608

 
14,149,204

 
52,884,713

 
53,139,309

 
 
 
 
 
$
58,974,672

 
$
61,198,788


See Notes to Unaudited  Financial Statements.


2


Lincolnway Energy, LLC

Statements of Operations

 
Three Months
Ended
 
Three Months
Ended
 
March 31, 2012
 
March 31, 2011
 
(Unaudited)
 
 
 
 
Revenues (Notes 2 and 6)
$
42,079,889

 
$
45,570,522

 
 

 
 

Cost of goods sold
43,033,139

 
42,581,533

 
 

 
 

Gross profit (loss)
(953,250
)
 
2,988,989

 
 
 
 
General and administrative expenses
727,450

 
648,483

 
 

 
 

Operating income (loss)
(1,680,700
)
 
2,340,506

 
 
 
 
Other income (expense):
 

 
 

Interest income
2,038

 
2,020

Interest expense
(30,947
)
 
(130,168
)
 
(28,909
)
 
(128,148
)
 
 
 
 
Net income (loss)
$
(1,709,609
)
 
$
2,212,358

 
 
 
 

Weighted average units outstanding
42,049

 
42,049

 
 

 
 

Net income (loss) per unit - basic and diluted
$
(40.66
)
 
$
52.61



See Notes to Unaudited  Financial Statements.

 


3




Lincolnway Energy, LLC

Statements of Operations

 
Six Months
Ended
 
Six Months
Ended
 
March 31, 2012
 
March 31, 2011
 
(Unaudited)
 
 
 
 
Revenues (Notes 2 and 6)
$
85,341,365

 
$
79,407,123

 
 

 
 

Cost of goods sold
83,565,094

 
75,996,577

 
 

 
 

Gross profit
1,776,271

 
3,410,546

 
 
 
 
General and administrative expenses
1,400,592

 
1,323,324

(Gain) on sale of property (Note 10)
(496,098
)
 

Operating income
871,777

 
2,087,222

 
 
 
 
Other income (expense):
 

 
 

Interest income
4,287

 
4,305

Interest expense
(79,435
)
 
(310,653
)
 
(75,148
)
 
(306,348
)
 
 
 
 
Net income
$
796,629

 
$
1,780,874

 
 
 
 

Weighted average units outstanding
42,049

 
42,049

 
 

 
 

Net income per unit - basic and diluted
$
18.95

 
$
42.35


See Notes to Unaudited  Financial Statements.

Lincolnway Energy, LLC

Statements of Cash Flows
 
Six Months
Ended
 
Six Months
Ended
 
March 31, 2012
 
March 31, 2011
 
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
796,629

 
$
1,780,874

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
3,906,716

 
4,228,418

(Gain) loss on sale or disposal of property and equipment
(496,098
)
 
42,550

Changes in working capital components:
 

 
 

Due from broker
195,004

 
995,547

Trade and other accounts receivable
1,421,374

 
(2,438,009
)
Inventories
(1,889,872
)
 
(730,928
)
Prepaid expenses and other
36,188

 
33,825

Deposits
178,087

 

Accounts payable
(157,300
)
 
(467,621
)
Accounts payable, related party
(235,965
)
 
540,307

Accrued expenses
(200,157
)
 
4,432

Derivative financial instruments
262,367

 
(1,639,933
)
Net cash provided by operating activities
3,816,973

 
2,349,462

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Purchase of property and equipment
(991,111
)
 
(915,046
)
Proceeds from sale of property
1,181,000

 

Purchase of investments
(7,518
)
 
(12,877
)
Net cash provided by (used in) investing activities
182,371

 
(927,923
)
 
 

 
 

CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Payments on long-term borrowings
(2,427,323
)
 
(39,309
)
Net cash (used in) financing activities
(2,427,323
)
 
(39,309
)
 
 
 
 
Net increase in cash and cash equivalents
1,572,021

 
1,382,230

 
 
 
 

CASH AND CASH EQUIVALENTS
 

 
 

Beginning
34,135

 
2,858,110

Ending
$
1,606,156

 
$
4,240,340

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
 
 
 
     INFORMATION, cash paid for interest net of amount capitalized
$
106,008

 
$
333,686

 
 

 
 

SUPPLEMENTAL DISCLOSURES OF NONCASH
 

 
 

INVESTING AND FINANCING ACTIVITIES
 
 
 
Construction in progress included in accounts payable
$

 
$
60,823

Distributions included in accrued expenses
$
1,051,225

 
$

See Notes to Unaudited  Financial Statements.

4

Lincolnway Energy, LLC

Notes to Unaudited Financial Statements
_____________________________________________________________________________________________________




Note 1.    Nature of Business and Significant Accounting Policies

Principal business activity:  Lincolnway Energy, LLC (the Company), located in Nevada, Iowa, was formed in May 2004 to pool investors to build a 50 million gallon annual production dry mill corn-based ethanol plant.  The Company began making sales on May 30, 2006 and became operational during the quarter ended June 30, 2006.

Basis of presentation and other information: The balance sheet as of September 30, 2011 was derived from the Company's audited balance sheet as of that date.  The accompanying financial statements as of and for the three and six months ended March 31, 2012 and 2011 are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods.  These unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto, for the year ended September 30, 2011 contained in the Company's Annual Report  on Form 10-K.  The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.

Use of estimates:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Trade accounts receivable: Trade accounts receivable are recorded at original invoice amounts less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering customers financial condition, credit history and current economic conditions. Receivables are written off when deemed uncollectible. Recoveries of receivables written off are recorded when received. A receivable is considered past due if any portion of the receivable is outstanding more than 90 days.
  
Income taxes:  The Company is organized as a partnership for federal and state income tax purposes and generally does not incur income taxes.  Instead, the Company's earnings and losses are included in the income tax returns of the members.  Therefore, no provision or liability for federal or state income taxes has been included in these financial statements.

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

Fair Value of financial instruments:  The carrying amounts of cash and cash equivalents, due from broker, derivative financial instruments, trade and other accounts receivable, accounts payable and accrued expenses approximate fair value.  The carrying amount of long-term debt approximates fair value because the interest rates fluctuate with market rates or the fixed rates approximate current rates offered to the Company for debt with similar terms and maturities.



Note 2.    Revenue

Components of revenue are as follows:

(Excludes hedging activity)
 
Three Months
 
Three Months
 
Six months
 
Six months
 
 
 Ended
 
 Ended
 
Ended
 
Ended
(In thousands)
 
March 31, 2012
 
March 31, 2011
 
March 31, 2012
 
March 31, 2011
Ethanol
 
$
31,428

 
$
36,454

 
$
65,141

 
$
64,436

Distillers' Grains
 
9,713

 
8,170

 
17,851

 
14,558

Other
 
976

 
918

 
2,386

 
1,356






Note 3.    Inventories

Inventories consist of the following as of:
 
March 31,
2012
 
September 30,
2011
 
 
 
 
Raw materials, including corn, coal, chemicals and supplies
$
3,814,258

 
$
3,956,604

Work in process
1,191,087

 
1,303,654

Ethanol and distillers grains
3,235,071

 
1,090,286

Total
$
8,240,416

 
$
6,350,544




Note 4.    Long-Term Debt

Long-term debt consists of the following as of:

 
March 31,
2012
 
September 30,
2011
 
 
 
 
Construction term loan. (A)
$
1,500,000

 
$
1,500,000

 
 

 
 

Construction/revolving term loan. (B)

 
1,000,000

 
 

 
 

Note payable to contractor (C)

 
1,250,000

 
 

 
 

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

 
152,500

 
 

 
 

Note payable to Iowa Department of Transportation. (E)
263,107

 
287,930

 
 
 
 

 
1,763,107

 
4,190,430

Less current maturities
(1,550,436
)
 
(1,452,409
)
 
$
212,671

 
$
2,738,021

 
 
 
 
(A)
The Company has a construction and term loan with a financial institution.  Borrowings under the term loan include a variable interest rate based on the one-month LIBOR index rate plus 3.30%.  The rate will be reset automatically without notice to the Company, on the first “US Banking Day” of each succeeding week, and each change shall be applicable to all outstanding balances as of that date.  The agreement requires principal payments of $1,250,000 per quarter commencing in December 2006 through March 2013.  The agreement requires the maintenance of certain financial and nonfinancial covenants.   Borrowings under this agreement are collateralized by substantially all of the Company's assets.  As of March 31, 2012, the Company has made principal payments of $37,500,000, since the inception of the loan, which under the terms of the agreement have been applied to scheduled payments in order of their maturity. The Company's next scheduled payment under the agreement is due in December 2012.

5


Lincolnway Energy, LLC

Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________


(B)
The Company has a $10,000,000 construction/revolving term credit facility with a financial institution which expires on September 1, 2015.  Borrowings under the credit facility agreement include a variable interest rate based on the one-month LIBOR index rate plus 3.30%.  The rate will be reset automatically without notice to the Company, on the first “US Banking Day” of each succeeding week, and each change shall be applicable to all outstanding balances as of that date.  Borrowings are subject to borrowing base restrictions as defined in the agreement.  The credit facility and revolving credit agreement require the maintenance of certain financial and nonfinancial covenants.  Borrowings under this agreement are collateralized by substantially all of the Company's assets.  There was no balance outstanding as of March 31, 2012.

(C)
The Company had a $1,125,000 subordinated note payable dated May 22, 2006 to an unrelated third party. The note payable was paid in full during the quarter ended December 31, 2011.

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

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

Note 5.    Related-Party Transactions

The Company entered into an agreement on January 24, 2006 with the Heart of Iowa Coop , dba Key Cooperative (Key), a member of the Company, to provide 100% of the requirement of corn for use in the operation of the ethanol plant. The agreement may be terminated before the end of the term by providing six months' notice of termination and paying the other party $2,000,000, reduced by $50,000 for each completed year of the agreement.  The Company purchased corn totaling $34,667,303 and $64,458,716 for the three months and six months ended March 31, 2012.  There were corn purchases of $32,477,180 and $55,729,082 for the three months and six months ended March 31, 2011. As of March 31, 2012, the Company had several basis contracts with Key representing approximately 3,442,000 bushels of corn.  The contracts mature on various dates through July 2012.  The Company also has made some miscellaneous purchases from Key (storage fees, fuel, and propane costs) amounting to $14,128 and $44,197 for the three months and six months ended March 31, 2012 , respectively.  There were miscellaneous purchases of $18,333 and $34,475 for the three months and six months ended March 31, 2011. As of March 31, 2012 the amount due to Key is $943,338.

On April 10, 2012, the Company delivered notice to Key to terminate the Amended and Restated Grain Handling Agreement they hold with Key. The termination of the agreement will be six months from the date of the notice, effective October 10, 2012. The Company will begin to originate corn in house at the time of the termination. The Company expects to incur a termination cost as required under the agreement, which will be expensed in the fiscal 2012 third quarter and is payable over a four year period with interest at the prime rate on the date of termination.

The Company is also purchasing propane from Innovative Ag Services, formerly, Prairie Land Cooperative, a member of the Company.  Total purchases for the three months and six months ended March 31, 2012 is $1,633 and $16,520, respectively. Total purchases for the three months and six months ended March 31, 2011 is $1,859 and $14,422, respectively.  As of March 31, 2012 there is $678 due to Innovative Ag Services.

6

Lincolnway Energy, LLC

Notes to Unaudited Financial Statements
_____________________________________________________________________________________________________



Note 6.    Commitments and Major Customer

On September 25, 2009, the Company entered into a agreement with an unrelated entity. The agreement became effective on October 1, 2009. The unrelated entity is responsible for marketing and purchasing all of the ethanol produced by the Company. For the three months and six months ended March 31, 2012 the Company has expensed $181,836 and $352,219, respectively, under this agreement for marketing fees. For the three and six months ended March 31, 2011 the Company has expensed $195,461 and $358,771, respectively. Revenues with this customer were $31,427,345 and $65,140,803 for the three and six months ended March 31, 2012 , respectively. For the three and six months ended March 31, 2011, revenues with this customer were $36,454,373 and $64,436,018, respectively. Trade accounts receivable of $4,596,093 was due from the customer as of March 31, 2012.

The Company has an agreement with an unrelated entity for marketing, selling and distributing the distiller's grains. For the three months and six months ended March 31, 2012, the Company has expensed marketing fees of $161,596 and $299,884, respectively, under this agreement. The company has expensed marketing fees of $142,977 and $243,697 for the three months and six months ended March 31, 2011, respectively. Revenues with this customer were $9,712,956 and $17,851,289 for the three months and six months ended March 31, 2012 , respectively. For the three months and six months ended March 31, 2011, revenues with this customer were $8,170,072 and $14,557,643, respectively. Trade accounts receivable of $1,377,020 was due from the customer as of March 31, 2012.

The Company has an agreement with an unrelated party to provide the coal supply for the ethanol plant. The agreement expires on January 1, 2013. The agreement is subject to a minimum purchase requirement. For the calendar year 2012 the estimated purchase commitments totals $5,930,400, respectively. For the three months and six months ended March 31, 2012 the company has purchased $2,001,518 and $3,746,023, respectively, of coal under this contract. For the three months and six months ended March 31, 2011 is $1,800,956 and $3,369,122, respectively.

The Company has entered into a variable contract with a supplier of denaturant. The variable contract is for a minimum purchase of 648,000 gallons at the average of the OPIS Conway In-Well Natural Gasoline High and Low price plus $.1925/usg. The term of the contract is from January 1, 2012 through June 30, 2012. The minimum future purchase commitment is $837,555.

The Company has entered into a fixed contract with a supplier of anhydrous ammonia. The contract is for a minimum purchase of 315 tons at the rate of $585 delivered ton. The term of the contract is from February 20, 2012 through May 31, 2012. The minimum future purchase commitment is $115,853.

Note 7.    Risk Management

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

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

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

The effects on operating income from derivative activities is as follows:

 
Three Months
 
Three Months
 
Six Months
 
Six Months
 
Ended
 
Ended
 
Ended
 
Ended
 
March 31, 2012
 
March 31, 2011
 
March 31, 2012
 
March 31, 2011
 
 
 
 
 
 
 
 
Increase (decrease) in revenue due to derivatives related to ethanol sales:
 
 
 
 
 
 
 
Realized
$

 
$
271,161

 
$

 
$
(665,141
)
Unrealized
(36,842
)
 
(243,364
)
 
(36,842
)
 
(277,347
)
Total effect on revenue
(36,842
)
 
27,797

 
(36,842
)
 
(942,488
)
 
 
 
 

 
 
 
 
(Increase) decrease in cost of goods sold due to derivatives related to corn costs:
 
 
 
 
 
 
 
Realized
164,650

 
863,338

 
244,213

 
(1,913,625
)
Unrealized
475,000

 
(24,162
)
 
66,850

 
1,030,413

Total effect on cost of goods sold
639,650

 
839,176

 
311,063

 
(883,212
)
 
 
 
 

 
 
 
 
Total increase (decrease) to operating income due to derivative activities
$
602,808

 
$
866,973

 
$
274,221

 
$
(1,825,700
)

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

Note 8.    Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company uses various methods including market, income and cost approaches.  Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market-corroborated, or generally unobservable inputs.  The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy.  The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.  Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1 -
Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 -
Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3 -
Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.  These valuation methodologies were applied to all of the Company's financial assets and financial liabilities carried at fair value.
 
Derivative financial instruments:  Commodity futures and exchange-traded commodity options contracts are reported at fair value utilizing Level 1 inputs.  For these contracts, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes and live trading levels from the CME and NYMEX markets.  The fair value measurements consider observable data that may include dealer quotes and live trading levels from the over-the-counter markets. 

The following table summarizes the financial liabilities measured at fair value on a recurring basis as of March 31, 2012 and September 30, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 
 
March 31, 2012
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets, derivative financial instruments
 
$
30,008

 
$
30,008

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
September 30, 2011
 
 
Total

 
Level 1

 
Level 2

 
Level 3

Assets, derivative financial instruments
 
$
292,375

 
$
292,375

 
$

 
$




Note 9.    Contingency

In May 2010, a lawsuit was filed against the Company and approximately 20 other ethanol plants by an unrelated party claiming the Company's operation of the corn oil extraction system is a patent infringement. The plaintiff seeks injunctive relief, an award of damages with interest and any other remedies available under certain patent statutes or otherwise under law.  The Company is currently defending the lawsuit with legal counsel.  The Company is unable to determine at this time if the lawsuit will have a material adverse affect on the Company.


Note 10.     Sale of Property

On October 5, 2011, the Company completed the sale of a land parcel adjacent to its primary site for a sales price of $1,181,000. A gain of $496,098 was recognized for the sale of the property for the six months ending March 31, 2012.



7


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement on Forward Looking Statements and Industry and Market Data

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

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

Actual future performance, outcomes and results may differ materially from those suggested by or expressed in forward looking statements as a result of numerous and varied factors, risks and uncertainties, some that are known and some that are not, and many of which are beyond the control of Lincolnway Energy and Lincolnway Energy's management.  It is not possible to predict or identify all of those factors, risks and uncertainties, but they include inaccurate assumptions or predictions by management, the accuracy and completeness of the publicly available information upon which part of Lincolnway Energy's business strategy is based and all of the various factors, risks and uncertainties discussed in this Item and elsewhere in this quarterly report and in Item 1A of Lincolnway Energy's Annual Report on Form 10-K for the fiscal year ended September 30, 2011. 

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

General Overview

Lincolnway Energy is an Iowa limited liability company that operates a dry mill, coal fired ethanol plant located in Nevada, Iowa.  Lincolnway Energy has been processing corn into fuel grade ethanol and distillers' grains at the ethanol plant since May 22, 2006.  

The ethanol plant has a nameplate production capacity of 50,000,000 gallons, which, at that capacity, would also generate approximately 136,000 tons of distillers' grains per year. Lincolnway Energy anticipates, however, being able to operate the plant at anywhere from 10% to 19% above the nameplate production. For the six months ended March 31, 2012, Lincolnway Energy was producing 17% above nameplate.




8


Lincolnway Energy's ethanol is marketed by Green Plains Trading Group, LLC and Lincolnway Energy's distillers' grains are marketed by Hawkeye Gold, LLC. Lincolnway Energy's revenues are derived primarily from the sale of its ethanol and distillers' grains.

Lincolnway Energy extracts corn oil from syrup which is generated in the production of ethanol.   Lincolnway Energy estimates that it will produce approximately 4,700 tons of corn oil per year.  Lincolnway Energy's corn oil is marketed by FEC Solutions, L.L.C.

EPCO Carbon Dioxide Products, Inc. has a plant located on Lincolnway Energy's, Nevada, Iowa site that collects the carbon dioxide gas which is produced as part of the fermentation process and converts that raw carbon dioxide gas into liquid carbon dioxide. EPCO markets and sells the liquid carbon dioxide. Lincolnway Energy estimates that it will supply approximately 88,000 tons of carbon dioxide gas per year.

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

Lincolnway Energy expects to fund its operations during the next 12 months using cash flow from continuing operations.  Lincolnway Energy also has a revolving line of credit which available to Lincolnway Energy if the need arises.



9


Results of Operations

The following table shows the results of operations and the percentages of revenues, cost of goods sold, operating expenses and other items to total revenues in Lincolnway Energy's statement of operations for the three months and six months ended March 31, 2012 and 2011 (dollars in thousands):
 
 
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
 
(Unaudited)
 
(Unaudited)
Income Statement Data
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
42,080

 
100.0
 %
 
$
45,570

 
100.0
 %
 
$
85,341

 
100
 %
 
$
79,407

 
100
 %
Cost of goods sold
 
43,033

 
102.3
 %
 
42,582

 
93.4
 %
 
83,565

 
97.9
 %
 
75,997

 
95.7
 %
Gross profit (loss)
 
(953
)
 
(2.3
)%
 
2,988

 
6.6
 %
 
1,776

 
2.1
 %
 
3,410

 
4.3
 %
General and administrative expenses
 
728

 
1.7
 %
 
648

 
1.4
 %
 
1,400

 
1.6
 %
 
1,323

 
1.7
 %
Gain on sale of property
 

 
 %
 

 
 %
 
(496
)
 
(0.6
)%
 

 
 %
Operating income (loss)
 
(1,681
)
 
(4.0
)%
 
2,340

 
5.2
 %
 
872

 
1.0
 %
 
2,087

 
2.6
 %
Other (expense)
 
(29
)
 
(0.1
)%
 
(128
)
 
(0.3
)%
 
(75
)
 
(0.1
)%
 
(306
)
 
(0.4
)%
Net income (loss)
 
$
(1,710
)
 
(4.1
)%
 
$
2,212

 
4.9
 %
 
$
797

 
0.9
 %
 
$
1,781

 
2.2
 %



The following table shows other key data for the periods presented:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
March 31,
 
 
(Unaudited)
Operating Data:
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
 
Ethanol sold (gallons in thousands)
 
14,547

 
15,637

 
28,178

 
28,702

Average gross price of ethanol sold (dollars per gallon)
 
$
2.16

 
$
2.33

 
$
2.31

 
$
2.25

Dry distillers grains sold (tons)
 
40,749

 
36,852

 
74,942

 
70,169

Average dry distillers grains sales price per ton
 
$
233.03

 
$
211.67

 
$
233.60

 
$
199.94

Average corn cost per bushel
 
$
6.31

 
$
6.27

 
$
6.28

 
$
5.54




Results of Operations for the Three Months Ended March 31, 2012 as Compared to the Three Months Ended March 31, 2011

Revenues. Revenues decreased by $3.5 million, or 7.7% to $42.1 million for the three months ended March 31, 2012 from $45.6 million for the three months ended March 31, 2011. The decrease in total revenues was primarily the result of a 7.3% decrease in ethanol price and a 7.0% decrease in ethanol sales volume for the three months ended March 31, 2012, when compared to the three months ended March 31, 2011.

10



Sales from ethanol decreased $5.1 million, or 13.8%, to $31.4 million for the three months ended March 31, 2012 from $36.5 million for the three months ended March 31, 2011. The average price of ethanol sold was $2.16 per gallon for the three months ended March 31, 2012 compared to $2.33 per gallon for the three months ended March 31, 2011. Ethanol sales volume decreased approximately 1.1 million gallons, or 7.0% for the three months ended March 31, 2012, when compared to the three months ended March 31, 2011. The decrease in sales volume is due to an increase in ethanol finished goods inventory compared to the ethanol finished good inventory balance in the prior year. For the three months ended March 31, 2012 there was a large carry of ethanol inventory at the plant due to the over supply of ethanol at the terminals. Railcar turnaround time increased resulting in higher inventories stored in the tanks at Lincolnway Energy. For more information on ethanol please refer to the next section, Risks, Trends and Factors that May Affect Future Operating Results.

Sales from co-products increased by $1.6 million, or 17.6%, to $10.7 million for the three months ended March 31, 2012
from $9.1 million for the three months ended March 31, 2011. Co-products include, dried distillers grains, wet distillers grains, corn oil, syrup and CO2. An increase in the volume of dried distillers grains sold and the sales price, generated the large increase for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. The average price of dried distillers grain sold was $233.03 per ton for the three months ended March 31, 2012, compared to $211.67 for the three months ended March 31, 2011. The increase in dried distillers grains price is attributable to the increase price of corn and the additional demand for the product. Dried distillers grain sales volume increased by 3,897 tons, or 10.6% for the three months ended March 31, 2012, compared to the three months ended March 31, 2011. Wet distiller's grain sales volume decreased by 3,338 tons, or 59.0% for the three months ended March 31, 2012 from the three months ended March 31, 2011. Dried distillers grain production increased for the three months ended March 31, 2012, due to an increase in dried distillers grain yields as a result of improved enzymes used in the process compared to the three months ended March 31, 2011. For the three months ended March 31, 2012 there were reported sales for syrup, corn oil and CO2 of approximately $976,000 an increase of $58,000 from the three months ended March 31, 2011. The sales increase is the result of a higher price received for CO2 and syrup for the three months ended March 31, 2012 compared to the three months ended March 31, 2011.

Revenues included a combined unrealized net loss of $36,842 related to ethanol derivative contracts for the three months ended March 31, 2012, compared to a $27,797 combined unrealized and realized gain for the three months ended March 31, 2011. As ethanol prices fluctuate, the value of ethanol-related derivative instruments are impacted, which effects Lincolnway Energy's financial performance. Lincolnway Energy expects the volatility in these derivative instruments to continue to have an impact on revenues due to the changes in value of derivative instruments relative to ethanol sales. These instruments are the primary tools of Lincolnway Energy's risk management program for ethanol revenues.

Cost of goods sold. Cost of goods sold increased by $0.4 million, or 0.9% to $43.0 million for the three months ended March 31, 2012 from $42.6 million for the three months ended March 31, 2011. Cost of goods sold includes, corn costs, process chemicals, denaturant, coal costs, electricity, production labor, repairs and maintenance, and depreciation.

Corn costs remained neutral for the three months ended March 31, 2012 at $32.4 million compared to the three months ended March 31, 2011. Corn costs represented 75.4% of our cost of goods sold for the three months ended March 31, 2012 compared to 76.6% for the three months ended March 31, 2011.

Freight and marketing increased by $1.2 million, or 49% to $3.5 million for the three months ended March 31, 2012 from $2.3 million for the three months ended March 31, 2011. The increase is the result of an increase in dried distillers grains sales volume and higher transportation costs for ethanol and dried distillers grain.

11



Results of Operations for the Six Months Ended March 31, 2012 as Compared to the Six Months Ended March 31, 2011

Revenues. Revenues increased by $5.9 million, or 7.5% to $85.3 million for the six months ended March 31, 2012 from $79.4 million for the six months ended March 31, 2011. The increase in total revenues was the result of a 2.7% increase in ethanol price for the six months ended March 31, 2012, when compared to the six months ended March 31, 2011 and a 16.8% increase in dried distillers grains price from the comparable period.

Sales from ethanol increased $.7 million, or 1.1%, to $65.1 million for the six months ended March 31, 2012 from $64.4 million for the six months ended March 31, 2011. The average price of ethanol sold was $2.31 per gallon for the six months ended March 31, 2012 compared to $2.25 per gallon for the six months ended March 31, 2011. Ethanol sales volume decreased approximately .5 million gallons, or 1.8% for the six months ended March 31, 2012, when compared to the six months ended March 31, 2011. The decrease in sales volume is due to an increase in ethanol finished goods inventory compared to the ethanol finished good inventory balance in the prior year. For the three months ended March 31, 2012 there was a large carry of ethanol inventory at the plant due to the over supply of ethanol at the terminals. For more information on ethanol please refer to the next section, Risks, Trends and Factors that May Affect Future Operating Results.

Sales from co-products increased by $4.3 million, or 27.2%, to $20.2 million for the six months ended March 31, 2012
from $15.9 million for the six months ended March 31, 2011. Co-products include, dried distillers grains, wet distillers grains, corn oil, syrup and CO2. An increase in the volume of dried distillers grains sold and the sales price, generated the large increase for the six months ended March 31, 2012 compared to the six months ended March 31, 2011. The average price of dried distillers grains sold was $233.60 per ton for the six months ended March 31, 2012, compared to $199.94 for the six months ended March 31, 2011. The increase in dried distillers grains price is attributable to the increased price of corn and the additional demand for the product. Dried distillers grains sales volume increased by 4,773 tons, or 6.8% for the six months ended March 31, 2012, compared to the six months ended March 31, 2011. Wet distiller's grains sales volume decreased by 4,321 tons, or 54% for the six months ended March 31, 2012 from the six months ended March 31, 2011. Dried distillers grains production increased for the three months ended March 31, 2012, due to an increase in dried distillers grains yields as a result of improved enzymes used in the process compared to the six months ended March 31, 2011. For the six months ended March 31, 2012 there were reported sales for syrup, corn oil and CO2 of approximately $2.2 million, an increase of approximately $.8 million from the six months ended March 31, 2011. The sales increase is from higher prices received for syrup, and CO2 and for improved corn oil yields.

Revenues included an unrealized loss of $36,842 related to ethanol derivative contracts for the six months ended March 31, 2012, compared to a $(942,488) combined unrealized and realized loss for the six months ended March 31, 2011. As ethanol prices fluctuate, the value of ethanol-related derivative instruments are impacted, which effects Lincolnway Energy's financial performance. Lincolnway Energy expects the volatility in these derivative instruments to continue to have an impact on revenues due to the changes in value of derivative instruments relative to ethanol sales. These instruments are the primary tools of Lincolnway Energy's risk management program for ethanol revenues.

Cost of goods sold. Cost of goods sold increased by $7.6 million, or 10.0% to $83.6 million for the six months ended March 31, 2012 from $76.0 million for the six months ended March 31, 2011. The increase was primarily due to higher corn, coal and freight cost in the 2012 period compared to the 2011 period. Cost of goods sold includes, corn costs, process chemicals, denaturant, coal costs, electricity, production labor, repairs and maintenance, and depreciation.

Corn costs increased $6.7 million, or 12.1% to $63.1 million for the six months ended March 31, 2012 from $56.4 million for the six months ended March 31, 2011. Corn costs represented 75.5% of our cost of goods sold for the six months ended March 31, 2012 compared to 74.2% for the six months ended March 31, 2011.

12



The increase in corn costs was mainly driven by an increase in cash corn prices and also an increase in corn consumption compared to the prior period. The average price of corn was $6.28 per bushel for the six months ended March 31, 2012, compared to $5.54 per bushel for the six months ended March 31, 2011. The six months ended March 31, 2012 corn costs also included a marked to market net gain of $.3 million for derivatives relating to future deliveries of corn, compared to a $.9 million loss in the same quarter for the prior year. Since Lincolnway Energy's derivative contracts are marked to market each quarter, the benefits of this risk management tool can cause corn costs to be volatile from quarter to quarter due to the change in value of the positions relative to the cost and use of the corn commodity being hedged. For more information on the corn markets please refer to the next section, Risks, Trends and Factors that May Affect Future Operating Results.

Coal costs increased by $.4 million to $3.8 million for the six months ended March 31, 2012 from $3.4 million for the six months ended March 31, 2011. The increase is due to an increase in coal pricing and transportation costs.

Ethanol and dried distillers grains freight costs increased by $.8 million to $4.2 million for the six months ended March 31, 2012 from $3.4 million for the six months ended March 31, 2011. The increase is due to a change in pricing for the ethanol contracts and higher transportation costs for dried distillers grains based off an increase in gross price. The ethanol contracts fluctuate monthly by either having the freight built into the price or broken out. This will cause ethanol revenue and ethanol freight to fluctuate each reporting period. This reporting period the ethanol contracts resulted into higher freight and revenue.

Depreciation decreased by $.4 million to $3.4 million for the six months ended March 31, 2012 from $3.8 million for the six months ended March 31, 2011.

Other income and (expense). Interest expense decreased $.232 million to $.079 million for the six months ended March 31, 2012 from $.311 million for the six months ended March 31, 2011. Lincolnway Energy has paid down debt by $7.6 million since March 31, 2011, which has lowered interest expense.


Risks, Trends and Factors that May Affect Future Operating Results

The ethanol industry as well as Lincolnway Energy experienced negative margins for the first calendar quarter of 2012. This is a result of record high U.S. ethanol inventories which has dropped the price of ethanol by 13% from the fourth calendar quarter of 2011 to the first calendar quarter of 2012. Corn prices on average did not decrease but stayed relatively stable during the first calendar quarter. The ethanol industry could start to see increase margins in the next few months if corn production expands as projected, ending corn stock inventories increase, E15 becomes widely available and ethanol and distillers grains export markets remain strong.

The USDA prospective planting report predicts 95.9 million acres of corn will be planted this year. This is the greatest area of corn seed planted since 1937. If we continue on the corn yield trend we will see record corn production and the rebuilding of corn stocks. If this all comes to fruition we could see lower prices for corn, which could improve ethanol margins if ethanol prices remain unchanged.

The USDA report also noted that corn used to produce ethanol in 2011/2012 was unchanged at 5 billion bushels. Weekly ethanol production has continued to fall hitting its lowest level since early last fall. Most of the recent decreases have come from plants conducting maintenance shutdowns or plants slowing production in anticipation that the price of ethanol will increase. In prior years demand for ethanol has increased during the summer driving months, which helped reduce ethanol inventories and improve ethanol price.

Lincolnway Energy attempts to offset or hedge some of the risk involved with changing corn prices through the use of futures and options on the Chicago Mercantile Exchange, as well as the purchase and physical delivery of corn contracts from suppliers. Lincolnway Energy does the same for ethanol and distillers grains due to the changing prices in those products. Lincolnway Energy continues to monitor and attempt to ensure adequate supply and protection against rapid price increases for corn and price decreases for ethanol and distillers grains.

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



13






Liquidity and Capital Resources

The following table summarizes Lincolnway Energy's sources and uses of cash and cash equivalents from the unaudited statement of cash flows for the periods presented (in thousands):
 
 
 
Six Months Ended March 31,
 
 
(Unaudited)
Cash Flow Data:
 
2012
 
2011
Net cash provided by operating activities
 
$
3,817

 
$
2,349

Net cash provided by (used in) investing activities
 
182

 
(928
)
Net cash (used in) financing activities
 
(2,427
)
 
(39
)
Net increase in cash and cash equivalents
 
1,572

 
1,382



For the six months ended March 31, 2012 , net cash provided by operating activities increased by $1.5 million, when compared to cash provided by operating activities for the six months ended March 31, 2011 . The increase in cash for operating activities is due to a $3.9 million change in accounts receivable, a $1.1 million change in derivative activity, offset by a $1.0 million decrease in net income, a $1.2 million change in inventory balances, a decrease of $.3 million in depreciation and other miscellaneous changes in working capital.

Cash flows from investing activities reflect the impact of property and equipment sold and acquired for the ethanol plant. Net cash used in investing activities decreased by $1.1 million for the six months ended March 31, 2012 compared to cash used in investing activities for the six months ended March 31, 2011. The decrease is due to proceeds received from the sale of property to Dupont Cellulosic Ethanol.

Cash flows from financing activities include transactions and events whereby cash is obtained from, or paid to, depositors, creditors or investors. Net cash used in financing activities increased by $2.4 million for the six months ended March 31, 2012 compared to cash used in investing activities for the six months ended March 31, 2011. The increase is due to an increase in payments on long-term borrowings for the six months ended March 31, 2012, compared to the six months ended March 31, 2011.

Lincolnway Energy's next term loan payment is due December 2012.

As of May 2012, Lincolnway Energy is in compliance with all bank covenants related to bank financing.

Lincolnway Energy's financial position and liquidity are, and will be, influenced by a variety of factors, including:

their ability to generate cash flows from operations;

the level of their outstanding indebtedness and the interest they are obligated to pay; and

their capital expenditure requirements, which consists primarily of plant improvements to improve efficiencies and railspur expansion.

Lincolnway Energy expects to have available cash to meet their current anticipated liquidity needs.







14




Critical Accounting Estimates and Accounting Policies

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

Revenue Recognition

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

Lincolnway Energy's ethanol production is sold to Green Plains Trade Group LLC (GPTG). The purchase price payable to Lincolnway Energy is GPTG's contract selling price for the ethanol in question, less various costs and a marketing fee to GPTG.

Lincolnway Energy's distiller's grain production is sold to Hawkeye Gold, LLC. The sales price for the distillers grains is Hawkeye Gold's contract selling price for the distillers grains in question, less freight costs and a marketing fee to Hawkeye Gold.

Derivative Instruments
Lincolnway Energy enters into derivative contracts to hedge its exposure to price risk related to forecasted corn needs, forward corn purchase contracts and ethanol contracts. Lincolnway Energy does not typically enter into derivative instruments other than for hedging purposes. All the derivative contracts are recognized on the March 31, 2012 balance sheet at their fair value. Although Lincolnway Energy believes its derivative positions are economic hedges, none has been designated as a hedge for accounting purposes. Accordingly, any realized or unrealized gain or loss related to these derivative instruments is recorded in the statement of operations as a component of cost of goods sold for corn derivatives and through revenue for ethanol derivatives.

Off-Balance Sheet Arrangements
Lincolnway Energy currently does not have any off-balance sheet arrangements.

15


Item 3.    Quantitative and Qualitative Disclosures About Market Risk

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

Commodity Price Risk

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

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

In general, rising corn prices result in lower profit margins and, accordingly, represent unfavorable market conditions.  Lincolnway Energy will generally not be able to pass along increased corn costs to its ethanol customers.  Lincolnway Energy is subject to various material risks related to the availability and price of corn, many of which are beyond the control of Lincolnway Energy.  For example, the availability and price of corn is subject to wide fluctuations due to various unpredictable factors, including weather conditions, crop yields, farmer planting decisions, governmental policies with respect to agriculture, and local, regional, national and international trade, demand and supply.  If Lincolnway Energy's corn costs were to increase $.10 per bushel from one year to the next, the impact on cost of goods sold would be approximately $2.1 million for the year, assuming corn use of 21 million bushels during the year.  
   
Lincolnway Energy's average gross corn cost during the three and six months ended months ended March 31, 2012 was, respectively, approximately $6.31 and $6.28 per bushel, compared to $6.27 and $5.54 per bushel for the three and six months ended months ended March 31, 2011.

During the quarter ended ended March 31, 2012, corn prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $5.94 per bushel for May 2012 delivery to a high of $6.74 per bushel for May 2012 delivery.  The corn prices based on the Chicago Mercantile Exchange daily futures data during the quarter ended ended March 31, 2011 ranged from a low of $6.085 per bushel for May 2011 delivery to a high of $7.42 per bushel for May 2011 delivery.

The average price Lincolnway Energy received for its ethanol during the three and six months ended months ended March 31, 2012 was, respectively, approximately $2.16 and $2.31 per gallon, as compared to $2.33 and $2.25 per gallon, respectively, during the three and six months ended months ended March 31, 2011.

During the quarter ended March 31, 2012, ethanol prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $2.11 per gallon for January 2012 delivery to a high of $2.36 per gallon for March 2012 delivery.  The ethanol prices based on the Chicago Mercantile Exchange daily futures data during the three months ended March 31, 2011 ranged from a low of $2.24 per gallon for May 2011 delivery to a high of $2.635 for May 2011 delivery.




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Although Lincolnway Energy intends its futures and option positions to accomplish an economic hedge against Lincolnway Energy's future purchases of corn or futures sales of ethanol, Lincolnway Energy has chosen not to use hedge accounting for those positions, which would match the gain or loss on the positions to the specific commodity purchase being hedged.  Lincolnway Energy is instead using fair value accounting for the positions, which generally means that as the current market price of the positions changes, the realized or unrealized gains and losses are immediately recognized in Lincolnway Energy's costs of goods sold in the statement of operations for corn positions or as a component of revenue in the statement of operations for ethanol positions.  The immediate recognition of gains and losses on those positions can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the positions relative to the cost and use of the commodity being hedged.  For example, Lincolnway Energy's net gain on corn derivative financial instruments that was included in its cost of goods sold for the six months ended March 31, 2012 was $311,063, as opposed to the net loss of $(883,212) for the six months ended March 31, 2011.

Lincolnway Energy attempts to offset or hedge some of the risk involved with changing corn prices through the trading of futures and options on the Chicago Mercantile Exchange, as well as the purchase and physical delivery contracts from suppliers. At this reporting time, Lincolnway Energy has corn coverage through the end of June 2012. Lincolnway Energy continues to stay at a near neutral corn position due to low margins and lack of ability to lock in profitable ethanol sales margins Lincolnway Energy continues to monitor and attempt to ensure adequate corn supply and protection against rapid price increases .Those activities are, however, also subject to various material risks, including price movements in the cash corn and corn futures markets which are highly volatile and can be influenced by factors and occurrences which are beyond the control of Lincolnway Energy.


Lincolnway Energy's cost per ton for coal under its current coal supply agreement is subject to various fixed and periodic adjustments based on factors which are outside of the control of Lincolnway Energy's management. The factors include changes in certain inflation type indices, increase in transportation costs and the quality of coal.  Lincolnway Energy's coal costs will therefore vary, and the variations could be material.  Lincolnway Energy's coal costs for the three months ended March 31, 2012 and 2011 represented approximately 5% of Lincolnway Energy's total cost of goods sold for that period.  

Interest Rate Risk

Lincolnway Energy has one loan agreement that can expose Lincolnway Energy to market risk related to changes in the interest rate imposed under the loan agreement.

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

 
Principal Balance
 
Lender
As of March 31, 2012
Interest Rate
 
 
 
Co Bank
$
1,500,000

3.55%
Iowa Department of Transportation
$
263,107

2.11%

The Co Bank loan has a variable interest rate loan based on the one-month LIBOR index rate, plus 3.3%. The interest rate for the Iowa Department of Transportation is fixed at the interest rate specified above.

Lincolnway Energy does not anticipate any material increase in interest rates during the remainder of 2012.



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Item 4.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Lincolnway Energy's  management,  under the supervision and with  the  participation  of  Lincolnway Energy's president and chief executive officer and Lincolnway Energy's chief financial  officer,  have evaluated the  effectiveness of Lincolnway Energy's disclosure  controls  and  procedures  (as defined in Rule  13a-15(e) under the Securities  Exchange  Act of 1934) as of the end of the  period covered by this quarterly report.  Based on that evaluation,  Lincolnway Energy's president and chief executive officer and Lincolnway Energy's chief financial  officer have  concluded  that, as of the end of the period covered by this quarterly report, Lincolnway Energy's disclosure controls and procedures have been effective to provide  reasonable  assurance that the information required to be disclosed in the reports Lincolnway Energy  files or submits  under the Securities Exchange  Act of 1934 is (i)  recorded,  processed, summarized and reported within the time  periods  specified  in the  Securities  and  Exchange Commission's   rules  and  forms,  and  (ii)  accumulated  and  communicated  to management,  including Lincolnway Energy's  principal executive and principal financial officers or persons performing such functions,  as appropriate,  to allow timely decisions regarding  disclosure.  Lincolnway Energy believes that a control system, no matter how well designed and operated, cannot provide absolute  assurance that the  objectives of the control system are met, and no evaluation of controls can provide  absolute  assurance that all control issues and instances of fraud,  if any, within a company have been detected.
 
No Changes in Internal Control Over Financial Reporting
 
No change in Lincolnway Energy's internal control over financial reporting occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, Lincolnway Energy's internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.    Legal Proceedings.

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

A Complaint for Patent Infringement was filed against Lincolnway Energy and certain other parties on May 3, 2010 by GS CleanTech Corporation, a wholly owned subsidiary of GreenShift Corporation. The Complaint was filed in the United States District Court for the Northern District of Iowa, Western Division, as Case No. 5:10-cv-04036. The Complaint alleges, in general, that the corn oil extraction equipment and related processes used by Lincolnway Energy and the other parties infringes upon one or more of the claims under certain patents held by GS CleanTech Corporation. The Complaint seeks injunctive relief, an award of damages with interest, and any other remedies available under certain patent statutes or otherwise under law. The Complaint claims damages of at least a reasonable royalty rate and lost profits. The Complaint also alleges that the alleged infringing conduct by Lincolnway Energy is willful, resulting in the right to recover treble damages and attorney fees pursuant to 35 U.S.C. §284. The case was transferred on August 6, 2010 to the United States District Court for the Southern District of Indiana pursuant to Multi-District Litigation proceedings, as Case No. 1:10-ml-02181. The initial claims construction hearing has been held, and the United States District Court has construed the disputed terms. Various discovery activities, motions and other procedural actions have also been made or taken. Lincolnway Energy is, however, unable to determine as of the date of this quarterly report if the Complaint will have a material adverse effect on Lincolnway Energy.




Item 1A.
Risk Factors.

There have been no material changes from the risk factors as previously disclosed in Lincolnway Energy's Form 10-K for the fiscal year ended September 30, 2011 and filed with the Securities and Exchange Commission on December 22, 2011.

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As noted in that Form 10-K, Congress had only extended the various ethanol tax incentives, including the 45¢ per gallon blenders credit for ethanol use and the 54¢ secondary tariff on imported ethanol, through December 31, 2011. As of the date of this quarterly report, those incentives have not been extended past December 31, 2011, and it is likely that those incentives will not be further extended. The loss of those tax incentives will have some adverse effects on the ethanol industry, and could have materially adverse effects on the ethanol industry over the longer term.

Two other continuing material legislative and regulatory risks to the ethanol industry are the possibility of reductions in, or further extensions for compliance with, the renewable fuels standards, and the possibility of no further increases in the permitted levels of ethanol blends in gasoline. Both of those risks are critical to both the current use of ethanol and any possible future increases in, or demand for, the use of ethanol.

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

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

An investment in any membership units of Lincolnway Energy involves a high degree of risk and is a speculative and volatile investment. An investor could lose all or part of his or her investment in any membership units.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.

Lincolnway Energy did not sell any membership units during the period of January 1, 2012 through March 31, 2012.

None of Lincolnway Energy's membership units were purchased by or on behalf of Lincolnway Energy or any affiliated purchaser (as defined in Rule 10b-18(a)(3) of the Exchange Act) of Lincolnway Energy during the period of January 1, 2012 through March 31, 2012.


Item 3.    Defaults Upon Senior Securities.

No disclosures are required to be made by Lincolnway Energy under this Item.

Item 4.     Mine Safety Disclosures.

This Item is not applicable to Lincolnway Energy.


Item 5.    Other Information.

There was no information required to be disclosed in a report on Form 8-K during the period of January 1, 2012 through March 31, 2012 which was not reported on a Form 8-K.

There were no material changes during the period of January 1, 2012 through March 31, 2012 to the procedures by which the members of Lincolnway Energy may recommend nominees to Lincolnway Energy's board.


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Item 6.    Exhibits.

The following exhibits are filed as part of this quarterly report.  Exhibits previously filed are incorporated by reference, as noted.
 
 
 
 
 
 
Incorporated by Reference
Exhibit
 
 
 
Filed Herewith;
 
 
 
Period
 
 
 
Filing
Number
 
Exhibit Description
 
Page Number
 
Form
 
Ending
 
Exhibit
 
Date
 
 
 
 
 
 
 
 
 
 
 
 
 
 3.1
 
Restatement of the Certificate of Organization
 
 
 
10-K
 
9/30/2010
 
 3.1
 
12/21/2010
 3.2
 
Second Amended and Restated Operating Agreement and Unit Assignment Policy
 
 
 
10-K
 
9/30/2010
 
 3.2
 
12/21/2010
10.2
 
Master Loan Agreement Between Lincolnway Energy, LLC and Farm Credit Services of America
 
 
 
10
 
 
 
10.2
 
1/27/2006
10.3
 
Construction and Term Loan Supplement Between Lincolnway Energy, LLC and FarmCredit Services of America
 
 
 
10
 
 
 
10.3
 
1/27/2006
10.4
 
Construction and Revolving Term Loan Supplement Between Lincolnway Energy, LLC and Farm Credit Services of America
 
 
 
10
 
 
 
10.4
 
1/27/2006
10.5
 
Loan Agreement Between Lincolnway Energy,  LLC and Iowa Department of Transportation
 
 
 
10
 
 
 
10.5
 
1/27/2006
10.7
 
Distiller's Grain Marketing Agreement Between Lincolnway Energy, LLC and Hawkeye Gold, LLC
 
 
 
10-K
 
9/30/2007
 
10.7
 
12/21/2007
*10.9
 
Coal Supply Agreement Between Lincolnway Energy, LLC and Williams Bulk Transfer, Inc.  See Exhibit 10.9.1 for an amendment to this agreement.
 
 
 
10
 
 
 
10.9
 
1/27/2006
*10.9.1
 
Amendment Number One to Coal Supply Agreement Between Lincolnway Energy, LLC and Williams Bulk Transfer, Inc.
 
 
 
10-K
 
9/30/2007
 
10.9.1
 
12/21/2007
10.10
 
Loan Agreement Between Lincolnway Energy, LLC and Iowa Department of Economic Development
 
 
 
10
 
 
 
10.10
 
1/27/2006
10.11
 
Amended and Restated Grain Handling Agreement Between Lincolnway Energy, LLC and Heart of Iowa Cooperative
 
 
 
10
 
 
 
10.11
 
1/27/2006
10.13
 
Industry Track Contract Between Lincolnway Energy, LLC and Union Pacific Railroad
 
 
 
10-Q
 
6/30/2006
 
10.13
 
8/14/2006
*10.15
 
Ethanol Marketing Agreement Between Lincolnway Energy, LLC and Green Plains Trade Group LLC
 
 
 
10-K
 
9/30/2009
 
10.15
 
12/22/2009
31.1
 
Rule 13a-14(a) Certification of President and Chief Executive Officer
 
E-1
 
 
 
 
 
 
 
 
31.2
 
Rule 13a-14(a) Certification of Chief Financial Officer
 
E-2
 
 
 
 
 
 
 
 
32.1
 
Section 1350 Certification of President and Chief Executive Officer
 
E-3
 
 
 
 
 
 
 
 
32.2
 
Section 1350 Certification of Chief Financial Officer
 
E-4
 
 
 
 
 
 
 
 
101
 
Interactive Data Files (furnished electronically herewith pursuant to Rule 405 of Regulation S-T)
 
 
 
 
 
 
 
 
 
 
* Material has been omitted pursuant to a request for confidential treatment and such material have been filed separately with the Securities and Exchange Commission.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
LINCOLNWAY ENERGY, LLC
 
 
 
May 15, 2012
By:
/s/   Richard Brehm
 
Name:    Richard Brehm
 
Title:      President and Chief
 
                 Executive Officer
 
 
 
May 15, 2012
By:
/s/   Kim Supercynski
 
Name:    Kim Supercynski
 
Title:      Chief Financial Officer



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EXHIBIT INDEX

Exhibits Filed With Form 10-Q
of Lincolnway Energy, LLC
For the Quarter Ended March 31, 2012

Description of Exhibit.
 
 
Page
 
 
 
 
31

Rule 13a-14(a)/15d-14(a) Certifications
 
 
 
 
 
 
31.1

Rule 13a-14(a) Certification of President and Chief Executive Officer
E-1
 
 
 
 
 
31.2

Rule 13a-14(a) Certification of Chief Financial Officer
E-2
 
 
 
 
32

Section 1350 Certifications
 
 
 
 
 
 
32.1

Section 1350 Certification of President and Chief Executive Officer
E-3
 
 
 
 
 
32.2

Section 1350 Certification of Chief Financial Officer
E-4


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