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EX-32.1 - EXHIBIT 32.1 - Lincolnway Energy, LLCexhibit3212013q1.htm
EX-31.1 - EXHIBIT 31.1 - Lincolnway Energy, LLCexhibit3112013q1.htm
EX-31.2 - EXHIBIT 31.2 - Lincolnway Energy, LLCexhibit3122013q1.htm
EX-10.19 - EXHIBIT - ETHANOL CONTRACT - Lincolnway Energy, LLCethanolmarketingagreemente.htm
EX-10.20 - EXHIBIT - COAL CONTRACT - Lincolnway Energy, LLCcoalsupplyagreementexhibit.htm
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EX-32.2 - EXHIBIT 32.2 - Lincolnway Energy, LLCexhibit3222013q1.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
December 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 or organization)
(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 February 1, 2013.



LINCOLNWAY ENERGY, LLC
FORM 10-Q
For the Quarter Ended December 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 4.
Mine Safety Disclosures
 
Item 5.
Other Information
 
Item 6.
Exhibits
 
 
 
 
Signatures
 
 
 
 
 
 
Exhibits Filed With This Report
 
 
Ethanol Marketing Agreement Between Lincolnway Energy, LLC and Eco-Energy, LLC
E-1
 
Coal Supply Agreement Between Lincolnway Energy, LLC and Williams Bulk Transfer, Inc.
E-2
 
Rule 13a-14(a) Certification of Chairman
E-3
 
Rule 13a-14(a) Certification of Chief Financial Officer
E-4
 
Section 1350 Certification of Chairman
E-5
 
Section 1350 Certification of Chief Financial Officer
E-6
 
Interactive Data Files (filed electronically herewith)
 




PART I - FINANCIAL INFORMATION

Item 1.    Unaudited Financial Statements.


Lincolnway Energy, LLC

Balance Sheets
 
December 31, 2012
 
September 30, 2012
 
(Unaudited)
 
 
ASSETS
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
182,398

 
$
151,824

Derivative financial instruments (Note 8 and 9)
197,479

 
71,978

Trade and other accounts receivable (Note 7)
7,193,819

 
9,276,324

Inventories (Note 3)
7,031,484

 
5,922,936

Prepaid expenses and other
301,158

 
325,361

Total current assets
14,906,338

 
15,748,423

 
 
 
 
PROPERTY AND EQUIPMENT
 

 
 

Land and land improvements
6,949,062

 
6,949,062

Buildings and improvements
1,604,305

 
1,604,305

Plant and process equipment
79,580,097

 
79,580,097

Office furniture and equipment
406,253

 
405,188

Construction in progress
28,595

 
21,226

 
88,568,312

 
88,559,878

Accumulated depreciation
(53,288,295
)
 
(51,313,592
)
 
35,280,017

 
37,246,286

 
 
 
 
OTHER ASSETS
 

 
 

Restricted cash
351,000

 
351,000

Financing costs, net of amortization of $314,152 and $305,384
157,809

 
166,577

Deposits
298,350

 
298,350

Investments
190,488

 
190,488

 
997,647

 
1,006,415

 
 
 
 
 
$
51,184,002

 
$
54,001,124


See Notes to Unaudited  Financial Statements.

2


 
Lincolnway Energy, LLC

Balance Sheets (continued)

 
December 31, 2012
 
September 30, 2012
 
(Unaudited)
 
 
LIABILITIES AND MEMBERS' EQUITY
 
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
1,067,543

 
1,018,976

Accounts payable, related party (Note 6)
642,009

 
829,067

Current maturities of long-term debt (Note 5)
25,618

 
50,968

Current settlement payable, related party (Note 6)

 
425,000

Revolving credit loan (Note 4)
3,771,000

 
200,000

Accrued expenses
1,057,500

 
896,744

Total current liabilities
6,563,670

 
3,420,755

 
 
 
 
NONCURRENT LIABILITIES
 
 
 
Long-term debt, less current maturities (Note 5)
187,053

 
3,424,053

Settlement payable, net of current amount, related party (Note 6)
1,275,000

 
1,275,000

Deferred revenue
1,000,000

 

Other
450,000

 
450,000

Total noncurrent liabilities
2,912,053

 
5,149,053

 
 
 
 
COMMITMENTS AND CONTINGENCY (Notes 7 and 10)


 


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

 
38,990,105

Retained earnings
2,718,174

 
6,441,211

 
41,708,279

 
45,431,316

 
 
 
 
 
$
51,184,002

 
$
54,001,124




3


Lincolnway Energy, LLC

Statements of Operations

 
Three Months
Ended
 
Three Months
Ended
 
December 31, 2012
 
December 31, 2011
 
(Unaudited)
 
 
 
 
Revenues (Notes 2 and 6)
$
47,412,674

 
$
43,261,476

 
 

 
 

Cost of goods sold
50,188,672

 
40,531,955

 
 

 
 

Gross profit (loss)
(2,775,998
)
 
2,729,521

 
 
 
 
General and administrative expenses
882,698

 
673,142

Gain on sale of property (Note 11)

 
496,098

 
 
 
 
Operating income (loss)
(3,658,696
)
 
2,552,477

 
 
 
 
Other income (expense):
 

 
 

Interest income
848

 
2,249

Interest expense
(65,189
)
 
(48,488
)
 
(64,341
)
 
(46,239
)
 
 
 
 
Net income (loss)
$
(3,723,037
)
 
$
2,506,238

 
 
 
 

Weighted average units outstanding
42,049

 
42,049

 
 

 
 

Net income (loss) per unit - basic and diluted
$
(88.54
)
 
$
59.60



See Notes to Unaudited Financial Statements.

 




 
 
 
 



4



Lincolnway Energy, LLC
Three Months
Ended
 
Three Months
Ended
Statements of Cash Flows
December 31, 2012
 
December 31, 2011
 
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
(3,723,037
)
 
$
2,506,238

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
1,983,471

 
1,947,070

Gain on sale of property

 
(496,098
)
Changes in working capital components:
 

 
 

Derivative financial instruments
(125,501
)
 
(104,776
)
Trade and other accounts receivable
2,082,505

 
1,575,702

Inventories
(1,108,548
)
 
378,041

Prepaid expenses and other
24,203

 
72,962

Accounts payable
48,567

 
142,382

Accounts payable, related party
(187,058
)
 
(265,084
)
Settlement fee payable, related party
(425,000
)
 

Deferred revenue
1,000,000

 

Accrued expenses
160,756

 
436,004

Net cash provided by (used in) operating activities
(269,642
)
 
6,192,441

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Purchase of property and equipment
(8,434
)
 
(808,308
)
Proceeds from sale of property

 
1,181,000

Net cash provided by (used in) investing activities
(8,434
)
 
372,692

 
 

 
 

CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Proceeds from revolving credit loan
14,884,000

 

Payments on revolving credit loan
(11,313,000
)
 

Proceeds from long-term borrowings
1,100,000

 

Payments on long-term borrowings
(4,362,350
)
 
(2,402,500
)
Net cash provided by (used in) financing activities
308,650

 
(2,402,500
)
 
 
 
 
Net increase in cash and cash equivalents
30,574

 
4,162,633

 
 
 
 

CASH AND CASH EQUIVALENTS
 

 
 

Beginning
151,824

 
34,135

Ending
$
182,398

 
$
4,196,768

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
 
 
 
     INFORMATION, cash paid for interest net of amount capitalized
$
70,172

 
$
81,458

 
 

 
 

SUPPLEMENTAL DISCLOSURES OF NONCASH
 

 
 

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

 
$
1,387

Construction in progress included in accrued expenses
$

 
$
20,000

See Notes to Unaudited  Financial Statements.

5

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, 2012 was derived from the Company's audited balance sheet as of that date.  The accompanying financial statements as of and for the three months ended December 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, 2012 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.

Deferred revenue: Deferred revenue represents fees received under a service agreement in advance of services being performed. The related revenue is deferred and recognized as the services are performed over the term of the contract.
  
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, 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.

Reclassification: Certain amounts in the 2011 cash flow statement have been reclassified to be consistent with their 2012 presentation.


6


Lincolnway Energy, LLC

Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________



Note 2.    Revenue

Components of revenue are as follows:
(Excludes hedging activity)
 
Three Months
 
Three Months
 
 
 
 Ended
 
 Ended
 
(In thousands)
 
December 31, 2012
 
December 31, 2011
 
Ethanol
 
$
34,013

 
$
33,713

 
Distillers' Grains
 
12,478

 
8,138

 
Other
 
922

 
1,410

 





Note 3.    Inventories

Inventories consist of the following as of:
 
December 31,
2012
 
September 30,
2012
 
 
 
 
Raw materials, including corn, coal, chemicals and supplies
$
2,760,603

 
$
2,048,130

Work in process
1,252,169

 
1,432,257

Ethanol and distillers grains
3,018,712

 
2,442,549

Total
$
7,031,484

 
$
5,922,936


As of December 31, 2012 and September 30, 2012 the Company recognized a reserve of $552,000 and $368,000, respectively, for a lower of cost or market inventory adjustment.


Note 4.    Revolving Credit Loan
 
The Company entered into a new master loan agreement with a financial institution on August 20, 2012. One of the supplements of the agreement is a monitored revolving credit loan for up to $10,000,000. The amount available and outstanding under the loan cannot exceed the borrowing base as calculated per the agreement (approximately $9,000,000 as of December 31, 2012). The purpose of the loan is to finance inventory and receivables. The Company will pay interest monthly on the unpaid balance at a variable rate (adjusted on a weekly basis) based upon the one-month LIBOR index rate plus 3.25%. The Company will also pay a commitment fee on the average daily unused portion of the loan at the rate of .30% per annum, payable monthly. The term of the loan will expire, and the Company must pay all unpaid principal amounts outstanding under the loan, on July 1, 2013. The loan is secured by substantially all assets of the Company and subject to certain financial and nonfinancial covenants as defined in the master loan agreement. There was a balance of $3,771,000 outstanding as of December 31, 2012.




7


Lincolnway Energy, LLC

Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________


Note 5.    Long-Term Debt

Long-term debt consists of the following as of:

 
December 31,
2012
 
September 30,
2012
 
 
 
 
Revolving term loan. (A)
$

 
$
3,237,000

 
 

 
 

Note payable to Iowa Department of Transportation. (B)
212,671

 
238,021

 
212,671

 
3,475,021

Less current maturities
(25,618
)
 
(50,968
)
 
$
187,053

 
$
3,424,053


(A)
The Company entered into a new master loan agreement with a financial institution on August 20, 2012. One of the supplements of the agreement is a revolving term loan available for up to $5,000,000. The revolving term loan is to be used to provide working capital. The Company will pay interest on the unpaid balance at a variable interest rate (adjusted on a weekly basis) based upon the one-month LIBOR index rate plus 3.50%. The Company will also pay a commitment fee on the average daily unused portion of the loan at the rate of .60% per annum, payable monthly. The loan is secured by substantially all assets of the Company and subject to certain financial and nonfinancial covenants as defined in the master loan agreement. The term of the loan will expire, and the Company must pay all unpaid principal amounts outstanding under the revolving term loan, on June 1, 2017. The September 30, 2012 balance was paid off during the quarter ended December 31, 2012.

(B)
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 revolving term loan (A) and revolving credit loan (Note 4.)


Note 6.    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 $41,257,123 for the three months ended December 31, 2012.  There were corn purchases of $29,791,413 for the three months ended December 31, 2011. As of December 31, 2012, the Company had several cash corn contracts with Key representing 228,254 bushels of corn, for a commitment of $1,722,132.  The contracts mature on various dates through March 2013.  The Company also has made some fuel and propane purchases from Key amounting to $23,658 and $30,068, respectively for the three months ended December 31, 2012 and 2011 . As of December 31, 2012 the amount due to Key is $547,055.

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 recorded a termination cost of $1,700,000 as required under the agreement, which was expensed for the quarter ending June 30, 2012. Payments of $425,000 will be made annually over a four year period with interest at the prime rate on the date of termination, due on January 1 of each year. On December 28, 2012 the first payment of $425,000 plus $12,412 of accrued interest was made.


8


Lincolnway Energy, LLC

Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

The Company is also purchasing anhydrous ammonia and propane from Innovative Ag Services, a member of the Company.  Total purchases for the three months ended December 31, 2012 and 2011 is $96,482 and $16,520, respectively. As of December 31, 2012 there is $94,954 due to Innovative Ag Services.


Note 7.    Commitments and Major Customer

The Company has an agreement with an unrelated entity for marketing ,selling and distributing all of the ethanol produced by the Company. For the three months ended December 31, 2012 and 2011 the Company has expensed $138,262 and $170,383, respectively, under this agreement for marketing fees. Revenues with this customer were $34,012,975 and $33,713,458, respectively, for the three months ended December 31, 2012 and 2011. Trade accounts receivable of $5,326,768 was due from the customer as of December 31, 2012.

The Company has an agreement with an unrelated entity for marketing, selling and distributing the distiller's grains. For the three months ended December 31, 2012 and 2011, the Company has expensed marketing fees of $187,396 and $138,288, respectively, under this agreement. Revenues with this customer were $12,478,100 and $8,138,333, respectively, for the three months ended December 31, 2012 and 2011. Trade accounts receivable of $1,564,428 was due from the customer as of December 31, 2012.

The Company entered into an agreement on January 1, 2013 with an unrelated party to provide the coal supply for the ethanol plant. The agreement expires on January 1, 2015. The agreement is subject to a minimum purchase requirement. For the calendar year 2013 the estimated purchase commitment totals, $2,030,000.

The Company has entered into a variable contract with a supplier of denaturant. The variable contract is for a minimum purchase of 243,000 gallons at the average of the OPIS Conway In-Well Natural Gasoline High and Low price plus $.1875/usg. The term of the contract is from January 1, 2013 through March 31, 2013. The minimum future purchase commitment is $581,621.


Note 8.    Risk Management

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

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

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 Company treats all contracts with the same counterparty on a net basis on the balance sheet.

Derivatives not designated as hedging instruments are as follows:

 
December 31 2012
 
September 30 2012
Derivative assets
$

 
$
134,050

Derivative liabilities
(22,900
)
 

Cash held by (due to) broker
220,379

 
(62,072
)
Total
$
197,479

 
$
71,978



9


Lincolnway Energy, LLC

Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________





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

 
Three Months
 
Three Months
 
 
Ended
 
Ended
 
 
December 31, 2012
 
December 31, 2011
 
 
 
 
 

 
(Increase) decrease in cost of goods sold due to derivatives related to corn costs:
 
 
 
 
Realized
900,735

 
79,563

 
Unrealized
(22,900
)
 
(408,150
)
 
Total effect on cost of goods sold
877,835

 
(328,587
)
 
 
 
 
 

 
Total increase (decrease) to operating income due to derivative activities
$
877,835

 
$
(328,587
)
 

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

Note 9.    Fair Value Measurements

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

Level 1 -
Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 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. 

10


Lincolnway Energy, LLC

Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________


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

 
 
December 31, 2012
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Liabilities, derivative financial instruments
 
$
(22,900
)
 
$
(22,900
)
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
September 30, 2012
 
 
Total

 
Level 1

 
Level 2

 
Level 3

Assets, derivative financial instruments
 
$
134,050

 
$
134,050

 
$

 
$



Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a nonrecurring basis were not significant at December 31, 2012


Note 10.    Contingency

In May 2010, a lawsuit was filed against the Company and approximately twenty other ethanol plants, design firms and equipment manufacturers by an unrelated party claiming the Company's operation of the corn oil extraction system is infringing at least one patent. 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 and has asserted various defenses including that it does not infringe and, further, that the patents are invalid.  The Company is unable to determine at this time if the lawsuit will have a material adverse affect on the Company.


Note 11.     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 three months ended December 31, 2011.



11


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, predictions 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 in all events likely to be inaccurate, at least to some degree, and especially over long periods of time. Forecasts and projections are also currently difficult to make with any degree of reliability or certainty given the difficult and uncertain political, financial, market, economic and other circumstances and uncertainties in existence at the time of the preparation of this quarterly report, both generally and with respect to the ethanol industry, and both in the United States and internationally. 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 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 Items 1A, 7 and 7A of Lincolnway Energy's Annual Report on Form 10-K for the fiscal year ended September 30, 2012.

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 that Lincolnway Energy believes to be materially complete, accurate, balanced and reliable, but there is no assurance of the accuracy, completeness or reliability of any third party information. For example, a trade or industry association for the ethanol industry may present information in a manner that is more favorable to the ethanol industry than would be presented by an independent source. Industry publications and surveys and other publicly available information also generally state that they have obtained information from sources believed to be accurate and 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 of ethanol per year, 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 9% to 19% above the nameplate production. For the three months ended December 31, 2012, Lincolnway Energy was producing 8% above nameplate.


12




Lincolnway Energy's ethanol was marketed by Green Plains Trading Group, LLC until January 1, 2013, at which time the ethanol began to be marketed by Eco-Energy, LLC. 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 the syrup that 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 site that collects the carbon dioxide gas that is produced as part of the fermentation process and converts that raw carbon dioxide gas into liquid carbon dioxide. EPCO also markets and sells the liquid carbon dioxide. Lincolnway Energy estimates that it will produce approximately 87,000 tons of carbon dioxide gas per year.

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

DuPont Danisco Cellulosic Ethanol, LLC ("DDCE") purchased approximately 59.05 acres of real estate from Lincolnway Energy in October, 2011. The real estate is located to the southwest of the real estate on which Lincolnway Energy's ethanol plant is located. DDCE intends to build a cellulosic or advanced biofuels plant on the real estate.

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

Lincolnway Energy does not anticipate that the revenues under the Load Out Services Agreement will be a material source of revenue for Lincolnway Energy, but Lincolnway Energy believes that it will be able to provide the services required under the Load Out Services Agreement without materially increasing its operating or other costs.
Lincolnway Energy expects to fund its operations during the next 12 months using cash flow from continuing operations and the revolving line of credit that is available to Lincolnway Energy.


Executive Summary

Highlights for the three months ended December 31, 2012, are as follows:

Total revenues increased 9.5% or $4.1 million, compared to the 2011 comparable period.

Total cost of goods sold increased 23.8%, or $9.7 million compared to the 2011 comparable period.
        
Net income decreased by $6.2 million to a net loss of $3.7 million, compared to net income of $2.5 million for the 2011 comparable period.


13


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 ended December 31, 2012 and 2011 (dollars in thousands):
 
 
 
Three Months Ended December 31,
 
 
 
(Unaudited)
 
Income Statement Data
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
47,413

 
100.0
 %
 
$
43,261

 
100.0
 %
 
Cost of goods sold
 
50,189

 
105.9
 %
 
40,532

 
93.7
 %
 
Gross profit (loss)
 
(2,776
)
 
(5.9
)%
 
2,729

 
6.3
 %
 
General and administrative expenses
 
883

 
1.9
 %
 
673

 
1.6
 %
 
Gain on sale of property
 

 
 %
 
496

 
1.1
 %
 
Operating income (loss)
 
(3,659
)
 
(7.8
)%
 
2,552

 
5.9
 %
 
Other net expense
 
(64
)
 
(0.1
)%
 
(46
)
 
(0.1
)%
 
Net income (loss)
 
$
(3,723
)
 
(7.9
)%
 
$
2,506

 
5.8
 %
 



The following table shows other key data for the periods presented:
 
 
 
Three Months Ended December 31,
 
 
 
(Unaudited)
Operating Data:
 
2012
 
2011
 
 
 
 
 
 
 
Ethanol sold (gallons in thousands)
 
14,861

 
13,631

 
Average gross price of ethanol sold (dollars per gallon)
 
$
2.29

 
$
2.47

 
Dry distillers grains sold (tons)
 
40,201

 
34,193

 
Average dry distillers grains sales price per ton
 
$
305.90

 
$
234.31

 
Average corn cost per bushel
 
$
7.57

 
$
6.26

 


14




Results of Operations for the Three Months Ended December 31, 2012 as Compared to the Three Months Ended December 31, 2011
 
Revenues. Revenues increased by $4.1 million, or 9.5% to $47.4 million for the three months ended December 31, 2012 from $43.3 million for the three months ended December 31, 2011 . There was a slight increase in ethanol sales of $.3 million, or 0.9%, to $34.0 million for the three months ended December 31, 2012 from $33.7 million for the three months ended December 31, 2011. The average price of ethanol sold decreased to $2.29 per gallon for the three months ended December 31, 2012 compared to $2.47 per gallon for the three months ended December 31, 2011. The decrease in ethanol price is due to the oversupply of ethanol and decrease in demand for ethanol during that time period. Ethanol sales volume however increased approximately 1.2 million gallons, or 9.0% for the three months ended December 31, 2012, when compared to the three months ended December 31, 2011. The increase in sales volume in 2012 is due to a decrease in sales volume in 2011 due to a decrease in production from an extended maintenance shutdown in November 2011.

Sales from co-products increased by $4.0 million, or 42.4%, to $13.4 million for the three months ended December 31, 2012 from $9.4 million for the three months ended December 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 increase in price generated the co-product increase for the three months ended December 31, 2012 compared to the three months ended December 31, 2011. The average price of dried distillers grain sold was $305.90 per ton for the three months ended December 31, 2012, compared to $234.31 for the three months ended December 31, 2011. The increase in dried distillers grains price is attributable to the additional demand for the product. Dried distillers grain sales volume increased by 6,008 tons, or 17.6% for the three months ended December 31, 2012, compared to the three months ended December 31, 2011. Dried distillers grain production increased for the three months ended December 31, 2012, due to the extended maintenance shutdown from the three months ended December 31, 2011. For the three months ended December 31, 2012 there were reported sales for syrup, corn oil and CO2 of approximately $.9 million, a decrease of $.3 million from the three months ended December 31, 2011.

Cost of goods sold. Cost of goods sold increased by $9.7 million, or 23.8% to $50.2 million for the three months ended December 31, 2012 from $40.5 million for the three months ended December 31, 2011. Costs increase primarily due to the increase in production and higher corn costs compared to the same quarter in the prior year. Cost of goods sold includes, corn costs, process chemicals, denaturant, coal costs, electricity, production labor, repairs and maintenance, and depreciation.

Corn costs increased by $8.9 million, or 29.1% to $39.5 million for the three months ended December 31, 2012 from $30.6 million for the three months ended December 31, 2011. The average price of corn consumed was $7.57 per bushel for the three months ended December 31, 2012, compared to $6.26 for the three months ended December 31, 2011. The three months ended December 31, 2012 corn costs also included a $.878 million marked to market net gain for derivatives relating to future deliveries, compared to a $.329 million loss in the same quarter for the prior year. Corn costs represented 78.7% of our cost of goods sold for the three months ended December 31, 2012 compared to 75.6% for the three months ended December 31, 2011.

Repair and maintenance decreased by $.3 million, or 48.4% to $.3 million for the three months ended December 31, 2012 from $.6 million for the three months ended December 31, 2011. The increase is a result of an extended maintenance shut down and the costs associated with repairing the coal combustor in 2011.

Coal costs increased by $.3 million, or 16.4% to $2.2 million for the three months ended December 31, 2012 from $1.9 million for the three months ended December 31, 2011. The increase is a result of 10% increase in coal usage and increased production due to not having a maintenance shutdown in the fall of 2012. The price of coal per ton increased by 5% to $75.01 per ton for the three months ended December 31, 2012 from $71.38 per ton for the three months ended December 31, 2011.

Dried distillers grains freight costs increased by $.6 million, or 48.4% to $1.9 million for the three months ended December 31, 2012 from $1.3 million for the three months ended December 31, 2011. The increase is due to a 17.6% increased in tons sold and an increase in container and railcar sales that have higher freight costs than truck sales.

General and administrative. General and administrative expenses increased by $.2 million, or 33.3% to $.9 million for the three months ended December 31, 2012 from $.7 million for the three months ended December 31, 2011. The increase is the result of miscellaneous income received from a contractor that offset the general and administrative expense in 2011.


15


Gain of sale of property. On October 5, 2011, Lincolnway Energy 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 three months ended December 31, 2011.




Risks, Trends and Factors that May Affect Future Operating Results

Ethanol margins remain challenged, driving reductions in domestic plant production to 770,000 barrels per day for the week ending January 25, 2013, the Department of Energy, Energy Information Administration reported. This is the weakest production rate since the June 2010 startup of weekly ethanol reports by the agency, down 1.79% from two weeks previous, and falling 18% behind year ago output. Ethanol margins have improved modestly as a result of reduced grind. Margin improvement remains fragile as the margin is being driven by reduced supply not higher demand. Corn prices have remained range bound and firm with a lack of farmer selling under $7.50 cash. Drought conditions are persistent in the Midwest with much anticipation for the development of more normal spring weather patterns.

The USDA, December 1, 2012 Grain Stocks Estimates were released January 11, 2013 including supply and demand forecasts. These are important forecasts because the final production estimates have been incorporated and the USDA also can work with the September - November residual usage estimates based on the December 1st stocks report. At this time the markets are using trend yields to develop opinions of what planted corn and soybean acreage will be in 2013, and while tentative, the estimates still provide a benchmark to work from as we enter the planting season. USDA raised their 2012/2013 corn/feed residual usage forecast 300 million bushels from 4.150 to 4.450 billion bushels and cut their export forecast by 200 million bushels from 1.150 billion to 950 million bushels compared to the previous month. Their carryout forecast is now 602 million bushels down 45 million bushels from last month.

Lincolnway Energy uses futures and option strategies on the Chicago Mercantile Exchange to hedge some of the risk involved with changing corn prices, as well as the purchase and physical delivery of corn contracts from area farmers and commercial suppliers. Lincolnway Energy incorporates risk management strategies to also cover ethanol and distillers grains subject to changing prices in those products. Lincolnway Energy continues to monitor and works to ensure adequate supply and protection against rapids price increases for corn and price decreases for ethanol and distillers grains.






16




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):
 
 
 
Three Months Ended December 31,
 
 
(Unaudited)
Cash Flow Data:
 
2012
 
2011
Net cash provided by (used in ) operating activities
 
$
(270
)
 
$
6,192

Net cash provided by (used in) investing activities
 
(8
)
 
373

Net cash provided by (used in) financing activities
 
309

 
(2,403
)
Net increase in cash and cash equivalents
 
31

 
4,162



For the three months ended December 31, 2012, net cash (used in ) operating activities decreased by $6.5 million, when compared to cash provided by operating activities for the three months ended December 31, 2011. The decrease in cash for operating activities is primarily due to a $6.2 decrease in net income.

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 $.4 million for the three months ended December 31, 2012 compared to the three months ended December 31, 2011. The decrease is due to proceeds received in 2011 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 provided by financing activities increased by $2.7 million for the three months ended December 31, 2012 compared to the three months ended December 31, 2011. The decrease is due to a decrease in debt payments for the three months ended December 31, 2012.

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;

their capital expenditure requirements, which consists primarily of plant improvements to improve efficiencies; and

their margin maintenance requirements on all commodity trading accounts.
 
Based on the financial projections prepared by management, Lincolnway Energy anticipates that they will have sufficient cash from the current credit facility and cash from operations to continue to operate the ethanol plant for the next 12 months. Operating margins are expected to remain tight through the end of the 2013 fiscal year. Mangement believes that the short corn supply has caused high corn prices and an oversupply of ethanol has negatively impacted the ethanol prices and has put a large amount of pressure on liquidity. Working capital exceeded $8.0 million as of December 31, 2012 and is projected to be in the $6.0 to $8.0 million range through the remaining fiscal year. Management continues to monitor the liquidity position on a weekly basis.


17



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 was sold to Green Plains Trade Group LLC (GPTG) until January 1, 2013, at which time the ethanol began to be sold to Eco-Energy, LLC. The purchase price that was paid to Lincolnway Energy under the contract with GPTG was 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 sales. Lincolnway Energy does not typically enter into derivative instruments other than for hedging purposes. All the derivative contracts are recognized on the December 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 contracts and as a component of revenue for ethanol contracts.

The effects on operating income from derivative activities is as follows:
 
Three Months
 
Three Months
 
 
Ended
 
Ended
 
 
December 31, 2012
 
December 31, 2011
 
 
 
 
 

 
(Increase) decrease in cost of goods sold due to derivatives related to corn costs:
 
 
 
 
Realized
900,735

 
79,563

 
Unrealized
(22,900
)
 
(408,150
)
 
Total effect on cost of goods sold
877,835

 
(328,587
)
 
 
 
 
 

 
Total increase (decrease) to operating income due to derivative activities
$
877,835

 
$
(328,587
)
 

18


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.

Inventories

Inventories are stated at the lower of cost or market using the first-in, first-out method.  In the valuation of inventories and purchase and sale commitments, market is based on current replacement values except that it does not exceed net realizable values and is not less than net realizable values reduced by allowances for approximate normal profit margin.

As of December 31, 2012 and September 30, 2012 the Company recognized a reserve of $552,000 and $368,000, respectively, for a lower of cost or market inventory adjustment.


Off-Balance Sheet Arrangements

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

19


Item 3.    Quantitative and Qualitative Disclosures About Market Risk

In addition to the various risks inherent in the ethanol industry and 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 experienced those market conditions during the three months ended December 31, 2012. 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. The widespread drought in the United States during 2012 resulted in significantly higher corn prices.  
   
Lincolnway Energy's average gross corn cost during the three months ended December 31, 2012 was, respectively, approximately $7.57 per bushel, compared to $6.26 per bushel for the three months ended December 31, 2011.

During the quarter ended December 31, 2012, corn prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $6.91 per bushel for March 2013 delivery to a high of $7.60 per bushel.  The corn prices based on the Chicago Mercantile Exchange daily futures data during the quarter ended ended December 31, 2011 ranged from a low of $5.79 per bushel for March 2012 delivery to a high of $6.56 per bushel.

The average price Lincolnway Energy received for its ethanol during the three months ended December 31, 2012 was, $2.29 per gallon, as compared to $2.47 per gallon, during the three months ended December 31, 2011.

During the quarter ended December 31, 2012, ethanol prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $2.19 per gallon for January 2013 delivery to a high of $2.47 per gallon.   The ethanol prices based on the Chicago Mercantile Exchange daily futures data during the three months ended December 31, 2011 ranged from a low of $2.06 per gallon for January 2012 delivery to a high of $2.79.

Lincolnway Energy may from time to time take various cash, futures, options or other positions in an attempt to minimize or reduce Lincolnway Energy's price risks related to corn and ethanol. The extent to which Lincolnway Energy enters into such positions may vary substantially from time to time and based on various factors, including seasonal factors and Lincolnway Energy's views as to future market trends. Those activities are, however, also subject to various material risks, including that price movements in the cash and futures corn and ethanol markets are highly volatile and are influenced by many factors and occurrences that are beyond the control of Lincolnway Energy. Lincolnway Energy could incur substantial losses on its cash, futures options or other positions.


20



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 three months ended December 31, 2012 was $877,835, as opposed to the net loss of $328,587 for the three months ended December 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 through purchase and physical delivery contracts from suppliers. As of February 1, 2013, Lincolnway Energy has corn coverage through March 2013. 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. As noted above those activities are, however, subject to various material risks, including that price movements in the cash corn and corn futures markets are highly volatile and are influenced by many factors and occurrences which are beyond the control of Lincolnway Energy.

Another important raw material for the production of ethanol by Lincolnway Energy is coal. Lincolnway Energy's cost per ton for coal under its current coal supply agreement is subject to various fixed and periodic adjustments based on factors that 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 December 31, 2012 and 2011 represented approximately 4% and 5%, respectively, of Lincolnway Energy's total cost of goods sold for that period.  

Interest Rate Risk

Lincolnway Energy has two loan agreements 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 December 31, 2012
Interest Rate
 
 
 
Farm Credit - revolving credit loan
$
3,771,000

3.46%
 
 
 
Farm Credit - revolving term loan
$

3.76%
 
 
 
Iowa Department of Transportation
$
212,671

2.11%

The interest rate under the IA. Department of Transportation loan agreement is fixed at the interest rates specified above. The interest rate on the Farm Credit monitored revolving credit loan is a variable interest rate loan based on the one-month LIBOR index rate plus 3.25% adjusting weekly. The interest rate on the Farm Credit revolving term loan is a variable interest rate based on the one-month LIBOR index plus 3.5% adjusted weekly.

Lincolnway Energy does not anticipate any material increase in interest rates during 2013.



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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 chairman 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 chairman 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 paragraphs, 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.

On May 3, 2010, Lincolnway Energy was sued by GS CleanTech Corporation ("GS CleanTech"), a wholly owned subsidiary of GS (Green Shift) CleanTech Corporation. The lawsuit involves claims by GS CleanTech that it owns proprietary rights related to the separation of corn oil from the by-product stream of the dry mill ethanol manufacturing process. The lawsuit was initially filed in United Stated District Court for the Northern District of Iowa as Case No. 5:10-cv-04036, and alleged infringement of United States Patent No. 7,601,858 ("858 Patent").

Shortly after the case was filed, GS CleanTech petitioned the Multi-District Litigation Panel of the Federal Judiciary, and was successful in having Lincolnway Energy's case as well as numerous other cases moved to the United States District Court for the Southern District of Indiana for all pretrial activity. The MDL proceeding is captioned: In re: Method of Processing Ethanol Byproducts and Related Subsystems ('858) Patent Litigation, Master Case No.: 1:10-ml-2181-LJM-DML.

Since the beginning of the case, GS CleanTech has obtained issuance of additional United States patents related to the corn oil separation technology. As a result, additional patents have been asserted against Lincolnway Energy. In addition to the '858 Patent, GS CleanTech has now asserted U.S. Patent No. 8,008,516 (the "'516 Patent") and U.S. Patent No. 8,008,517 (the "'517 Patent"), both of which are continuations of, and are based upon, the disclosures of, the '858 Patent. GS CleanTech has also asserted U.S. Patent No. 8,168,037 ("'037 Patent") against Lincolnway Energy and certain of the other MDL Defendants. The '037 Patent purports to cover certain process steps and is based upon a slightly differing patent specification as compared to the '858 Patent. Additionally, on November 7, 2012, the United States District Court for the Southern District of Indiana entered an Order granting permission to GS CleanTech to assert newly issued United States Patent No. 8,283,484 ("'484 Patent"). The litigation began as an infringement claim of one patent, but, with the additional patents noted in this paragraph, now involves five different patents.

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Claims construction related to the patent claim terms of the '858 Patent has occurred. The Court construed various of the terms. GS CleanTech has requested that further construction be had as it relates to the patent claims of the '516 Patent and the '517 Patent. The Court has not adopted GS CleanTech's position. The newly asserted '037 Patent may require claims construction, and a separate Case Management Order has been entered as it relates to said patent and the parties against whom it is asserted. A claims construction procedure and further modifications to the Case Management Order may also be required in light of the Court's grant of permission to GS CleanTech to assert the '484 Patent.

GS CleanTech is seeking damages in this lawsuit. GS CleanTech has claimed damages consisting of at least a reasonable royalty rate and disgorgement of profits and lost profits. GS CleanTech has further claimed the infringing conduct by Lincolnway Energy is willful resulting in entitlement to recover treble damages and attorney fees pursuant to the provisions of 35 U.S.C. §284.

In the MDL case, the Defendants have filed a Motion for Summary Judgment of Non-Infringement based upon a single claims element. Said element focuses upon the de-oiled syrup stream emerging from the centrifuge after oil separation has occurred, and requires that the de-oiled stream be substantially free of oil. GS CleanTech has filed a separate Motion for Summary Judgment of Infringement asserting that the oil separation processes of all of the Defendants, including Lincolnway Energy, infringe the '858 Patent, the '516 Patent and the '517 Patent. Defendants are working collectively to resist GS Clean Tech's Motion for Summary Judgment of Infringement.

Lincolnway Energy has produced documents pursuant to a Protective Order entered by the US District Court and has provided a corporate deposition to GS CleanTech pursuant to FRCP 30(B)(6).  Lincolnway Energy has joined with a number of other ethanol manufacturers as well as ethanol process equipment manufacturers in defending against the GS CleanTech patents and the claims asserted by GS CleanTech thereunder.  These defenses include claims of non-infringement as well as claims of patent invalidity based upon a number of grounds.  Depositions have been jointly taken by Defendants as to these defenses as well as the claims asserted by GS CleanTech. Discovery is ongoing in this lawsuit. The proceedings have significantly increased Lincolnway Energy's legal costs.





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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, 2012 and filed with the Securities and Exchange Commission on December 21, 2012.

The increased corn costs caused primarily by the drought in 2012, along with the weaker ethanol prices over the past several months, have caused various ethanol plants to suspend production, and it is likely that other plants will also suspend production if the current corn and ethanol market conditions continue. It is also possible that some ethanol plants may fail if the current corn and ethanol market conditions worsen or continue, which could lead to further consolidations within the ethanol industry.

The various federal ethanol tax incentives, including the 45¢ per gallon blenders credit for ethanol use and the 54¢ secondary tariff on imported ethanol, expired on December 31, 2011. As of the date of this quarterly report, those incentives had not been extended or reinstated, and it is likely that those incentives will not be extended or reinstated. The loss of those tax incentives has had adverse effects on the ethanol industry, and could have materially adverse effects on the ethanol industry over the long 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 areas are critical to both the current levels of use of ethanol and any possible future increases in, or demand for, the use of ethanol. There are industry and legislative proponents for altering those standards or eliminating those standards, and for there to be no further increases in the permitted levels of ethanol blends. For example, it has been reported that the American Petroleum Institute ("API") is considering asking the Supreme Court to review the recent ruling of the U.S. Court of Appeals for the District of Columbia that upheld the EPA's decision to allow E15 fuel for cars made in 2001 or later. The API is also reported to support a repeal of the renewable fuels standards. Also, if ethanol production does not increase, or declines due to the current adverse market conditions, that may lead to the need to lower, suspend or extend out further the renewable fuels standards, which then might also provide support for those who want to reduce or eliminate those standards.

There continues to be a substantial amount of political and economic uncertainty surrounding the budget deficit, debt ceiling and related budget and tax issues in the United States and abroad. 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 further increases in tax rates, are likely to occur. Some of the tax and other incentives that benefit the ethanol industry have already been eliminated or reduced, and some of the remaining incentives could also be eliminated or reduced. Nearly all of the states and local communities are facing similar economic, budget and tax issues. The possible outcomes to, and effects of, all of those issues are very difficult to analyze or predict at this time, but there will almost certainly be some adverse effects, at least in some ways and for some period of time, on certain groups or sectors of the economy, and perhaps the economy as a whole. Many of the same issues are also being faced by Europe and many other regions and countries, all of which adversely affects the United States.

There is still a substantial amount of civil unrest and other political uncertainty in the Middle East and other oil producing nations. There have been changes in the government in some countries, and additional and further changes are possible. 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 October 1, 2012 through December 31, 2012.    
        

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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) during the period of October 1, 2012 through December 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 October 1, 2012 through December 31, 2012 which was not reported on a Form 8-K.

There were no material changes during the period of October 1, 2012 through December 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
10.5
 
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. See Exhibit 10.7.1 for an amendment to this agreement
 
 
 
10-K
 
9/30/2007
 
10.7
 
12/21/2007
10.7.1
 
Amendment to Distiller's Grain Marketing Agreement Between Lincolnway Energy and Hawkeye Gold, LLC
 
 
 
10-K
 
9/30/2012
 
 
 
12/21/2012
*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
10.11
 
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
10.16
 
Master Loan Agreement and Amendment Among Farm Credit Services of America, FLC; Farm Credit Services of America, PCA; and Lincolnway Energy, LLC
 
 
 
10-K
 
9/30/2012
 
 
 
12/21/2012
10.17
 
Revolving Term Loan Supplement and Amendment Between Farm Credit Services of America, FLCA and Lincolnway Energy, LLC
 
 
 
10-K
 
9/30/2012
 
 
 
12/21/2012
10.18
 
Monitored Revolving Credit Supplement and Amendment Between Farm Credit Services of America, PCA and Lincolnway Energy, LLC
 
 
 
10-K
 
9/30/2012
 
 
 
12/21/2012
*10.19
 
Ethanol Marketing Agreement Between Lincolnway Energy, LLC and Eco-Energy, LLC
 
E-1
 
 
 
 
 
 
 
 

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*10.20
 
Coal Supply Agreement Between Lincolnway Energy, LLC and Williams Bulk Transfer, Inc.
 
E-2
 
 
 
 
 
 
 
 
31.1
 
Rule 13a-14(a) Certification of Chairman
 
E-3
 
 
 
 
 
 
 
 
31.2
 
Rule 13a-14(a) Certification of Chief Financial Officer
 
E-4
 
 
 
 
 
 
 
 
32.1
 
Section 1350 Certification of Chairman
 
E-5
 
 
 
 
 
 
 
 
32.2
 
Section 1350 Certification of Chief Financial Officer
 
E-6
 
 
 
 
 
 
 
 
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 has been filed separately with the Securities and Exchange Commission.





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
 
 
 
February 14, 2013
By:
/s/   Jeff Taylor
 
Name:    Jeff Taylor
 
Title:     Chairman
 
                
 
 
 
February 14, 2013
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 December 31, 2012

Description of Exhibit.
 
 
Page
 
 
 
 
*10.19

 
Ethanol Marketing Agreement Between Lincolnway Energy, LLC and Eco-Energy, LLC
E-1
 
 
 
 
*10.20

 
Coal Supply Agreement Between Lincolnway Energy, LLC and Williams Bulk Transfer
E-2
 
 
 
 
31

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

Rule 13a-14(a) Chairman
E-3
 
 
 
 
 
31.2

Rule 13a-14(a) Certification of Chief Financial Officer
E-4
 
 
 
 
32

Section 1350 Certifications
 
 
 
 
 
 
32.1

Section 1350 Chairman
E-5
 
 
 
 
 
32.2

Section 1350 Certification of Chief Financial Officer
E-6
 
 
 
 
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 has been filed separately with the Securities and Exchange Commission


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