Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Cardinal Ethanol LLCFinancial_Report.xls
EX-32.1 - CERTIFICATION - Cardinal Ethanol LLCa321certification9-30x14.htm
EX-32.2 - CERTIFICATION - Cardinal Ethanol LLCa322certification9-30x14.htm
EX-31.1 - CERTIFICATION - Cardinal Ethanol LLCa311certification9-30x14.htm
EX-31.2 - CERTIFICATION - Cardinal Ethanol LLCa312certification9-30x14.htm
EX-10.54 - EXHIBIT - Cardinal Ethanol LLCa1054employeebonusplanamen.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
x
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
 
For the fiscal year ended September 30, 2014
 
 
 
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 000-53036
 
CARDINAL ETHANOL, LLC
(Exact name of registrant as specified in its charter)
 
Indiana
 
20-2327916
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1554 N. County Road 600 E., Union City, IN 47390
(Address of principal executive offices)
 
(765) 964-3137
(Registrant's telephone number, including area code)
 
Securities registered pursuant to 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Membership Units.

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

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

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

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

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

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

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

As of March 31, 2014, the aggregate market value of the membership units held by non-affiliates (computed by reference to the most recent offering price of such membership units) was $51,810,000. There is no established public trading market for our membership units. The aggregate market value was computed by reference to the price at which membership units were last sold by the registrant ($5,000 per unit).

As of November 25, 2014, there were 14,606 membership units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III of this Annual Report is incorporated herein by reference to the Company's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended September 30, 2014.


1


INDEX

 
Page Number
 
 
 
 
 
 


2


CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

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

Reduction or elimination of the Renewable Fuel Standard;
Changes in the availability and price of corn and natural gas;
Our inability to secure credit or obtain additional equity financing we may require in the future to continue our operations;
Decreases in the price we receive for our ethanol, distiller grains and corn oil;
Our ability to satisfy the financial covenants contained in our credit agreements with our lender;
Our ability to profitably operate the ethanol plant and maintain a positive spread between the selling price of our products and our raw material costs;
Negative impacts that our hedging activities may have on our operations;
Ethanol and distiller grains supply exceeding demand and corresponding price reductions;
Our ability to generate free cash flow to invest in our business and service any debt;
Changes in the environmental regulations that apply to our plant operations;
Changes in our business strategy, capital improvements or development plans;
Changes in plant production capacity or technical difficulties in operating the plant;
Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;
Lack of transport, storage and blending infrastructure preventing our products from reaching high demand markets;
Changes in federal and/or state laws;
Changes and advances in ethanol production technology;
Competition from alternative fuel additives;
Changes in interest rates or the lack of credit availability;
Changes in legislation benefiting renewable fuels;
Our ability to retain key employees and maintain labor relations;
Volatile commodity and financial markets;
Limitations and restrictions contained in the instruments and agreements governing any indebtedness.

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

AVAILABLE INFORMATION

Information about us is also available at our website at www.cardinalethanol.com, under "SEC Filings" which includes links to the reports we have filed with the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this Annual Report on Form 10-K.

PART I

ITEM 1. BUSINESS

Business Development

Cardinal Ethanol, LLC is an Indiana limited liability company. It was formed on February 7, 2005 with the name of Indiana Ethanol, LLC. On September 27, 2005, we changed our name to Cardinal Ethanol, LLC. References to “we,” “us,” “our,”

3


“Cardinal” and the “Company” refer to Cardinal Ethanol, LLC. We were formed for the purpose of raising capital to develop, construct, own and operate a 100 million gallon per year ethanol plant in east central Indiana near Union City, Indiana. We began producing ethanol, distillers grains and corn oil at the plant in November 2008. In August 2010, we obtained a new Title V air permit allowing us to increase our annual ethanol production to 140 million gallons compared to 110 million gallons under our previous permit. We have been operating at an annual rate of approximately 116 million gallons for the fiscal year ended 2014. We expect to continue at this level for the next twelve months. However, inability to buy corn at prices that allow us to operate profitably could require us to decrease or halt production.

On October 8, 2013, we terminated our interest rate swap agreement and amended our First Amended and Restated Construction Loan Agreement dated June 10, 2013 (the "Loan Agreement") with First National Bank of Omaha ("FNBO") to change the date upon which the Declining Revolving Credit Loan began to revolve from April 8, 2014 to October 8, 2013. The amount paid upon termination of the interest rate swap was $662,597. In addition, we paid $10,958,643 towards the balance of the Declining Revolving Note (the "Declining Note"). On October 17, 2013, an additional $16,985,332 was paid towards the Declining Note to pay the balance in full.
    
On February 27, 2014, we again amended our Loan Agreement and, in connection therewith, executed a First Amended and Restated Declining Revolving Credit Note dated February 27, 2014 that replaced the Declining Note. The amendment reduced the maximum availability of the Declining Revolving Credit Loan from approximately $26,000,000 to $5,000,000 and required that we make monthly interest payments rather than the quarterly principal and interest payments previously required. The amendment also deleted the requirements that we make excess cash flow payments and maintain a certain Fixed Charge Coverage ratio, increased the maximum annual capital expenditures from $4,000,000 to $5,000,000 and removed the restrictions on redemptions of units and distributions to members. Finally, the amendment extended the termination date of the Revolving Credit Loan from June 11, 2014 to February 28, 2015.
    
Throughout the fiscal year, the board of directors periodically declared cash distributions to the members of record on the declaration date. The table below shows the dates and amounts of these distributions for the fiscal year ended September 30, 2014:

Date Declared
 
Distribution Declared Per Unit
 
Total Distribution Amount
 
Month Distribution Paid
November 14, 2013
 
$
475

 
$
6,937,850

 
December 2013
February 11, 2014
 
1,072

 
15,657,632

 
February 2014
May 20, 2014
 
1,500

 
21,909,000

 
May 2014
August 19, 2014
 
1,500

 
21,909,000

 
August 2014
Totals
 
$
4,547

 
$
66,413,482

 
 

Subsequent to year end, the board of directors declared a cash distribution. The date and amounts are listed in the table below:

Date Declared
 
Distribution Declared Per Unit
 
Total Distribution Amount
 
Month Distribution Paid
November 18, 2014
 
$
1,700

 
$
24,830,200

 
November 2014

Financial Information

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

The principal products we are producing at the plant are fuel-grade ethanol and distillers grains. In addition, we are extracting corn oil for sale. Raw carbon dioxide gas is another co-product of the ethanol production process. We have entered into an agreement with Air Products and Chemicals, Inc. to capture a portion of the raw carbon dioxide we produce at the plant.

4


The table below shows the approximate percentage of our total revenue which is attributed to each of our products for each of our last three fiscal years.

Product
 
Fiscal Year 2014
 
Fiscal Year 2013
 
Fiscal Year 2012
Ethanol
 
78
%
 
75
%
 
78
%
Distiller Grains
 
18
%
 
22
%
 
19
%
Corn Oil
 
3
%
 
3
%
 
3
%
Carbon Dioxide
 
> 1%

 
> 1%

 
> 1%


Ethanol

Our primary product is ethanol. Ethanol is ethyl alcohol, a fuel component made primarily from corn and various other grains. The ethanol we produce is manufactured from corn. Although the ethanol industry continues to explore production technologies employing various feedstocks, such as biomass, corn-based production technologies remain the most practical and provide the lowest operating risks. Corn produces large quantities of carbohydrates, which convert into glucose more easily than most other kinds of biomass. The Renewable Fuels Association estimates current domestic ethanol production capacity of approximately 14.9 billion gallons with approximately 4% of that capacity idled as of November 6, 2014.

An ethanol plant is essentially a fermentation plant. Ground corn and water are mixed with enzymes and yeast to produce a substance called “beer,” which contains about 10% alcohol and 90% water. The “beer” is boiled to separate the water, resulting in ethyl alcohol, which is then dehydrated to increase the alcohol content. This product is then mixed with a certified denaturant to make the product unfit for human consumption and commercially saleable.

Ethanol can be used as: (i) an octane enhancer in fuels; (ii) an oxygenated fuel additive for the purpose of reducing ozone and carbon monoxide emissions; and (iii) a non-petroleum-based gasoline substitute. Approximately 95% of all ethanol is used in its primary form for blending with unleaded gasoline and other fuel products. Used as a fuel oxygenate, ethanol provides a means to control carbon monoxide emissions in large metropolitan areas. The principal purchasers of ethanol are generally the wholesale gasoline marketer or blender. The principal markets for our ethanol are petroleum terminals in the northeastern United States.

Distillers Grains

The principal co-product of the ethanol production process is distillers grains, a high protein, high-energy animal feed supplement primarily marketed to the dairy, beef, poultry and swine industries. Distillers grains contain by-pass protein that is thought to be superior to other protein supplements such as cottonseed meal and soybean meal. Dry mill ethanol processing creates three forms of distiller grains: Distillers Wet Grains with Solubles ("DWS"), Distillers Modified Wet Grains with Solubles ("DMWS") and Distillers Dried Grains with Solubles ("DDGS"). DWS is processed corn mash that contains approximately 70% moisture. DWS has a shelf life of approximately three days and can be sold only to farms within the immediate vicinity of an ethanol plant. DMWS is DWS that has been dried to approximately 50% moisture. DMWS have a slightly longer shelf life of approximately ten days and are often sold to nearby markets. DDGS is DWS that has been dried to 10% to 12% moisture. DDGS has an almost indefinite shelf life and may be sold and shipped to any market regardless of its vicinity to an ethanol plant.

Corn Oil

In November 2008, we began separating some of the corn oil contained in our distiller's grains for sale. We have worked hard to improve corn oil production levels and continue to fine tune the operation of our equipment to further increase production rates. The corn oil that we produce is not food grade corn oil and therefore cannot be used for human consumption. However, corn oil can be used as the feedstock to produce biodiesel, as a feed ingredient and has other industrial uses.

Carbon Dioxide

In March 2010, we entered into an Agreement with Air Products and Chemicals, Inc. ("Air Products") (formerly known as EPCO Carbon Dioxide Products, Inc.) under which Air Products purchases a portion of the carbon dioxide gas produced at our plant. In addition, we entered into a Site Lease Agreement with Air Products under which Air Products leases a portion of our property, on which it is operating a carbon dioxide liquefaction plant. We initially supplied Air Products, at the liquefaction plant, carbon dioxide gas meeting certain specifications and at a rate sufficient for Air Products to produce 54,750 tons of liquid carbon dioxide per year in exchange for payment of a contractual price per ton of liquid carbon dioxide shipped out of the liquefaction

5


plant by Air Products. In November 2011, we amended this agreement to allow for an expansion of the carbon dioxide liquefaction plant which was completed in September 2012. Under the amendment, Air Products pays us for a minimum of 98,700 tons each year or approximately $493,500 annually.

Ethanol, Distillers Grains and Corn Oil Markets      

As described below in "Distribution of Principal Products," we market and distribute our ethanol and distillers grains through third parties. Our ethanol and distillers grains marketers make all decisions, in consultation with management, with regard to where our products are marketed. Our ethanol and distillers grains are predominately sold in the domestic market. Specifically, we ship a substantial portion of the ethanol we produce to the New York harbor. We expect our ethanol and distillers grains marketers to explore all markets for our products, including export markets, and believe that there is some potential for increased international sales of our products. However, due to high transportation costs, and the fact that we are not located near a major international shipping port, we expect a majority of our products to continue to be marketed and sold domestically.

Over the last year, exports of ethanol have increased with Canada receiving the largest percentage of ethanol produced in the United States and Brazil a distant second. The United Arab Emirates and the Philippines have also been top destinations. Ethanol exports could continue to increase in the future if market conditions are favorable. However, the imposition by the European Union in 2013 of a tariff on ethanol which is produced in the United States has created uncertainty as to the viability of that market for ethanol produced in the United States and may require United States producers to seek out other markets for their products.

The United States ethanol industry exported a significant amount of distillers grains to China and Mexico in 2014. However, demand for distillers grains from China decreased during the second half of 2014 when China announced in June 2014 that it would stop issuing import permits for distillers grains from the United States due to the presence in some shipments of a genetically modified trait not approved for import. This announcement was followed in July 2014 by a new requirement by China of a certification by the United States government that distillers grains shipments to China are free of the genetically modified trait. Officials from the United States and China have been unable to agree on testing procedures for distillers grains exported to China. If the certification requirements continue, export demand of distillers grains could be significantly reduced as a result.

We market and distribute all of the corn oil we produce directly to end users and third party brokers in the domestic market.

Distribution of Principal Products

Our ethanol plant is located near Union City, Indiana in Randolph County. We selected the site because of its location to existing ethanol consumption and accessibility to road and rail transportation. Our site is in close proximity to rail and major highways that connect to major population centers such as Indianapolis, Cincinnati, Columbus, Cleveland, Toledo, Detroit, New York and Chicago.

Ethanol Distribution

We entered into an Ethanol Purchase and Sale Agreement with Murex, LLC ("Murex") for the purpose of marketing and distributing all of the ethanol we produce at the plant. The initial term of the agreement was five years commencing on the date of first delivery of ethanol with automatic renewal for one year terms thereafter unless otherwise terminated by either party. The agreement may be terminated due to the insolvency or intentional misconduct of either party or upon the default of one of the parties as set forth in the agreement.
Under the terms of the agreement, Murex markets all of our ethanol unless we choose to sell a portion at a retail fueling station owned by us or one of our affiliates. Murex pays to us the purchase price invoiced to the third-party purchaser less all resale costs, taxes paid by Murex and Murex's commission. Murex has agreed to purchase on its own account and at market price any ethanol which it is unable to sell to a third party purchaser. Murex has promised to use its best efforts to obtain the best purchase price available for our ethanol. In addition, Murex has agreed to promptly notify us of any and all price arbitrage opportunities. Under the agreement, Murex is responsible for all transportation arrangements for the distribution of our ethanol. On November 22, 2011, we amended our agreement to provide for an annual cap on the commission paid to Murex. We also agreed to extend the initial term of the agreement to an eleven year period, which now expires in 2019.

6


Distillers Grains Distribution
We have entered into an agreement with CHS, Inc. to market all distillers grains we produce at the plant. CHS, Inc. is a diversified energy, grains and foods company owned by farmers, ranchers and cooperatives. CHS, Inc. provides products and services ranging from grain marketing to food processing to meet the needs of its customers around the world. We receive a percentage of the selling price actually received by CHS, Inc. in marketing our distillers grains to its customers. The initial term of our agreement with CHS, Inc. was for one year commencing as of November 1, 2008. Thereafter, the agreement will remain in effect unless otherwise terminated by either party with 120 days notice. Under the agreement, CHS, Inc. is responsible for all transportation arrangements for the distribution of our distillers grains.
Corn Oil Distribution
We market and distribute all of the corn oil we produce directly to end users and third party brokers. Our corn oil is mainly used as a feed ingredient and as a feedstock in biodiesel production.
Federal Ethanol Supports and Governmental Regulation

Federal Ethanol Supports

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

The United States Environmental Protection Agency (the "EPA") has the authority to waive the RFS statutory volume requirement, in whole or in part, provided one of the following two conditions have been met: (1) there is inadequate domestic renewable fuel supply; or (2) implementation of the requirement would severely harm the economy or environment of a state, region or the United States. Annually, the EPA passes a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligations.

The RFS statutory volume requirement for 2014 is approximately 18.15 billion gallons, of which corn based ethanol can be used to satisfy approximately 14.4 billion gallons. The RFS statutory volume requirement for 2015 is approximately 20.5 billion gallons, of which corn based ethanol can be used to satisfy approximately 15 billion gallons. However, on November 15, 2013, the EPA announced a proposal to significantly reduce the RFS levels for 2014 to 15.21 billion gallons of which corn based ethanol could be used to satisfy only 13 billion gallons. This proposed rule would result in a lowering of the 2014 standard below the 2013 level of 13.8 billion gallons. The EPA also sought comment on several petitions it has received for partial waiver of the statutory volumes for 2014. The 60-day public comment period ended on January 28, 2014 and the rule was submitted by the EPA to the Office of Management and Budget ("OMB") for review on August 22, 2014. Furthermore, there have also been recent proposals in Congress to reduce or eliminate the RFS. On November 21, 2014, the EPA announced that it would delay finalizing the rule on the 2014 RFS standards until after the end of 2014. The EPA indicated that it intends to take action on the 2014 standards in 2015 prior to or in conjunction with action on the 2015 standards. If the EPA's proposal becomes a final rule significantly reducing the volume requirements under the RFS or if the RFS were to be otherwise reduced or eliminated by the exercise of the EPA waiver authority or by Congress, the market price and demand for ethanol could decrease which will negatively impact our financial performance. Current ethanol production capacity exceeds the EPA's proposed 2014 standard which can be satisfied by corn based ethanol.

In February 2010, the EPA issued new regulations governing the RFS. These new regulations have been called RFS2. The most controversial part of RFS2 involves what is commonly referred to as the lifecycle analysis of green house gas emissions. Specifically, the EPA adopted rules to determine which renewable fuels provided sufficient reductions in green house gases, compared to conventional gasoline, to qualify under the RFS program. RFS2 establishes a tiered approach, where regular renewable fuels are required to accomplish a 20% green house gas reduction compared to gasoline, advanced biofuels and biomass-based biodiesel must accomplish a 50% reduction in green house gases, and cellulosic biofuels must accomplish a 60% reduction in green house gases. Any fuels that fail to meet this standard cannot be used by fuel blenders to satisfy their obligations under the RFS program. The scientific method of calculating these green house gas reductions has been a contentious issue. Many in the

7


ethanol industry were concerned that corn based ethanol would not meet the 20% green house gas reduction requirement based on certain parts of the environmental impact model that many in the ethanol industry believed was scientifically suspect. However, RFS2 as adopted by the EPA provides that corn-based ethanol from modern ethanol production processes does meet the definition of a renewable fuel under the RFS program. Our ethanol plant was grandfathered into the RFS due to the fact that it was constructed prior to the effective date of the lifecycle green house gas requirement and is not required to prove compliance with the lifecycle green house gas reductions. Many in the ethanol industry are concerned that certain provisions of RFS2 as adopted may disproportionately benefit ethanol produced from sugarcane. This could make sugarcane based ethanol, which is primarily produced in Brazil, more competitive in the United States ethanol market. If this were to occur, it could reduce demand for the ethanol that we produce.
 
Most ethanol that is used in the United States is sold in a blend called E10. E10 is a blend of 10% ethanol and 90% gasoline. E10 is approved for use in all standard vehicles. Estimates indicate that the 2014 gasoline demand in the United States will be approximately 135 billion gallons. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 13.5 billion gallons per year. This is commonly referred to as the “blending wall,” which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. This is a theoretical limit because it is believed that it would not be possible to blend ethanol into every gallon of gasoline that is being used in the United States and it discounts the possibility of additional ethanol used in higher percentage blends such as E85 used in flex fuel vehicles.

The EPA has approved the use of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model year 2001 and later. However, there were still significant federal and state regulatory hurdles that needed to be addressed. The EPA has made recent gains towards clearing those federal regulatory hurdles. In February 2012, the EPA approved health effects and emissions testing on E15 which was required by the Clean Air Act before E15 can be sold into the market. In March 2012, the EPA approved a model Misfueling Mitigation Plan and fuel survey which must be submitted by applicants before E15 registrations can be approved. In April 2012, the EPA approved the first E15 registrations approving twenty producers who have successfully registered their product to be used as E15. Finally, in June 2012, the EPA gave the final approval to allow the sale of E15. Although management believes that these developments are significant steps towards introduction of E15 in the marketplace, there are still obstacles to meaningful market penetration by E15. Many states still have regulatory issues that prevent the sale of E15. Sales of E15 may be limited because it is not approved for use in all vehicles, the EPA requires a label that management believes may discourage consumers from using E15, and retailers may choose not to sell E15 due to concerns regarding liability. In addition, different gasoline blendstocks may be required at certain times of the year in order to use E15 due to federal regulations related to fuel evaporative emissions. This may prevent E15 from being used during certain times of the year in various states. As a result, management believes that E15 may not have an immediate impact on ethanol demand in the United States.

The Volumetric Ethanol Excise Tax Credit ("VEETC") provided a volumetric ethanol excise tax credit of 4.5 cents per gallon of gasoline that contains at least 10% ethanol (total credit of 45 cents per gallon of ethanol blended which is 4.5 divided by the 10% blend). VEETC expired on December 31, 2011. In addition to the expiration of the tax incentives, a 54 cent per gallon tariff imposed on ethanol imported into the United States also expired on December 31, 2011. The ethanol industry in the United States experienced increased competition from ethanol produced outside of the United States during 2012. These increased ethanol imports were likely at least in part due to the expiration of the tariff on imported ethanol. However, ethanol imports have decreased in 2013 and 2014.

The United States Department of Agriculture (“USDA”) also provides financial assistance to help implement “blender pumps” in the United States in order to increase demand for ethanol and to help offset the cost of introducing mid-level ethanol blends into the United States retail gasoline market. A blender pump is a gasoline pump that can dispense a variety of different ethanol/gasoline blends. Blender pumps typically can dispense E10, E20, E30, E40, E50 and E85. These blender pumps accomplish these different ethanol/gasoline blends by internally mixing ethanol and gasoline which are held in separate tanks at the retail gas stations. Many in the ethanol industry believe that increased use of blender pumps will increase demand for ethanol by allowing gasoline retailers to provide various mid-level ethanol blends in a cost effective manner and allowing consumers with flex-fuel vehicles to purchase more ethanol through these mid-level blends. However, blender pumps cost approximately $25,000 each, so it may take time before they become widely available in the retail gasoline market.

Effect of Governmental Regulation

The government's regulation of the environment changes constantly. We are subject to extensive air, water and other environmental regulations and we have been required to obtain a number of environmental permits to construct and operate the plant. It is possible that more stringent federal or state environmental rules or regulations could be adopted, which could increase our operating costs and expenses. It also is possible that federal or state environmental rules or regulations could be adopted that

8


could have an adverse effect on the use of ethanol. For example, changes in the environmental regulations regarding the required oxygen content of automobile emissions could have an adverse effect on the ethanol industry. Plant operations are governed by the Occupational Safety and Health Administration (“OSHA”). OSHA regulations may change such that the costs of operating the plant may increase. Any of these regulatory factors may result in higher costs or other adverse conditions effecting our operations, cash flows and financial performance.

In late 2009, California passed a Low Carbon Fuels Standard ("LCFS"). The California LCFS requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which is measured using a lifecycle analysis, similar to the RFS. On December 29, 2011, a federal district court in California ruled that the California LCFS was unconstitutional which halted implementation of the California LCFS. However, the California Air Resources Board ("CARB") appealed this court ruling and on September 18, 2013, the federal appellate court reversed the federal district court finding the LCFS constitutional and remanding the case back to federal district court to determine whether the LCFS imposes a burden on interstate commerce that is excessive in light of the local benefits. On June 30, 2014, the United States Supreme Court declined to hear the appeal of the federal appellate court ruling. In addition, a state court in California required that CARB take certain corrective actions regarding the approval of the LCFS regulations while allowing the LCFS regulations to remain in effect during this process. If federal and state challenges to the LCFS are ultimately unsuccessful, the LCFS could have a negative impact on demand for corn-based ethanol and result in decreased ethanol prices.    

We have obtained all of the necessary permits to operate the plant. In the fiscal year ended September 30, 2014, we incurred costs and expenses of approximately $264,000 complying with environmental laws. Although we have been successful in obtaining all of the permits currently required, any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources in complying with such regulations.

Competition

Ethanol

We are in direct competition with numerous ethanol producers, many of whom have greater resources than we do. Following the significant growth during 2005 and 2006, the ethanol industry has grown at a much slower pace. As of November 6, 2014, the Renewable Fuels Association estimates that there are 213 ethanol production facilities in the United States with capacity to produce approximately 14.9 billion gallons of ethanol and another 5 plants under expansion or construction with capacity to produce an additional 120 million gallons. However, the Renewable Fuels Association estimates that approximately 4% of the ethanol production capacity in the United States is idled.

Since ethanol is a commodity product, competition in the industry is predominantly based on price. We have also experienced increased competition from oil companies who have purchased ethanol production facilities. These oil companies are required to blend a certain amount of ethanol each year. Therefore, the oil companies may be able to operate their ethanol production facilities at times when it is unprofitable for us to operate. Larger ethanol producers may be able to realize economies of scale that we are unable to realize. This could put us at a competitive disadvantage to other ethanol producers. The ethanol industry is continuing to consolidate where a few larger ethanol producers are increasing their production capacities and are controlling a larger portion of the United States ethanol production. Further, some ethanol producers own multiple ethanol plants which may allow them to compete more effectively by providing them flexibility to run certain production facilities while they have other facilities shut down. This added flexibility may allow these ethanol producers to compete more effectively, especially during periods when operation margins are unfavorable in the ethanol industry.

The largest ethanol producers include Archer Daniels Midland, Flint Hill Resources LP, Green Plains Renewable Energy, POET Biorefining and Valero Renewable Fuels, each of which are capable of producing significantly more ethanol than we produce.

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

U.S. FUEL ETHANOL PRODUCTION CAPACITY
BY TOP PRODUCERS
Producers of Approximately 500
million gallons per year (mmgy) or more


9


Company
Current Capacity
(mmgy)

Under Construction/
Expansions
(mmgy)
 

Archer Daniels Midland
1,720.0


POET Biorefining
1,629.0


Valero Renewable Fuels
1,240.0


Green Plains Renewable Energy
1,004.0


Flint Hill Resources LP
760.0


Updated: November 6, 2014

The ethanol industry in the United States experienced increased competition from ethanol produced outside of the United States during 2012 which was likely the result of the expiration of the tariff on imported ethanol which expired on December 31, 2011. Although ethanol imports decreased in 2013 and 2014, increased competition from ethanol imports may continue to have a negative impact on demand for ethanol produced in the United States which could result in lower operating margins.

We also anticipate increased competition from renewable fuels that do not use corn as the feedstock. Many of the current ethanol production incentives are designed to encourage the production of renewable fuels using raw materials other than corn. One type of ethanol production feedstock is cellulose. Cellulose is the main component of plant cell walls and is the most common organic compound on earth. Cellulose is found in wood chips, corn stalks, rice, straw, amongst other common plants. Cellulosic ethanol is ethanol produced from cellulose. Several companies and researchers have commenced pilot projects to study the feasibility of commercially producing cellulosic ethanol and are producing cellulosic ethanol on a small scale and at least three companies have reportedly begun producing on a commercial scale. A handful of other companies have begun construction on commercial scale cellulosic ethanol plants some of which are expected to be completed by the end of 2014. If this technology can be profitably employed on a commercial scale, it could potentially lead to ethanol that is less expensive to produce than corn based ethanol. Cellulosic ethanol may also capture more government subsidies and assistance than corn based ethanol. This could decrease demand for our product or result in competitive disadvantages for our ethanol production process.

Our ethanol plant also competes with producers of other gasoline additives having similar octane and oxygenate values as ethanol. Alternative fuels, gasoline oxygenates and alternative ethanol production methods are also continually under development. The major oil companies have significantly greater resources than we have to market other additives, to develop alternative products, and to influence legislation and public perception of ethanol. These companies also have sufficient resources to begin production of ethanol should they choose to do so.

    A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids, electric cars or clean burning gaseous fuels. Electric car technology has recently grown in popularity, especially in urban areas. While currently there are a limited number of vehicle recharging stations, making electric cars not feasible for all consumers, there has been increased focus on developing these recharging stations which may make electric car technology more widely available in the future. This additional competition from alternate sources could reduce the demand for ethanol, which would negatively impact our profitability.

Distillers Grains Competition

Ethanol plants in the Midwest produce the majority of distillers grains and primarily compete with other ethanol producers in the production and sales of distillers grains. According to the Renewable Fuels Association's 2014 Ethanol Industry Outlook, ethanol plants produced 35.5 million metric tons of distillers grains in the 2012/2013 marketing year and are expected to produce an estimated 37.8 million metric tons in 2013/2014. The amount of distillers grains produced is expected to fluctuate with changes in ethanol production.

The primary consumers of distillers grains are dairy and beef cattle, according to the Renewable Fuels Association's 2014 Ethanol Industry Outlook. In recent years, an increasing amount of distillers grains have been used in the swine and poultry markets. Numerous feeding trials show advantages in milk production, growth, rumen health, and palatability over other dairy cattle feeds. With the advancement of research into the feeding rations of poultry and swine, we expect these markets to expand and create additional demand for distillers grains; however, no assurance can be given that these markets will in fact expand, or if they do, that we will benefit from it. The market for distillers grains is generally confined to locations where freight costs allow it to be competitively priced against other feed ingredients. Distillers grains compete with three other feed formulations: corn gluten feed, dry brewers grain and mill feeds. The primary value of these products as animal feed is their protein content. Dry brewers grain and distillers grains have about the same protein content, and corn gluten feed and mill feeds have slightly lower protein contents.

10


Sources and Availability of Raw Materials
Corn Feedstock Supply
The major raw material required for our ethanol plant to produce ethanol, distillers grain and corn oil is corn. To produce 116 million gallons of ethanol per year, our ethanol plant needs approximately 41 million bushels of corn per year, or approximately 112,000 bushels per day, as the feedstock for its dry milling process. Traditionally, corn grown in the area of the plant site has been fed locally to livestock or exported for feeding or processing and/or overseas export sales.

We are significantly dependent on the availability and price of corn. The price and availability of corn are subject to significant fluctuations depending upon a number of factors affecting grain commodity prices in general, including crop conditions, weather, governmental programs and foreign purchases. Because the market price of ethanol is not directly related to grain prices, ethanol producers are generally not able to compensate for increases in the cost of grain feedstock through adjustments in prices charged for their ethanol. We therefore anticipate that our plant's profitability will be negatively impacted during periods of high grain prices.
In an attempt to minimize the effects of the volatility of corn costs on operating profits, we take hedging positions in corn futures markets. Hedging means protecting the price at which we buy corn and the price at which we will sell our products in the future. It is a way to attempt to reduce the risk caused by price fluctuation. The effectiveness of hedging activities is dependent upon, among other things, the cost of corn and our ability to sell sufficient amounts of ethanol and distillers grains to utilize all of the corn subject to the futures contracts. Hedging activities can result in costs to us because price movements in grain contracts are highly volatile and are influenced by many factors beyond our control. These costs may be significant.

The price at which we purchase corn will depend on prevailing market prices. During the first three quarters of our fiscal year ended September 30, 2014, our average price paid per bushel of corn was significantly lower compared to the same period in 2013 due to increased supply resulting from a plentiful 2013 harvest in our corn supply region. Corn prices were relatively steady during our fourth quarter trending downwards towards the end of the fourth quarter and subsequent to our fiscal year end.
On November 6, 2014, the United States Department of Agriculture ("USDA") released a report estimating the 2014 corn crop at 14.4 billion bushels with yields averaging 173.4 bushels per acre. This would represent a new record yield and production in the United States. The USDA forecasted area harvested for grain at 83.1 million acres, down 5% from 2013.

Management expects that corn prices will remain lower through the winter of 2014 as a result of an increase in supply from a plentiful 2014 harvest. However, if corn prices rise again, it will have a negative effect on our operating margins unless the price of ethanol and distillers grains out paces rising corn prices. Management will continue to monitor the availability of corn in our area. However, should we experience unfavorable operating conditions that prevent us from profitably operating the ethanol plant, we may need to reduce or even halt production at our plant.

Risk Management Services

We entered into a Risk Management Agreement with John Stewart & Associates ("JS&A") under which JS&A provides risk management and related services pertaining to grain hedging, grain pricing information, aid in purchase of grain, and assistance in risk management as it pertains to ethanol and our co-products. In exchange for JS&A's risk management services, we pay JS&A a fee of $1,500 per month. We entered into the agreement in July of 2007 and the initial term of the agreement was for one year. We are currently on a month to month basis for this contract with JS&A. The agreement may be terminated by either party at any time upon written notice.

We have also entered into an agreement with Advance Trading to assist us with hedging corn, ethanol and natural gas. We pay them a fee of $3,000 per month for these services. The term of the agreement is a month to month agreement, and may be terminated by either party at any time upon proper notice.

Utilities

We engaged U.S. Energy Services, Inc. to provide us with on-going energy management services. U.S. Energy manages the procurement and delivery of energy to their clients' locations. U.S. Energy Services is an independent, employee-owned company, with their main office in Minneapolis, Minnesota and branch offices in Kansas City, Kansas and Omaha, Nebraska. U.S. Energy Services manages energy costs through obtaining, organizing and tracking cost information. Their major services include supply management, price risk management and plant site development. Their goal is to develop, implement, and maintain a dynamic strategic plan to manage and reduce their clients' energy costs. A large percentage of U.S. Energy Services' clients are ethanol plants and other renewable energy plants. We pay U.S. Energy Services, Inc. a monthly fee of $4,258 plus pre-approved

11


travel expenses. The monthly fee will increase 4% per year on the anniversary date of the agreement. The agreement is year to year.
Natural Gas

Natural gas is also an important input commodity to our manufacturing process. Our natural gas usage for our fiscal year ended September 30, 2014 was approximately 0.27% more MMBTUs than for last fiscal year, constituting approximately 7.7% of our total costs of goods sold. We are using natural gas to produce process steam and to dry our distillers grain products to a moisture content at which they can be stored for long periods of time, and can be transported greater distances, so that we can market the product to broader livestock markets, including poultry and swine markets in the continental United States.

On March 20, 2007, we entered into a Long-Term Transportation Service Contract for Redelivery of Natural Gas with Ohio Valley Gas Corporation ("Ohio Valley"). Under the contract, Ohio Valley receives, transports and redelivers natural gas to us for all of our natural gas requirements up to a maximum of 100,000 therms per purchase gas day and our estimated annual natural gas requirements of 34,000,000 therms. For all gas received for and redelivered to us by Ohio Valley, we pay a throughput rate in the amount of $0.0138 per therm for the first five years of the contract term, and $0.0138 increased by the compounded inflation rate as established and determined by the U.S. Consumer Price Index - All Urban Consumers for Transportation for the following five years. In addition, we pay a service charge for all gas received for and redelivered to us by Ohio Valley in the amount of $750 per delivery meter per billing cycle per month for the first five years of the contract term and $750 increased by the compounded inflation rate over the initial rate as established and determined by the U.S. Consumer Price Index - All Urban Consumers for Transportation for the following five years. The initial term of the contract is ten years. Provided neither party terminates the contract, the contract will automatically renew for a series of not more than three consecutive one year periods.

Electricity

We require a significant amount of electrical power to operate the plant. On May 2, 2007, we entered into an agreement with Indiana Michigan Power Company to furnish our electric energy. The initial term of the contract is 30 months from the time service is commenced and continues thereafter unless terminated by either party with 12 months written notice. We pay Indiana Michigan Power Company monthly pursuant to their standard rates.

Water

We require a significant supply of water. Engineering specifications show our plant's water requirements to be approximately 774 gallons per minute, 1.1 million gallons per day, depending on the quality of water. We have assessed our water needs and available supply and have determined that we have an adequate supply. Union City Water Works is supplying the water necessary to operate our plant.

         Much of the water used in our ethanol plant is recycled back into the process. There are, however, certain areas of production where fresh water is needed. Those areas include boiler makeup water and cooling tower water. Boiler makeup water is treated on-site to minimize all elements that will harm the boiler and recycled water cannot be used for this process. Cooling tower water is deemed non-contact water because it does not come in contact with the mash, and, therefore, can be regenerated back into the cooling tower process. The makeup water requirements for the cooling tower are primarily a result of evaporation. Much of the water can be recycled back into the process, which minimizes the discharge water. This will have the long-term effect of lowering wastewater treatment costs. Many new plants today are zero or near zero effluent discharge facilities. Our plant design incorporates the ICM/Phoenix Bio-Methanator wastewater treatment process resulting in a zero discharge of plant process water.

Employees

We have 48 full-time employees as of November 25, 2014.

Research and Development

We do not conduct any research and development activities associated with the development of new technologies for use in producing ethanol and distillers grains.

Patents, Trademarks, Licenses, Franchises and Concessions

We do not currently hold any patents, trademarks, franchises or concessions.


12


We were granted a license by ICM, Inc. to use certain ethanol production technology necessary to operate our ethanol plant. The cost of the license granted by ICM, Inc. was included in the amount we paid to Fagen, Inc. to design and build our ethanol plant.

In addition, we were granted a license by ICM, Inc. to use certain corn oil technologies necessary to extract corn oil during our plant operations.

Seasonality of Ethanol Sales

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

Working Capital

We primarily use our working capital for purchases of raw materials necessary to operate the ethanol plant. Our primary source of working capital is our operations along with our Revolving Credit Note with our primary lender First National Bank of Omaha. At September 30, 2014, we have approximately $15,000,000 available to draw on the Revolving Credit Note. We currently have no outstanding borrowings under our Revolving Credit Note.

Dependence on One or a Few Major Customers

As discussed above, we have entered into a marketing agreement with Murex for the purpose of marketing and distributing our ethanol and have engaged CHS, Inc. for the purpose of marketing and distributing our distillers grains. We rely on Murex for the sale and distribution of our ethanol and CHS, Inc. for the sale and distribution of our distillers grains. Therefore, although there are other marketers in the industry, we are highly dependent on Murex and CHS, Inc. for the successful marketing of our products. Any loss of Murex or CHS, Inc. as our marketing agent for our ethanol and distillers grains respectively could have a significant negative impact on our revenues.
 
Financial Information about Geographic Areas

All of our operations are domiciled in the United States. All of the products sold to our customers for fiscal years 2014, 2013 and 2012 were produced in the United States and all of our long-lived assets are domiciled in the United States. We have engaged third-party professional marketers who decide where our products are marketed and we have no control over the marketing decisions made by our third-party professional marketers. These third-party marketers may decide to sell our products in countries other than the United States. In 2014, a significant amount of distillers grains produced in the Untied States was exported to China and Mexico. However, demand for distillers grains from China decreased during the second half of 2014 as a result of additional requirements imposed by China due to the presence in some shipments of a genetically modified trait not approved for import. Over the last year, exports of ethanol have increased with Canada receiving the largest percentage of ethanol produced in the United States and Brazil a distant second. The United Arab Emirates and the Philippines have also been top destinations. However, although there is some potential to sell our products on the international markets, we anticipate that our products will still primarily be marketed and sold in the United States.

ITEM 1A. RISK FACTORS

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

Risks Relating to Our Business 

Our existing debt financing agreements contain, and our future debt financing agreements may contain, restrictive covenants that limit distributions and impose restrictions on the operation of our business. The use of debt financing makes it more difficult for us to operate because we must make principal and interest payments on the indebtedness and abide by covenants contained in our debt financing agreements. Although we have significantly reduced our level of debt, the restrictive covenants contained in our financing agreements may have important implications on our operations, including, among other things: (a) limiting our ability to obtain additional debt or equity financing; (b) subjecting all or substantially all of our assets to liens; and

13


(c) limiting our ability to make business and operational decisions regarding our business, including, among other things making capital improvements and selling or purchasing assets or engaging in transactions we deem to be appropriate and in our best interest.

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

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

The prices for and availability of natural gas are subject to volatile market conditions.  These market conditions often are affected by factors beyond our control such as higher prices as a result of colder than average weather conditions or natural disasters, overall economic conditions and foreign and domestic governmental regulations and relations.  Significant disruptions in the supply of natural gas could impair our ability to manufacture ethanol and more significantly, distiller's grains for our customers.  Furthermore, increases in natural gas prices or changes in our natural gas costs relative to natural gas costs paid by competitors may adversely affect our results of operations and financial condition. We seek to minimize the risks from fluctuations in the prices of corn and natural gas through the use of hedging instruments.  However, these hedging transactions also involve risks to our business.  See “Risks Relating to Our Business - We engage in hedging transactions which involve risks that could harm our business.” If we were to experience relatively higher corn and natural gas costs compared to the selling prices of our products for an extended period of time, the value of our units may be reduced.
 
Declines in the price of ethanol or distiller's grain would significantly reduce our revenues. The sales prices of ethanol and distiller's grains can be volatile as a result of a number of factors such as overall supply and demand, the price of gasoline and corn, levels of government support, and the availability and price of competing products. We are dependent on a favorable spread between the price we receive for our ethanol and distiller's grains and the price we pay for corn and natural gas. Any lowering of ethanol and distiller's grains prices, especially if it is associated with increases in corn and natural gas prices, may affect our ability to operate profitably. We anticipate the price of ethanol and distiller's grains to continue to be volatile in our 2015 fiscal year as a result of the net effect of changes in the price of gasoline and corn and increased ethanol supply offset by increased ethanol demand. Declines in the prices we receive for our ethanol and distiller's grains will lead to decreased revenues and may result in our inability to operate the ethanol plant profitably for an extended period of time which could decrease the value of our units.

We may violate the terms of our credit agreements and financial covenants which could result in our lender demanding immediate repayment of our loans. We were in compliance with all financial covenants at September 30, 2014. Current management projections indicate that we will be in compliance with our loan covenants through September 30, 2015. However, unforeseen circumstances may develop which could result in us violating our loan covenants. If we violate the terms of our credit agreement, our primary lender could deem us in default of our loans and require us to immediately repay any outstanding balance of our loans.

Our inability to maintain or secure credit facilities we may require in the future may negatively impact our liquidity. While we do not currently require more financing than we have, in the future we may need additional financing. If we require financing in the future and we are unable to secure such financing, or we are unable to secure the financing we require on reasonable terms, it may have a negative impact on our liquidity. This could negatively impact the value of our units.

The ethanol industry is an industry that is changing rapidly which can result in unexpected developments that could negatively impact our operations and the value of our units. The ethanol industry has grown significantly in the last decade. This rapid growth has resulted in significant shifts in supply and demand of ethanol over a very short period of time. As a result, past performance by the ethanol plant or the ethanol industry generally might not be indicative of future performance. We may experience a rapid shift in the economic conditions in the ethanol industry which may make it difficult to operate the ethanol plant profitably. If changes occur in the ethanol industry that make it difficult for us to operate the ethanol plant profitably, it could result in a reduction in the value of our units.
 
We engage in hedging transactions which involve risks that could harm our business.  We are exposed to market risk from changes in commodity prices.  Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process.  We seek to minimize the risks from fluctuations in the prices of corn, natural gas and ethanol through

14


the use of hedging instruments.  The effectiveness of our hedging strategies is dependent on the price of corn, natural gas and ethanol and our ability to sell sufficient products to use all of the corn and natural gas for which we have futures contracts.  Our hedging activities may not successfully reduce the risk caused by price fluctuation which may leave us vulnerable to high corn and natural gas prices. Alternatively, we may choose not to engage in hedging transactions in the future and our operations and financial conditions may be adversely affected during periods in which corn and/or natural gas prices increase. Utilizing cash for margin calls has an impact on the cash we have available for our operations which could result in liquidity problems during times when corn prices rise or fall significantly.
 
Price movements in corn, natural gas and ethanol contracts are highly volatile and are influenced by many factors that are beyond our control.  There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of corn or natural gas.  However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.  We may incur such costs and they may be significant which could impact our ability to profitably operate the plant and may reduce the value of our units.
 
Our business is not diversified.  Our success depends largely on our ability to profitably operate our ethanol plant. We do not have any other lines of business or other sources of revenue if we are unable to operate our ethanol plant and manufacture ethanol, distiller's grains, corn oil and carbon dioxide.  If economic or political factors adversely affect the market for ethanol, distiller's grains, corn oil or carbon dioxide, we have no other line of business to fall back on. Our business would also be significantly harmed if the ethanol plant could not operate at full capacity for any extended period of time.
  
We depend on our management and key employees, and the loss of these relationships could negatively impact our ability to operate profitably. We are highly dependent on our management team to operate our ethanol plant. We may not be able to replace these individuals should they decide to cease their employment with us, or if they become unavailable for any other reason. While we seek to compensate our management and key employees in a manner that will encourage them to continue their employment with us, they may choose to seek other employment. Any loss of these officers and key employees may prevent us from operating the ethanol plant profitably and could decrease the value of our units.

Changes and advances in ethanol production technology could require us to incur costs to update our plant or could otherwise hinder our ability to compete in the ethanol industry or operate profitably.  Advances and changes in the technology of ethanol production are expected to occur.  Such advances and changes may make the ethanol production technology installed in our plant less desirable or obsolete.  These advances could also allow our competitors to produce ethanol at a lower cost than we are able.  If we are unable to adopt or incorporate technological advances, our ethanol production methods and processes could be less efficient than our competitors, which could cause our plant to become uncompetitive or completely obsolete.  If our competitors develop, obtain or license technology that is superior to ours or that makes our technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that our ethanol production remains competitive.  Alternatively, we may be required to seek third-party licenses, which could also result in significant expenditures.  These third-party licenses may not be available or, once obtained, they may not continue to be available on commercially reasonable terms.  These costs could negatively impact our financial performance by increasing our operating costs and reducing our net income.

We are subject to litigation involving our corn oil extraction technology. We have been sued by GS CleanTech Corporation asserting its intellectual property rights to certain corn oil extraction processes we obtained from ICM, Inc. in August 2008. GS CleanTech is seeking to enforce its patent rights against ICM and the Company. The court recently ruled that all of the patents claimed by GS CleanTech were invalid and that the Company had not infringed. However, this ruling is subject to appeal and we expect that GS CleanTech will file an appeal. If GS CleanTech is successful in any appeal filed and allowed to continue to pursue its infringement action against the Company, we may be forced to pay damages to GS CleanTech as a result of our use of such technology and cease our production of corn oil.
 
Risks Related to Ethanol Industry
 
If the rail logistical problems persist, we may face delays in shipments of our products which could negatively impact our financial performance. High demand and an unusually harsh winter resulted in rail delays and rail logistical problems during fiscal year 2014. Rail delays have caused some ethanol plants to slow or suspend production. Due to our location, we have not been materially affected by these logistical problems. However, if inadequate rail logistics persist, we may face increased delays in shipment of our products which could have a negative affect on our financial performance.

If China's new requirements on U.S. distillers grains shipments continue and the U.S. is unable to comply with such
requirements, exports of distillers grains could be dramatically reduced which could have a negative effect on the price of distillers grains in the U.S. and negatively affect our profitability. China, the largest buyer of distillers grains in the world, announced in June 2014 that it would stop issuing import permits for U.S. distillers grains due to the presence of a genetically

15


modified trait not approved by China for import. This announcement was followed in July 2014 by a new requirement by China of a certification by the U.S. government that distillers grains shipments to China are free of the genetically modified trait. Officials from the U.S and China have been unable to agree on testing procedures for distillers grains exported to China. If the certification requirements continue and U.S. producers can not satisfy those requirements, export demand of distillers grains could be significantly reduced as a result. If export demand of distillers grains is significantly reduced as a result, the price of distillers grains in the U.S. would likely continue to decline which would have a negative effect on our revenue and could impact our ability to profitably operate which could in turn reduce the value of our units.

If exports to Europe are decreased due to the imposition by the European Union of a tariff on U.S. ethanol, ethanol prices may be negatively impacted. The European Union imposed a tariff on ethanol which is produced in the United States and exported to Europe. If exports of ethanol to Europe decrease as a result, it could negatively impact the market price of ethanol in the United States. Any decrease in ethanol prices or demand may negatively impact our ability to profitably operate the ethanol plant.

Demand for ethanol may not continue to grow unless ethanol can be blended into gasoline in higher percentage blends for conventional automobiles. Currently, ethanol is blended with conventional gasoline for use in standard (non-flex fuel) vehicles to create a blend which is 10% ethanol and 90% conventional gasoline. In order to expand demand for ethanol, higher percentage blends of ethanol must be utilized in conventional automobiles. Such higher percentage blends of ethanol have become a contentious issue with automobile manufacturers and environmental groups having fought against higher percentage ethanol blends. Although there have been significant developments towards introduction of E15 in the marketplace, there are still obstacles to meaningful market penetration by E15. As a result, the approval of E15 may not significantly increase demand for ethanol.

Technology advances in the commercialization of cellulosic ethanol may decrease demand for corn based ethanol which may negatively affect our profitability. The current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based biomass, such as agricultural waste, forest residue, municipal solid waste, and energy crops. This trend is driven by the fact that cellulose-based biomass is generally cheaper than corn, and producing ethanol from cellulose-based biomass would create opportunities to produce ethanol in areas which are unable to grow corn. The Energy Independence and Security Act of 2007 and the 2008 Farm Bill offer a very strong incentive to develop commercial scale cellulosic ethanol. The statutory volume requirement in the RFS requires that 16 billion gallons per year of advanced bio-fuels be consumed in the United States by 2022. Additionally, state and federal grants have been awarded to several companies who are seeking to develop commercial-scale cellulosic ethanol plants. As a result, at least three companies have reportedly already begun producing on a commercial scale and a handful of other companies have begun construction on commercial scale cellulosic ethanol plants some of which are expected to be completed by the end of 2014. If an efficient method of producing ethanol from cellulose-based biomass is developed, we may not be able to compete effectively. If we are unable to produce ethanol as cost-effectively as cellulose-based producers, our ability to generate revenue and our financial condition will be negatively impacted.

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

We operate in an intensely competitive industry and compete with larger, better financed entities which could impact our ability to operate profitably.  There is significant competition among ethanol producers. There are numerous producer-owned and privately-owned ethanol plants planned and operating throughout the Midwest and elsewhere in the United States.  In addition, we have seen increased competition from oil companies who have purchased ethanol production facilities. We also face competition from outside of the United States. The largest ethanol producers include Archer Daniels Midland, Flint Hill Resources LP, Green Plains Renewable Energy, POET Biorefining and Valero Renewable Fuels, all of which are each capable of producing significantly more ethanol than we produce. Further, many believe that there will be further consolidation occurring in the ethanol industry in the near future which will likely lead to a few companies who control a significant portion of the ethanol production market. We may not be able to compete with these larger entities. These larger ethanol producers may be able to affect the ethanol market in ways that are not beneficial to us which could affect our financial performance. 
 
Competition from the advancement of alternative fuels may lessen the demand for ethanol.  Alternative fuels, gasoline oxygenates and ethanol production methods are continually under development. A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids, electric cars or clean burning gaseous fuels. Like ethanol, these emerging technologies offer an option to address worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. If these alternative technologies continue to expand and gain broad acceptance and become readily available to consumers for motor vehicle use, we may not be able to compete effectively.

16


This additional competition could reduce the demand for ethanol, resulting in lower ethanol prices that might adversely affect our results of operations and financial condition.
 
Consumer resistance to the use of ethanol based on the belief that ethanol is expensive, uses too much corn, adds to air pollution, harms engines and/or takes more energy to produce than it contributes may affect the demand for ethanol.  Certain individuals believe that use of ethanol will have a negative impact on gasoline prices at the pump and that ethanol uses too much of the available corn supply. Many also believe that ethanol adds to air pollution and harms car and truck engines. Still other consumers believe that the process of producing ethanol actually uses more fossil energy, such as oil and natural gas, than the amount of energy that is produced. These consumer beliefs could potentially be wide-spread and may be increasing as a result of recent efforts to increase the allowable percentage of ethanol that may be blended for use in conventional automobiles. If consumers choose not to buy ethanol based on these beliefs, it would affect the demand for the ethanol we produce which could negatively affect our profitability and financial condition.

Risks Related to Regulation and Governmental Action
    
Government incentives for ethanol production may be eliminated in the future, which could hinder our ability to operate at a profit. The ethanol industry is assisted by various federal ethanol production and tax incentives, including the RFS set forth in the Energy Policy Act of 2005. The RFS helps support a market for ethanol that might disappear without this incentive.
On November 15, 2013, the EPA announced a proposal to significantly reduce the RFS levels for 2014 to 15.21 billion gallons of which corn based ethanol could be used to satisfy only 13 billion gallons. This proposed rule would result in a lowering of the 2014 standard below the 2013 level of 13.8 billion gallons. The EPA also sought comment on several petitions it has received for partial waiver of the statutory volumes for 2014. The 60-day public comment period ended on January 28, 2014 and the rule was submitted by the EPA to the Office of Management and Budget ("OMB") for review on August 22, 2014. Furthermore, there have also been recent proposals in Congress to reduce or eliminate the RFS. On November 21, 2014, the EPA announced that it would delay finalizing the rule on the 2014 RFS standards until after the end of 2014. The EPA indicated that it intends to take action on the 2014 standards in 2015 prior to or in conjunction with action on the 2015 standards. If the EPA's proposal becomes a final rule significantly reducing the volume requirements under the RFS or if the RFS were to be otherwise reduced or eliminated by the exercise of the EPA waiver authority or by Congress, the market price and demand for ethanol could decrease which will negatively impact our financial performance.

The tariff that protected the United States ethanol industry expired at the end of 2011. The ethanol industry in the United States experienced increased competition from ethanol produced outside of the United States during 2012 which was likely at least in part due to the expiration of the tariff on imported ethanol. While ethanol imports decreased in 2013 and 2014, the expiration of the tariff could lead to an increase in the importation of ethanol produced in other countries, especially in areas of the United States that are easily accessible by international shipping ports which could result in an increase of ethanol supplies and decreased ethanol prices.

Changes in environmental regulations or violations of these regulations could be expensive and reduce our profitability.  We are subject to extensive air, water and other environmental laws and regulations.  In addition, some of these laws require our plant to operate under a number of environmental permits. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment.  A violation of these laws and regulations or permit conditions can result in substantial fines, damages, criminal sanctions, permit revocations and/or plant shutdowns.  In the future, we may be subject to legal actions brought by environmental advocacy groups and other parties for actual or alleged violations of environmental laws or our permits.  Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to spend considerable resources in order to comply with future environmental regulations. The expense of compliance could be significant enough to reduce our profitability and negatively affect our financial condition.
 
The California Low Carbon Fuel Standard may decrease demand for corn based ethanol which could negatively impact our profitability. California passed a Low Carbon Fuels Standard ("LCFS") which requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which reductions are measured using a lifecycle analysis. Management believes that these regulations could preclude corn based ethanol produced in the Midwest from being used in California. California represents a significant ethanol demand market. If the ethanol industry is unable to supply corn based ethanol to California, it could significantly reduce demand for the ethanol we produce. This could result in a reduction of our revenues and negatively impact our ability to profitably operate the ethanol plant.


17


ITEM 2. PROPERTIES

Our plant site is made up of two adjacent parcels which together total approximately 295 acres in east central Indiana near Union City, Indiana. The address of our plant is 1554 N. County Road 600 E., Union City, Indiana 47390. In November 2008, the plant was substantially completed and plant operations commenced. The plant consists of the following buildings:

A grains area, fermentation area, distillation - evaporation area;
A dryer/energy center area;
A tank farm;
An auxiliary area; and
An administration building.

Our plant is in excellent condition and is capable of functioning at over 100% of its 100 million gallons per year nameplate production capacity.

All of our tangible and intangible property, real and personal, serves as the collateral for the debt financing with First National Bank of Omaha, which is described below under "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations."

ITEM 3. LEGAL PROCEEDINGS

Patent Infringement

On June 27, 2008, we entered into a Tricanter Purchase and Installation Agreement with ICM, Inc. for the construction and installation of a Tricanter Oil Separation System. On February 12, 2010, GS CleanTech Corporation ("GS CleanTech") filed a lawsuit in the United States District Court for the Southern District of Indiana, claiming that the Company's operation of the oil recovery system manufactured and installed by ICM, Inc. infringes a patent claimed by GS CleanTech. GS CleanTech sought royalties and damages associated with the alleged infringement, as well as attorney's fees from the Company. GS CleanTech subsequently filed actions against at least fourteen other ethanol producing companies for infringement of its patent rights, adding several additional patents. GS CleanTech successfully petitioned for the cases to be joined in a multi-district litigation ("MDL") which was assigned to the United States District Court for the Southern District of Indiana (Case No. 1:10-ml-02181). We have since answered and counterclaimed that the patent claims at issue are invalid and that the Company is not infringing.

Motions for summary judgment were filed by the defendants, including the Company, and GS CleanTech. Meanwhile, GS Cleantech filed suit against another group of defendants which were joined with the MDL. On October 23, 2014, the United States District Court granted summary judgment finding that all of the patents claimed by GS CleanTech were invalid and that the Company had not infringed. Certain of our counterclaims against GS CleanTech were not resolved by the rulings on summary judgment and are still pending. We expect that GS CleanTech will appeal the ruling on the motions for summary judgment.

On February 16, 2010, ICM, Inc. agreed to indemnify, at ICM's expense, the Company from and against all claims, demands, liabilities, actions, litigations, losses, damages, costs and expenses, including reasonable attorney's fees arising out of any claim of infringement of patents, copyrights or other intellectual property rights by reason of our purchase and use of the oil recovery system and agrees to defend the Company. Several of the other defendants also use equipment and processes provided by ICM, Inc. ICM, Inc. has, and we expect it will continue, to vigorously defend itself and the Company in this lawsuit and in any appeal filed by GS CleanTech. If GS CleanTech were to be successful in any appeal filed and allowed to continue to pursue its claims, we estimate that damages, if awarded, would be based on a reasonable royalty to, or lost profits of, GS CleanTech. Because of its October 23, 2014 ruling, it seems unlikely that the District Court would deem the case exceptional. However, in the event it would be deemed to be exceptional, attorney's fees may be awarded and are likely to be $1,000,000 or more. ICM, Inc. has also agreed to indemnify us. However, in the event that damages were to be awarded, if ICM, Inc. does not fully indemnify us for any reason, we could be liable and could also be required to cease use of our oil separation process and seek out a replacement or cease oil production altogether.

Air Emissions Permit

In January 2010, we applied for a Title V Operating Permit for air emissions from the Indiana Department of Environmental Management ("IDEM"). IDEM issued the permit on August 5, 2010. This permit increased our operating capacity and emission limits. The new permit increased the Company's potential to emit criteria pollutants, which includes particulate matter. Each criteria pollutant must be less than 250 tons per consecutive twelve month period. This provision was based on a rule change issued by the Environmental Protection Agency ("EPA") on May 1, 2007, which allowed ethanol plants to emit up to 250 tons per

18


criteria pollutant, excluding fugitive dust, instead of only 100 tons per criteria pollutant, including fugitive dust.

On September 8, 2010, the National Resource Defense Council ("NRDC") filed an administrative appeal challenging IDEM's authority to grant the Title V Operating Permit. NRDC argued that IDEM failed to incorporate the May 1, 2007 EPA rule change into the EPA - approved State Implementation Plan ("SIP") and that as a result, the Permit was improperly issued as the existing SIP still limited ethanol plants to 100 tons of particulate matter. The NRDC appeal regarding our Title V Operating Permit was stayed pending resolution of similar administrative appeals filed by NRDC against other ethanol plants in Indiana.
 
NRDC was successful in one of its administrative appeals, resulting in a January 11, 2011 ruling by an administrative law judge that IDEM cannot change its interpretation of Indiana's rules to match the EPA's rules without first revising the SIP.  That decision was later reversed on appeal in a decision issued on May 15, 2012 by the Marion County Superior Court.   On April 23, 2013, the Indiana Court of Appeals reversed the earlier decision by the Marion County Superior Court. IDEM filed a petition for rehearing with the Indiana Court of Appeals, which was denied on July 31, 2013. On September 2, 2014, the Indiana Supreme Court ruled in favor of IDEM reversing the Indiana Court of Appeals and affirming the Marion County Superior Court decision.

NRDC subsequently filed a motion to dismiss its challenge to our Title V Operating Permit. An order dismissing the challenge was entered on September 23, 2014.
 

ITEM 4. MINE SAFETY DISCLOSURES

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
As of November 25, 2014, we had approximately 14,606 membership units outstanding and approximately 1,113 unit holders of record. There is no public trading market for our units. However, we have established through FNC Ag Stock, LLC a Unit Trading Bulletin Board, a private online matching service, in order to facilitate trading among our members.  The Unit Trading Bulletin Board has been designed to comply with federal tax laws and IRS regulations establishing an “alternative trading service,” as well as state and federal securities laws.  Our Unit Trading Bulletin Board consists of an electronic bulletin board that provides a list of interested buyers with a list of interested sellers, along with their non-firm price quotes.  The Unit Trading Bulletin Board does not automatically affect matches between potential sellers and buyers and it is the sole responsibility of sellers and buyers to contact each other to make a determination as to whether an agreement to transfer units may be reached.  We do not become involved in any purchase or sale negotiations arising from our Unit Trading Bulletin Board and have no role in effecting the transactions beyond approval, as required under our operating agreement, and the issuance of new certificates.  We do not give advice regarding the merits or shortcomings of any particular transaction.  We do not receive, transfer or hold funds or securities as an incident of operating the Unit Trading Bulletin Board.  We do not receive any compensation for creating or maintaining the Unit Trading Bulletin Board.  In advertising our alternative trading service, we do not characterize Cardinal Ethanol as being a broker or dealer or an exchange.  We do not use the Unit Trading Bulletin Board to offer to buy or sell securities other than in compliance with the securities laws, including any applicable registration requirements.
 
There are detailed timelines that must be followed under the Unit Trading Bulletin Board Rules and Procedures with respect to offers and sales of membership units.  All transactions must comply with the Unit Trading Bulletin Board Rules, our operating agreement, and are subject to approval by our board of directors.

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

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


19


Selling Quarter
 
Low Price
 
High Price
 
Average Price
 
# of
Units Traded
2013 1st 
 
$
3,500

 
$
3,500

 
$
3,500

 
4

2013 2nd 
 
$
3,500

 
$
4,075

 
$
3,800

 
37

2013 3rd 
 
$
3,950

 
$
4,750

 
$
4,125

 
31

2013 4th 
 
$
4,365

 
$
5,125

 
$
4,790

 
54

2014 1st 
 
$
5,150

 
$
5,731

 
$
5,553

 
49

2014 2nd 
 
$
5,700

 
$
8,000

 
$
6,261

 
59

2014 3rd 
 
$
11,600

 
$
12,600

 
$
12,285

 
13

2014 4th 
 
$
12,400

 
$
20,500

 
$
15,018

 
39

 
The following table contains the bid and asked prices that were posted on the Company's alternative trading service bulletin board and includes some transactions that were not completed. The Company believes the table above more accurately describes the trading value of its units as the bid and asked prices below include some offers that never resulted in completed transactions. The information was compiled by reviewing postings that were made on the Company's alternative trading service bulletin board.
Listing Quarter
 
Low Price
 
High Price
 
Average Price
 
# of
Units Listed
2013 1st 
 
$
3,500

 
$
3,900

 
$
3,809

 
22

2013 2nd 
 
$
3,300

 
$
4,050

 
$
3,832

 
53

2013 3rd 
 
$
3,850

 
$
4,750

 
$
4,063

 
23

2013 4th 
 
$
4,365

 
$
5,125

 
$
4,790

 
54

2014 1st 
 
$
5,000

 
$
6,300

 
$
5,494

 
77

2014 2nd 
 
$
5,700

 
$
15,500

 
$
8,223

 
53

2014 3rd 
 
$
12,250

 
$
12,600

 
$
12,430

 
30

2014 4th 
 
$
18,800

 
$
30,000

 
$
25,901

 
105

 
We made distributions of $4,547 per unit to our members during our fiscal year ended September 30, 2014. We made distributions of $382 per unit to our members during our fiscal year ended September 30, 2013. Our board of directors has complete discretion over the timing and amount of distributions to our members. Our expectations with respect to our ability to make future distributions are discussed in greater detail in "Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

Performance Graph

The following graph shows a comparison of cumulative total member return since September 30, 2009, calculated on a dividend reinvested basis, for the Company, the NASDAQ Composite Index (the “NASDAQ”) and an index of other companies that have the same SIC code as the Company (the “Industry Index”). The graph assumes $100 was invested in each of our units, the NASDAQ, and the Industry Index on September 30, 2009. Data points on the graph are annual. Note that historic unit price performance is not necessarily indicative of future unit price performance.


20



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


21


ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial and operating data as of the dates and for the periods indicated. The selected balance sheet financial data as of the year ended September 30, 2012, 2011 and 2010 and the selected income statement data and other financial data for the years ended September 30, 2011 and 2010 have been derived from our audited financial statements that are not included in this Form 10-K. The selected balance sheet financial data for the years ended September 30, 2014 and 2013 and the selected income statement data and other financial data for the years ended September 30, 2014, 2013 and 2012 have been derived from the audited Financial Statements included elsewhere in this Form 10-K. You should read the following table in conjunction with "Item 7- Management Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the accompanying notes included elsewhere in this Form 10-K. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following financial data.

Statement of Operations Data:
 
2014
 
2013
 
2012
 
2011
 
2010
Revenues
 
$
337,355,515

 
$
357,611,814

 
$
321,194,387

 
$
337,019,930

 
$
224,807,338

 
 
 
 
 
 
 
 
 
 
 
Cost Goods Sold
 
244,414,762

 
324,122,396

 
311,971,054

 
302,690,475

 
195,880,762

 
 
 
 
 
 
 
 
 
 
 
Gross Profit
 
92,940,753

 
33,489,418

 
9,223,333

 
34,329,455

 
28,926,576

 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
4,945,382

 
4,697,637

 
4,680,729

 
4,250,752

 
3,735,530

 
 
 
 
 
 
 
 
 
 
 
Operating Income
 
87,995,371

 
28,791,781

 
4,542,604

 
30,078,703

 
25,191,046

 
 
 
 
 
 
 
 
 
 
 
Other Expense, Net
 
(733,697
)
 
(2,436,357
)
 
(2,690,624
)
 
(4,569,566
)
 
(4,740,467
)
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
$
87,261,674

 
$
26,355,424

 
$
1,851,980

 
$
25,509,137

 
$
20,450,579

 
 
 
 
 
 
 
 
 
 
 
Weighted Average Units Outstanding
 
14,606

 
14,606

 
14,606

 
14,606

 
14,606

 
 
 
 
 
 
 
 
 
 
 
Net Income Per Unit
 
$
5,974.37

 
$
1,804.42

 
$
126.80

 
$
1,746.48

 
$
1,400.15

 
 
 
 
 
 
 
 
 
 
 
Cash Distributions Per Unit
 
$
4,547

 
$
382

 
$
430

 
$

 
$
60

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
2014
 
2013
 
2012
 
2011
 
2010
Current Assets
 
$
60,034,736

 
$
57,914,023

 
$
35,973,410

 
$
49,830,340

 
$
31,898,901

 
 
 
 
 
 
 
 
 
 
 
Net Property and Equipment
 
105,632,776

 
110,311,216

 
117,825,363

 
125,169,711

 
132,780,346

 
 
 
 
 
 
 
 
 
 
 
Other Assets
 
718,553

 
554,837

 
730,992

 
876,699

 
851,732

 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
166,386,065

 
168,780,076

 
154,529,765

 
175,876,750

 
165,530,979

 
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
13,380,637

 
13,149,364

 
16,662,886

 
18,628,361

 
20,562,149

 
 
 
 
 
 
 
 
 
 
 
Long-Term Debt
 

 
24,154,710

 
27,943,975

 
42,960,017

 
56,188,380

 
 
 
 
 
 
 
 
 
 
 
Derivative Instrument - Interest Rate Swap - (Long Term)
 

 

 
628,358

 
1,961,239

 
3,130,402

 
 
 
 
 
 
 
 
 
 
 
Members' Equity
 
153,005,428

 
131,476,002

 
109,294,546

 
112,327,133

 
85,650,048


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


22


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

Results of Operations for the Fiscal Years Ended September 30, 2014 and 2013

The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the fiscal years ended September 30, 2014 and 2013:
 
2014
 
2013
Statement of Operations Data
Amount
 
%
 
Amount
 
%
Revenues
$
337,355,515

 
100.0

 
$
357,611,814

 
100.0

Cost of Goods Sold
244,414,762

 
72.5

 
324,122,396

 
90.6

Gross Profit
92,940,753

 
27.5

 
33,489,418

 
9.4

Operating Expenses
4,945,382

 
1.5

 
4,697,637

 
1.3

Operating Income
87,995,371

 
26.0

 
28,791,781

 
8.1

Other Expense, net
(733,697
)
 
(0.2
)
 
(2,436,357
)
 
(0.7
)
Net Income
$
87,261,674

 
25.8

 
$
26,355,424

 
7.4

    
Revenues

Our revenues from operations come from three primary sources: sales of fuel ethanol, distillers grains and corn oil. The following table shows the sources of our revenue for the fiscal years ended September 30, 2014 and 2013.

 
2014
 
2013
Revenue Source
Amount
% of Revenues
 
Amount
% of Revenues
Ethanol Sales
$
264,292,640

78.3
%
 
$
268,890,949

75.2
%
Distillers Grains Sales
61,708,274

18.3

 
78,000,528

21.8

Corn Oil Sales
10,514,166

3.1

 
9,940,405

2.8

Other Revenue
840,435

0.3

 
779,932

0.2

Total Revenues
$
337,355,515

100
%
 
$
357,611,814

100
%

Ethanol
    
Our revenues from ethanol decreased for our fiscal year ended September 30, 2014 as compared to our fiscal year ended September 30, 2013. This decrease in revenues is primarily the result of a decrease in the average price per gallon of ethanol sold for the fiscal year ended September 30, 2014 as compared to the same period in 2013.
    
We experienced an increase in ethanol gallons sold of approximately 6.04% for the fiscal year ended September 30, 2014 as compared to the same period in 2013 resulting primarily from increasing production run rates. We are currently operating at approximately 18% above our nameplate capacity. Management anticipates that the gallons of ethanol sold by our plant will remain relatively consistent for the fiscal year ended September 30, 2015.

Our average price per gallon of ethanol sold for the fiscal year ended September 30, 2014 was approximately 7.41% lower than our average price per gallon of ethanol sold for the same period in 2013. Ethanol prices were lower towards the beginning of our fiscal year due primarily to significantly lower corn prices as changes in ethanol prices are typically directionally consistent with changes in corn prices. During our second fiscal quarter, ethanol prices were positively impacted by increased ethanol exports and higher than expected gasoline demand and lower inventories as some plants curtailed production in response to inadequate rail logistics. Ethanol prices again trended downwards during our third and fourth fiscal quarters primarily as a result of declining corn prices and increased national ethanol supply due in part to improved rail logistics. Although the average price per gallon of ethanol sold for the fiscal year ended September 30, 2014 is lower as compared to the same period in 2013, the decline in ethanol prices has been less than the corresponding decline in corn prices creating a favorable spread between the price of ethanol and the price of corn and resulted in positive operating margins throughout our fiscal year ended September 30, 2014.


23


Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. Ethanol prices are expected to decrease in correlation with corn prices if the price of corn continues to fall as a result of a plentiful harvest. A softening in domestic demand in combination with increased ethanol production could further increase ethanol stocks which could have a negative effect on ethanol prices unless additional demand can be created from foreign markets. In addition, if the renewable volume obligations set forth in the RFS were to be reduced as proposed by the EPA, demand for ethanol could decrease further which will negatively impact ethanol prices.

In the ordinary course of business, we enter into forward contracts for our commodity purchases and sales. At September 30, 2014, we have no forward ethanol sales contracts. As of September 30, 2014, we have open short (selling) positions for 30,660,000 gallons of ethanol and 11,970,000 open long (buying) position for gallons of ethanol on the New York Mercantile Exchange to hedge our forward corn contracts and ethanol inventory. Our ethanol derivatives are forecasted to settle through April 2015. For the fiscal years ended September 30, 2014 and 2013, we recorded net gains on our ethanol derivative contracts of $3,334,054 and losses of $55,761, respectively. These gains and losses were recorded with our revenues in the statements of operations and comprehensive income.

Distillers Grains

Our revenues from distillers grains decreased in the fiscal year ended September 30, 2014 as compared to the same period in 2013. This decrease in revenues is primarily the result of a decrease in the average market price per ton of distillers grains sold for the period ended September 30, 2014 compared to the same period in 2013. The average price per ton of distillers grains sold for the fiscal year ended September 30, 2014 was approximately 21.37% lower than the average price per ton of distillers grains sold for the same period in 2013. This decline in the market price of distillers grains is due primarily to significantly lower corn prices during the fiscal year ended September 30, 2014 as compared to the same period in 2013 as market prices for distillers grains change in relation to the prices of other animal feeds, such as corn and also soybean meal. In addition, while an increase in foreign export supported the price of distillers grains as a percentage of corn value during our first and second fiscal quarters, we experienced a weakening in demand from foreign markets during our third and fourth fiscal quarters. China, who is a significant consumer of exported distillers grains, announced in June that it would stop issuing import permits for distillers grains from the United States due to the presence in some shipments of an unapproved genetically modified organism. This announcement was followed in July 2014 by a new requirement by China of a certification by the United States government that distillers grains shipments to China are free of the genetically modified trait. Officials from the United States and China have been unable to agree on testing procedures for distillers grains exported to China. Management expects distillers grains prices to generally follow corn which is expected to decrease in response to a plentiful harvest. Distillers grains prices will also likely decline due to lower demand if end-users switch to lower priced alternatives or if the decrease in export demand persists particularly from China.
    
We experienced an increase of approximately 0.51% in distillers grains tons sold in the fiscal year ended September 30, 2014 as compared to the same period in 2013 due primarily to increased plant production run rates. Management anticipates that the distillers grains sold by our plant will remain relatively consistent for the fiscal year ended September 30, 2015.

At September 30, 2014, we have forward distillers grains contracts of approximately 105,000 tons at various prices for various delivery periods through June 2015.

Corn Oil

Our revenues from corn oil sales increased approximately 5.77% in the fiscal year ended September 30, 2014 as compared to the same period in 2013 which was primarily a result of an increase in production rates of corn oil in the fiscal year ended September 30, 2014 as compared to the same period in 2013. The average price per pound of corn oil was approximately 15.79% lower for the fiscal year ended September 30, 2014 as compared to the same period in 2013.

Corn oil prices have been relatively steady throughout our fiscal year and management expects corn oil prices will remain relatively steady in the near term. However, corn oil prices could decrease due to additional plants entering into the market and producing corn oil which could result in an oversupply negatively affecting prices unless additional demand can be created. Management expects corn oil production will remain relatively consistent for the fiscal year ended September 30, 2015.

Cost of Goods Sold

Our cost of goods sold as a percentage of revenues was approximately 72.5% for the fiscal year ended September 30, 2014 as compared to approximately 90.6% for the same period in 2013. This decrease in cost of goods sold as a percentage of revenues was the result of decreased corn prices relative to ethanol prices for the fiscal year ended September 30, 2014 as compared to the same period in 2013. Our two largest costs of production are corn and natural gas.

24



Corn

Our largest cost associated with the production of ethanol, distillers grains and corn oil is corn cost. During the fiscal year ended September 30, 2014, we used approximately 3.79% more bushels of corn to produce our ethanol, distillers grain and corn oil as compared to the same period in 2013. More bushels were used in production because we produced more gallons of ethanol during the fiscal year ended September 30, 2014 compared to the same period in 2013. During the fiscal year ended September 30, 2014, our average price paid per bushel of corn decreased approximately 34.31% as compared to the same period in 2013 due to a plentiful 2013 harvest and in response to reports of a record corn crop for 2014. Corn prices were lower towards the beginning of our fiscal year trending upwards somewhat during our second fiscal quarter. However, corn prices overall were low due to increased supply in our corn supply region. Adequate local corn supplies helped keep corn prices relatively steady during much of our third fiscal quarter until prices declined towards the end of our third fiscal quarter and during our fourth fiscal in response to USDA crop reports projecting a larger crop than previously expected. Management is currently optimistic that corn prices will remain lower throughout the winter as a result of an increase in supply from an abundant 2014 harvest. However, weather, world supply and demand, current and anticipated stocks, agricultural policy and other factors can contribute to volatility in corn prices. If corn prices rise again, it will have a negative effect on our operating margins unless the price of ethanol and distillers grains out paces rising corn prices.

In the ordinary course of business, we entered into forward purchase contracts for our commodity purchases. At September 30, 2014, we have forward corn purchase contracts for various delivery periods through January 2016 for a total commitment of approximately $14,042,000. Approximately $2,459,000 of the forward corn purchases were with related parties. As of September 30, 2014, we also have open short (selling) positions for 1,695,000 bushels of corn on the Chicago Board of Trade and long (buying) positions for 4,460,000 bushels of corn on the Chicago Board of Trade to hedge our forward corn contracts and corn inventory. Our corn derivatives are forecasted to settle through March 2016. For the fiscal years ended September 30, 2014 and 2013, we recorded net losses on our corn derivative contracts of $5,015,169 and gains of $4,610,942, respectively. These losses and gains were recorded against cost of goods sold in the statements of operations and comprehensive income. Volatility in the price of corn could significantly impact our cost of goods sold.
 
Natural Gas

Our natural gas cost was higher during our fiscal year ended September 30, 2014 as compared to the fiscal year ended September 30, 2013. This increase in cost of natural gas for the fiscal year ended September 30, 2014 as compared to the same period in 2013 was primarily the result of an increase of approximately 49.76% in the average price per MMBTU of our natural gas due to exceptionally cold weather experienced throughout the United States. We also used approximately 0.27% more natural gas for the fiscal year ended September 30, 2014 as compared to the same period in 2013 due to higher production run rates.

Natural gas prices were lower towards the beginning of our fiscal year but increased during our second fiscal quarter due to exceptionally cold weather experienced throughout the United States. Natural gas prices stabilized during our third fiscal quarter declining near the end of the third quarter and during our fourth fiscal quarter in response to warmer weather. Unless we experience a catastrophic weather event that would cause problems related to the supply of natural gas, management anticipates that natural gas prices will continue at current levels during the fall as natural gas stocks are replenished, then likely rising during the late fall and winter from seasonal demand.

As of September 30, 2014, we have 150,000 open short (selling) positions of natural gas on the New York Mercantile Exchange to hedge our natural gas purchases. We recorded net gains on our natural gas derivative contracts of $51,257 and $24,647 for the fiscal years ended September 30, 2014 and 2013, respectively. These net gains were recorded in our cost of goods sold in our statements of operations and comprehensive income.
    
Operating Expense

Our operating expenses as a percentage of revenues were approximately 1.5% and 1.3% for the fiscal years ended September 30, 2014 and 2013, respectively. Operating expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees and other general administrative costs. Our efforts to optimize efficiencies and maximize production may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses generally do not vary with the level of production at the plant, we expect our operating expenses to remain steady into and throughout our 2015 fiscal year.

25



Operating Income

Our income from operations for the fiscal year ended September 30, 2014 was approximately 26% of our revenues compared to operating income of approximately 8% of revenues for the same period in 2013. The increase in operating income for the fiscal year ended September 30, 2014 was primarily the result of decreases in the cost of corn relative to the price of ethanol and distillers grains.

Other Expense

We had other expense of approximately 0.2% of revenues for the fiscal year ended September 30, 2014 compared to other expense of approximately 0.7% of revenues for the same period in 2013. This decrease in other expense for the fiscal year ended September 30, 2014, was primarily due to debt repayment which reduced our interest expense.

Results of Operations for the Fiscal Years Ended September 30, 2013 and 2012
 
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the fiscal years ended September 30, 2013 and 2012:
 
2013
 
2012
Statement of Operations Data
Amount
 
%
 
Amount
 
%
Revenues
$
357,611,814

 
100.0

 
$
321,194,387

 
100.0

Cost of Goods Sold
324,122,396

 
90.6

 
311,971,054

 
97.1

Gross Profit
33,489,418

 
9.4

 
9,223,333

 
2.9

Operating Expenses
4,697,637

 
1.3

 
4,680,729

 
1.5

Operating Income
28,791,781

 
8.1

 
4,542,604

 
1.4

Other Expense, net
(2,436,357
)
 
(0.7
)
 
(2,690,624
)
 
(0.8
)
Net Income
$
26,355,424

 
7.4

 
$
1,851,980

 
0.6

    
Revenues

Our revenues from operations come from three primary sources: sales of fuel ethanol, distillers grains and corn oil. The following table shows the sources of our revenue for the fiscal years ended September 30, 2013 and 2012.

 
2013
 
2012
Revenue Source
Amount
% of Revenues
 
Amount
% of Revenues
Ethanol Sales
$
268,890,949

75.2
%
 
$
250,212,033

77.9
%
Distillers Grains Sales
78,000,528

21.8

 
61,949,043

19.3

Corn Oil Sales
9,940,405

2.8

 
8,749,940

2.7

Other Revenue
779,932

0.2

 
283,371

0.1

Total Revenues
$
357,611,814

100
%
 
$
321,194,387

100
%

Ethanol
    
Our revenues from ethanol increased for our fiscal year ended September 30, 2013 as compared to our fiscal year ended September 30, 2012. Our increase in revenues was the result of higher ethanol production rates and higher ethanol prices on average in the fiscal year ended September 30, 2013 as compared to the same period in 2012. During the fiscal year ended September 30, 2013, we produced approximately 11% above our nameplate capacity for ethanol production. Our average price per gallon of ethanol sold for the fiscal year ended September 30, 2013 was approximately 5.19% higher than our average price per gallon of ethanol sold for the same period in 2012. We also experienced an increase in the amount of ethanol sold of approximately 2.14% for fiscal year ended September 30, 2013 as compared to the same period in 2012 resulting primarily from an increase in ethanol production rates.
    

26


For the fiscal years ended September 30, 2013 and 2012, we recorded net losses on our ethanol derivative contracts of $55,761 and net gains of $974,555, respectively. These gains and losses were recorded with our revenues in the statements of operations and comprehensive income.

Distillers Grains

Our revenues from distillers grains increased in the fiscal year ended September 30, 2013 as compared to the same period in 2012. This increase was primarily the result of an increase in the average price per ton of distillers grains along with higher sales volumes in the fiscal year ended September 30, 2013 as compared to the same period in 2012. Our average price per ton of distillers grains sold for the fiscal year ended September 30, 2013 was approximately 20.98% higher than our average price per ton of distillers grains sold for the same period in 2012. We also experienced an increase in tons of distillers grains sold of approximately 3.79% for fiscal year ended September 30, 2013 as compared to the same period in 2012 resulting primarily from an increase in ethanol production rates.
    
Corn Oil

Our revenue from corn oil sales increased in the fiscal year ended September 30, 2013 as compared to the same period in 2012 which was primarily a result of higher yields of corn oil production in the fiscal year ended September 30, 2013 as compared to the same period in 2012 which offset a slight decrease in corn oil prices. During the fiscal year ended September 30, 2013, we sold approximately 23.58% more corn oil as compared to the same period in 2012. The average price per pound of corn oil was approximately 7.32% lower for the fiscal year ended September 30, 2013 as compared to the same period in 2012.

Cost of Goods Sold

Our cost of goods sold as a percentage of revenues was approximately 91% for the fiscal year ended September 30, 2013 as compared to approximately 97% for the same period in 2012. This decrease in cost of goods sold as a percentage of revenues was primarily the result of a decrease in the price of corn relative to the price of ethanol and distillers grains for the fiscal year ended September 30, 2013 as compared to the same period in 2012. Our two largest costs of production are corn and natural gas.

Corn

During the fiscal year ended September 30, 2013, we used approximately 2.14% more bushels of corn to produce our ethanol, distillers grain and corn oil as compared to the same period in 2012 due to higher ethanol production rates. During the fiscal year ended September 30, 2013, our average price per bushel of corn increased approximately 3.45% as compared to the same period in 2012.

For the fiscal years ended September 30, 2013 and 2012, we recorded net gains on our corn derivative contracts of $4,610,942 and net losses of $7,004,120, respectively. These gains and losses were recorded against cost of goods sold in the statements of operations and comprehensive income.

Natural Gas

During our fiscal year ended September 30, 2013, we purchased approximately 1.63% more MMBTU's of natural gas
as compared to the same period in 2012. Management attributes this increase in natural gas to the increased ethanol production during the year. During the fiscal year ended September 30, 2013, the average price per MMBTU of natural gas increased approximately 25.77% as compared to the same period in 2012.
    
For the fiscal years ended September 30, 2013 and 2012, we recorded net gains of $24,647 and net losses of $60,224, respectively on our natural gas derivative contracts. These net gains and losses were recorded in our cost of good sold in our statements of operations and comprehensive income.

Operating Expense

Our operating expenses as a percentage of revenues were approximately 1% for the fiscal years ended September 30, 2013 and 2012. Operating expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees and other general administrative costs. Our efforts to optimize efficiencies and maximize production may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses generally do not vary with the level of production at the plant, we expect our operating expenses to remain steady.


27


Operating Income

Our income from operations for the fiscal year ended September 30, 2013 was approximately 8% of our revenues compared to an operating income of approximately 1% of our revenues for the same period in 2012. The increase in operating income for the fiscal year ended September 30, 2013 compared to the same period in 2012 was primarily the result of increased ethanol production levels and increases in the price of ethanol and distillers grains relative to the cost of corn.

Other Expense

Our other expense for the fiscal year ended September 30, 2013 was approximately 0.7% of our revenues compared to other expense of approximately 0.8% of revenues for the same period in 2012. Our other expense for the fiscal year ended September 30, 2013 and 2012 consisted primarily of interest expense.

Changes in Financial Condition for the Fiscal Year Ended September 30, 2014

The following table highlights the changes in our financial condition for the fiscal years ended September 30, 2014 and 2013:

 
September 30, 2014
 
September 30, 2013
Current Assets
$
60,034,736

 
$
57,914,023

Current Liabilities
13,380,637

 
13,149,364

Long-term Liabilities

 
24,154,710

Member's Equity
$
153,005,428

 
$
131,476,002


We experienced an increase in our total current assets at September 30, 2014 compared to September 30, 2013. The increase is primarily due to an increase in cash of approximately $3,515,000 at September 30, 2014 as compared to September 30, 2013 due to increased operating margins. We also experienced an increase in commodity derivative instruments of approximately $1,681,000 at September 30, 2014 as compared to September 30, 2013. These increases in total current assets were partially offset by a decrease in restricted cash of approximately $974,000 and a decrease in inventories of approximately $2,899,000 due to less inventories on hand and a decline in the average prices of those inventories.

We experienced a decrease in our total current liabilities at September 30, 2014 compared to September 30, 2013. The decrease is primarily due to a decrease in our current maturities of long-term debt of approximately $3,789,000 at September 30, 2014 as compared to September 30, 2013 due to paying off our debt in October 2013. This decrease in total current liabilities was partially offset by an increase in our commodity derivative instruments of approximately $1,090,000 at September 30, 2014 as compared to September 30, 2013 and an increase of approximately $3,055,000 in our accounts payable related to corn due to producers delaying payment on corn they have already delivered.

We experienced a decrease in our long-term liabilities as of September 30, 2014 compared to September 30, 2013. At September 30, 2014, we had no outstanding borrowings in the form of long-term loans, compared to approximately $24,155,000 at September 30, 2013. The decrease is due to our paying the balance of our Declining Note and terminating our interest rate swap in October 2013.

Liquidity and Capital Resources

Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash from our operations to continue to operate the ethanol plant for the next 12 months. However, we may seek additional credit in order to complete certain capital improvements as described below. We do not anticipate seeking additional equity financing during our 2015 fiscal year. However, should we experience unfavorable operating conditions in the ethanol industry that prevent us from profitably operating the ethanol plant, we could have difficulty maintaining our liquidity and may need to rely on our revolving lines of credit for operations.

28


    
Comparison of Cash Flows for Fiscal Years Ended September 30, 2014 and 2013

The following table shows cash flows for the fiscal year ended September 30, 2014 and 2013:

 
 
2014
 
2013
Net cash provided by operating activities
 
$
101,839,992

 
$
33,430,374

Net cash used for investing activities
 
(3,967,259
)
 
(683,121
)
Net cash used for financing activities
 
(94,357,457
)
 
(9,213,496
)
Net increase in cash
 
3,515,276

 
23,533,757

Cash, beginning of period
 
24,216,700

 
682,943

Cash, end of period
 
$
27,731,976

 
$
24,216,700


Cash Flow from Operations

We experienced an increase in our cash flow from operations for the fiscal year ended September 30, 2014 as compared to the same period in 2013. Approximately $101,840,000 of cash was provided by operating activities for the fiscal year ended September 30, 2014 as compared to approximately $33,430,000 provided by operating activities for the fiscal year ended September 30, 2013. This was primarily due to an increase in our net income from operations for the fiscal year ended September 30, 2014 to approximately $87,262,000 as compared to net income of approximately $26,355,000 for the same period in 2013. Other changes which resulted in an increase in our cash flow from operations were inventories increased approximately $3,893,000 and accounts payable corn increased approximately $6,913,000.

Cash Flow Used for Investing Activities

Cash used for investing activities was approximately $3,967,000 for the fiscal year ended September 30, 2014 as compared to approximately $683,000 for the same period in 2013. Cash used for investing activities increased due to an increase in capital expenditures for the construction of a new 730,000 bushel grain bin for the fiscal year ended September 30, 2014 as compared to the same period in 2013. This is explained in greater detail below in our discussion of capital improvements.
    
Cash Flow Used for Financing Activities

Cash used for financing activities was approximately $94,357,000 for the fiscal year ended September 30, 2014 as compared to cash used in financing activities of approximately $9,213,000 for the same period in 2013. This increase was primarily due to an increase in net payments on long term debt to approximately $27,944,000 for the fiscal year ended September 30, 2014 as compared to approximately $3,634,000 for the fiscal year ended September 30, 2013. We also paid distributions of approximately $66,413,000 for the fiscal year ended September 30, 2014 as compared to approximately $5,579,000 for the same period in 2013.

Our liquidity, results of operations and financial performance will be impacted by many variables, including the market price for commodities such as, but not limited to, corn, ethanol and other energy commodities, as well as the market price for any co-products generated by the facility and the cost of labor and other operating costs.  Assuming future relative price levels for corn, ethanol and distillers grains remain consistent with the relative price levels as of September 30, 2014, we expect operations to generate adequate cash flows to maintain operations. This expectation assumes that we will be able to sell all the ethanol that is produced at the plant.    
Comparison of Cash Flows for Fiscal Years Ended September 30, 2013 and 2012

The following table shows cash flows for the fiscal year ended September 30, 2013 and 2012:


29


 
 
2013
 
2012
Net cash provided by operating activities
 
$
33,430,374

 
$
18,003,110

Net cash used for investing activities
 
(683,121
)
 
(1,231,316
)
Net cash used for financing activities
 
(9,213,496
)
 
(26,890,923
)
Net increase (decrease) in cash
 
23,533,757

 
(10,119,129
)
Cash, beginning of period
 
682,943

 
10,802,072

Cash, end of period
 
$
24,216,700

 
$
682,943


Cash Flow from Operations

We experienced an increase in our cash flow from operations for the fiscal year ended September 30, 2013 as compared to the same period in 2012. Approximately $33,430,000 of cash was provided by operating activities for the fiscal year ended September 30, 2013 as compared to approximately $18,003,000 provided by operating activities for the fiscal year ended September 30, 2012. This was primarily due to an increase in our net income from operations for the fiscal year ended September 30, 2013 to approximately $26,355,000 as compared to net income of approximately $1,852,000 for the same period in 2012.

Cash Flow Used for Investing Activities

Cash used for investing activities was approximately $683,000 for the fiscal year ended September 30, 2013 as compared to approximately $1,231,000 for the same period in 2012. Cash used for investing activities decreased due to a decrease in capital expenditures and an increase in investment proceeds which together more than offset an increase in payments for construction in process for the fiscal year ended September 30, 2013 as compared to the same period in 2012.
    
Cash Flow Used for Financing Activities

Cash used for financing activities was approximately $9,213,000 for the fiscal year ended September 30, 2013 as compared to cash used for financing activities of approximately $26,891,000 for the same period in 2012. This decrease was primarily due to a decrease in net payments on long term debt to approximately $3,634,000 for the fiscal year ended September 30, 2013 as compared to approximately $20,608,000 for the fiscal year ended September 30, 2012. We also paid distributions of approximately $5,579,000 for the fiscal year ended September 30, 2013 as compared to approximately $6,281,000 for the same period in 2012.

Short and Long Term Debt Sources

On December 19, 2006, we entered into a loan agreement with First National Bank of Omaha ("FNBO") establishing a senior credit facility for the construction of our plant. The credit facility was in the amount of $96,000,000, consisting of an $83,000,000 construction note, a $10,000,000 revolving line of credit and a $3,000,000 letter of credit. We also entered into an interest rate swap agreement for $41,500,000 of the construction term loan in order to achieve a fixed rate on a portion of this loan. The term loans had a maturity of five years with a ten-year amortization and were set to mature on April 8, 2014.
On June 10, 2013, we closed on a new loan agreement with FNBO, the First Amended and Restated Construction Loan Agreement which replaces the earlier agreement and establishes two new notes, the Declining Revolving Note ("Declining Note") and the Revolving Credit Note. In exchange, we granted liens on all property (real and personal, tangible and intangible) which include, among other things, a mortgage on the property, a security interest on commodity trading accounts, and assignment of material contracts. On October 8, 2013, we executed a First Amendment of the First Amended and Restated Construction Loan Agreement (the "First Amendment") with FNBO which amends the date upon which the Declining Revolving Credit Loan begins to revolve from April 8, 2014 to October 8, 2013. 
On February 27, 2014, we entered into a Second Amendment of First Amended and Restated Construction Loan Agreement (the "Second Amendment") that amends the First Amended and Restated Construction Loan Agreement dated June 10, 2013 and executed a First Amended and Restated Declining Revolving Credit Note dated February 27, 2014 that replaces the Declining Revolving Credit Note dated June 10, 2013. The Second Amendment reduces the maximum availability of the Declining Revolving Credit Loan from approximately $26,000,000 to $5,000,000. In addition, we will now be required to make monthly interest payments on the Declining Revolving Credit Loan rather than the quarterly principal and interest payments previously required. The Second Amendment also deletes the requirements that we make excess cash flow payments and maintain a certain fixed charge coverage ratio, increases the maximum annual capital expenditures from $4,000,000 to $5,000,000 and removes the restrictions on redemptions of units and distributions to members. Finally, the Second Amendment extended the termination date of the Revolving Credit Loan from June 11, 2014 to February 28, 2015.

30



Declining Note

The Declining Note had an initial principal balance of $28,889,410 which replaced the fixed rate note that had been established by the earlier loan agreement. The Declining Note incorporated the interest rate swap which fixed the interest rate at 8.11% percent per year until expiration and could be prepaid and amounts borrowed back based on a declining schedule. On October 8, 2013, the interest rate swap was terminated and the the date upon which the Declining Revolving Credit Loan began to revolve was amended from April 8, 2014 to October 8, 2013. The amount paid upon termination of the interest rate swap was $662,597. In addition, we paid $10,958,643 towards the balance of the Declining Note on October 8, 2013 and an additional $16,985,332 towards the Declining Note to pay the balance in full on October 17, 2013. On February 27, 2014, we entered into the Second Amendment which reduces the maximum availability under the Declining Note from approximately $26,000,000 to $5,000,000. In addition, we will now be required to make monthly interest payments rather than the quarterly principal and interest payments previously required. The interest rate on the Declining Note is based on the 3-month London Interbank Offered Rate ("LIBOR") plus three hundred basis points. The interest rate at September 30, 2014 was 3.24%. The fair value of the interest rate swap at September 30, 2014 was $0 and was $681,233 at September 30, 2013 and is included in current liabilities on the balance sheet (Note 7). There were no borrowings outstanding on the Declining Note at September 30, 2014.
    
Revolving Credit Note

The Revolving Credit Note has a limit of $15,000,000 supported by a borrowing base made up of our corn, ethanol, dried distillers grain and corn oil inventories reduced by accounts payable associated with those inventories having a priority over FNBO. It is also supported by the eligible accounts receivable and commodity trading account excess margin funds. On February 27, 2014, the Revolving Credit Note was extended to February 28, 2015. The interest rate on the Revolving Credit Note is based on the 1-month LIBOR plus three hundred basis points. The interest rate at September 30, 2014 was 3.16%. There were no borrowings outstanding on the Revolving Credit Note at September 30, 2014 or September 30, 2013.

Covenants

Our loans are secured by our assets and material contracts. In addition, during the term of the loans, we will be subject to certain financial covenants. Our minimum working capital is $15,000,000, which is calculated as our current assets plus the amount available for drawing under our long term revolving note, less current liabilities.

Our loan agreement also requires us to obtain prior approval from our lender before making, or committing to make, capital expenditures exceeding an aggregate amount of $5,000,000 in any single fiscal year.

We are meeting our liquidity needs and complying with our financial covenants and the other terms of our loan agreements at September 30, 2014. Based on current management projections, we anticipate that future operations will be sufficient to generate enough cash flow to maintain operations, service any new debt and comply with our financial covenants and other terms of our loan agreements through September 30, 2015. Should market conditions deteriorate in the future, circumstances may develop which could result in us violating the financial covenants or other terms of our loan agreements. Should we violate the terms or covenants of our loan or fail to obtain a waiver of any such term or covenant, our primary lender could deem us in default of our loans and require us to immediately repay a significant portion or possibly the entire outstanding balance of our loans if we have a balance outstanding. In that event, our lender could also elect to proceed with a foreclosure action on our plant.
Tax Abatement

In October 2006, the real estate on which our plant was constructed was determined to be an economic revitalization area, which qualified us for tax abatement. The abatement period is for a ten year term, with an effective date beginning calendar year end 2009 for the property taxes payable in calendar year 2010. The program allows for 100% abatement of property taxes beginning in year 1, and then decreases on a ratable scale so that in year 11 the full amount of property taxes are due and payable. We must apply annually and meet specified criteria to qualify for the abatement program.

Capital Improvements

In September 2013, we began construction on a steel grain bin with an approximate capacity of 730,000 bushels of corn. The new grain bin was placed in service during the first quarter of fiscal year 2014. The cost of constructing the steel grain bin and necessary conveying equipment was approximately $2,400,000. We began installation of certain technologies during our third fiscal quarter which we anticipate will decrease plant downtime, alleviate plant bottlenecks and better utilize fermentation

31


capacities to increase production rates. Installation is expected to be complete during our first fiscal quarter 2015. The cost of these technologies was approximately $1,067,000.

The board of directors has approved a management proposal of a project which is expected to add storage capacity and also increase production capacity to near 135 million gallons over the next twelve to eighteen months. The plan, as proposed, is expected to cost up to approximately $18,000,000 and will require prior approval from our lender in order to exceed the $5,000,000 covenant limit for capital expenditures for any single fiscal year. Management has discussed the project with our lender on a preliminary basis and our lender has indicated a willingness to discuss the project details and possible waiver of the covenant. However, formal approval of the expenditure has not been obtained from the lender as of the date of this report. If such approval is obtained, we expect to pay for the proposed capital expenditures with cash from our current credit facilities and cash from our operations. We also expect that we may seek up to an additional $13,000,000 in credit from our lender to help pay for the project. We do not currently know whether our lender will agree to expand our current credit facilities or, if it does, upon what terms the additional credit would be extended.
    
Contractual Cash Obligations

In addition to our long-term debt obligations, we have certain other contractual cash obligations and commitments. The following tables provide information regarding our contractual obligations and approximate commitments as of September 30, 2014:
 
Payment Due By Period
Contractual Cash Obligations
Total
 
Less than
One Year
 
One to
Three
Years
 
Three to
Five
Years
 
After Five
Years
Operating Lease Obligations
$
4,787,962

 
$
1,172,964

 
$
2,345,928

 
$
1,269,070

 
$

Purchase Obligations
14,436,000

 
14,160,900

 
275,100

 

 

Total Contractual Cash Obligations
$
19,223,962

 
$
15,333,864

 
$
2,621,028

 
$
1,269,070

 
$

 
The operating lease obligations in the table above include our hopper railcars and forklift lease obligations as of September 30, 2014. Purchase obligations consist of forward contracted corn deliveries and forward contracted natural gas purchases.

Critical Accounting Estimates

Management uses various estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Accounting estimates that are the most important to the presentation of our results of operations and financial condition, and which require the greatest use of judgment by management, are designated as our critical accounting estimates. We have the following critical accounting estimates:

We enter into derivative instruments to hedge the variability of expected future cash flows related to interest rates. We
do not typically enter into derivative instruments other than for economic hedging purposes. All derivative instruments are recognized on the September 30, 2014 balance sheet at their fair market value. Changes in the fair value of a derivative instrument that is designated as and meets all of the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income and reclassified into earnings as the underlying hedged items affect earnings.

At September 30, 2013, we had an interest rate swap with a fair value of $681,233 recorded as derivative instruments in the current liabilities section of the balance sheet. The interest rate swap was designated as a cash flow hedge. The interest rate swap agreement was terminated in October 2013.

As of September 30, 2014, we have open short (selling) positions for 1,695,000 bushels of corn and long (buying) positions for 4,460,000 bushels of corn on the Chicago Board of Trade, open short (selling) positions of 30,660,000 gallons of ethanol and long (buying) positions of 11,970,000 gallons of ethanol on the Chicago Board of Trade; and open short (selling) positions of 150,000 MMBTUs of natural gas on the New York Mercantile Exchange. These derivatives have not been designated as an effective hedge for accounting purposes. Corn, ethanol and natural gas positions are forecasted to settle through March 2016, April 2015 and December 2014, respectively. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding as disclosed above.

32



We carry our long-lived assets at the original acquisition cost as required by current generally accepted accounting principles. Due to business conditions and the business environment in which our industry operates, the fair market value of those assets could, theoretically, fall below the amount which we carry them in our financial statements. In such cases, those assets would be known as impaired. Thus, we periodically perform an assessment of the fair value of these assets. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of the useful lives of property and equipment to be a critical accounting estimate. Our assessment shows us that the fair value of our long-lived assets as a group is substantially in excess of its carrying value.

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

We enter forward contracts for corn purchases to supply the plant. These contracts represent firm purchase commitments which must be evaluated for potential losses. We have determined that there are no losses that are required to be recognized on these firm purchase commitments related to corn contracts in place at September 30, 2014. Our estimates include various assumptions including the future prices of ethanol, distillers grains and corn.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from our Declining Note and our Revolving Credit Note which bear a variable interest rate.  The interest rate for the Declining Note is the 3-month LIBOR rate plus 300 basis points with no minimum. The interest rate for the Revolving Credit Note is the 1-month LIBOR rate plus 300 basis points with no minimum. There were no outstanding balances on the Declining Note or the Revolving Credit Note at September 30, 2014.

The specifics of the Revolving Credit Note and Declining Note are discussed in greater detail above.

Commodity Price Risk

We expect to be exposed to market risk from changes in commodity prices.  Exposure to commodity price risk results from our dependence on corn in the ethanol production process and the sale of ethanol.

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


33


We enter into fixed price contracts for corn purchases on a regular basis.  It is our intent that, as we enter in to these contracts, we will use various hedging instruments to maintain a near even market position.  For example, if we have 1 million bushels of corn under fixed price contracts we would generally expect to enter into a short hedge position to offset our price risk relative to those bushels we have under fixed price contracts.  Because our ethanol marketing company (Murex) is selling substantially all of the gallons it markets on a spot basis we also include the corn bushel equivalent of the ethanol we have produced that is inventory but not yet priced as bushels that need to be hedged.

As of September 30, 2014, we have open short (selling) positions for 1,695,000 bushels of corn on the Chicago Board of Trade and open short (selling) positions for 30,660,000 gallons of ethanol on the New York Mercantile Exchange and Chicago Board of Trade to hedge our forward corn contracts and corn inventory. As of September 30, 2014, we have open long (buying) positions for 4,460,000 bushels of corn on the Chicago Board of Trade and open long (buying) positions for 11,970,000 gallons of ethanol on the New York Mercantile Exchange and Chicago Board of Trade. In addition, we have open short (selling) positions for 150,000 MMBTUs of natural gas on the New York Mercantile Exchange. These derivatives have not been designated as an effective hedge for accounting purposes. Corn derivatives are forecasted to settle through March 2016, ethanol derivatives are forecasted to settle through April 2015 and natural gas derivatives are forecasted to settle through December 2014. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding as disclosed above.

For the fiscal years ended September 30, 2014, we recorded a loss due to the change in fair value of our outstanding corn derivative positions of $5,015,169 and a gain due to the change in fair value of our outstanding ethanol derivative positions of $3,334,054. We also recorded a gain due to changes in fair value of our outstanding natural gas derivative positions of $51,257.

At September 30, 2014, we have committed to purchase approximately 3,346,000 bushels of corn through January 2016 at an average bushel price of $4.20 and the spot price at September 30, 2014 was $2.98 per bushel.   As contracts are delivered, any losses realized will be recognized in our gross margin.  Due to the volatility and risk involved in the commodities market, we cannot be certain that these losses will be realized. 

As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us. As of September 30, 2014, we had price protection in place for approximately 8% of our anticipated corn needs for the next 12 months.

A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas prices and average ethanol price as of September 30, 2014 of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from September 30, 2014. The results of this analysis, which may differ from actual results, are approximately as follows:

 
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)
Unit of Measure
Hypothetical Adverse Change in Price as of
September 30, 2014
Approximate Adverse Change to Income
Natural Gas
2,706,000

MMBTU
10
%
 
$
1,158,275

Ethanol
118,000,000

Gallons
10
%
 
$
19,151,400

Corn
37,654,000

Bushels
10
%
 
$
11,220,781

DDGs
210,000

Tons
10
%
 
$
2,415,170


For comparison purposes, the results of our sensitivity analysis as of September 30, 2013 were approximately as follows:


34


 
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)
Unit of Measure
Hypothetical Adverse Change in Price as of
September 30, 2013
Approximate Adverse Change to Income
Natural Gas
3,162,500

MMBTU
10
%
 
$
1,220,725

Ethanol
111,680,000

Gallons
10
%
 
$
25,128,000

Corn
38,506,000

Bushels
10
%
 
$
17,019,652

DDGs
173,000

Tons
10
%
 
$
3,892,500


Liability Risk

We participate in a captive reinsurance company (the “Captive”).  The Captive reinsures losses related to worker's compensation, commercial property and general liability.  Premiums are accrued by a charge to income for the period to which the premium relates and is remitted by our insurer to the captive reinsurer.  The Captive reinsures catastrophic losses in excess of a predetermined amount.  Our premiums are structured such that we have made a prepaid collateral deposit estimated for losses related to the above coverage.  The Captive insurer has estimated and collected an amount in excess of the estimated losses but less than the catastrophic loss limit insured by the Captive. We cannot be assessed in excess of the amount in the collateral fund.

35


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Members of Cardinal Ethanol, LLC
We have audited the accompanying balance sheets of Cardinal Ethanol, LLC as of September 30, 2014 and 2013, and the related statements of operations and comprehensive income, cash flows, and changes in members' equity for each of the fiscal years in the three year period ended September 30, 2014. Cardinal Ethanol, LLC's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cardinal Ethanol, LLC as of September 30, 2014 and 2013, and the results of its operations and its cash flows for each of the fiscal years in the three year period ended September 30, 2014, in conformity with accounting principles generally accepted in the United States of America.



/s/ Boulay PLLP
Minneapolis, Minnesota
November 25, 2014



36


CARDINAL ETHANOL, LLC
Balance Sheets

 ASSETS
September 30, 2014
 
September 30, 2013


 

Current Assets

 

Cash
$
27,731,976

 
$
24,216,700

Restricted cash
885,100

 
1,859,132

Trade accounts receivable
21,766,301

 
20,857,587

Miscellaneous receivables
5,968

 
99,008

Inventories
7,425,399

 
10,324,442

Prepaid and other current assets
529,461

 
547,913

Commodity derivative instruments
1,690,531

 
9,241

Total current assets
60,034,736

 
57,914,023



 

Property, Plant, and Equipment

 

Land and land improvements
21,124,597

 
21,124,597

Plant and equipment
126,234,680

 
122,831,387

Building
7,018,061

 
7,007,100

Office equipment
579,019

 
546,050

Vehicles
31,928

 
31,928

Construction in process
1,015,044

 
422,624


156,003,329

 
151,963,686

Less accumulated depreciation
(50,370,553
)
 
(41,652,470
)
Net property, plant, and equipment
105,632,776

 
110,311,216



 

Other Assets

 

Deposits

 
80,000

Investment
718,553

 
474,837

Total other assets
718,553

 
554,837



 

Total Assets
$
166,386,065

 
$
168,780,076



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


37


CARDINAL ETHANOL, LLC
Balance Sheets

LIABILITIES AND MEMBERS' EQUITY
September 30, 2014
 
September 30, 2013


 

Current Liabilities

 

Accounts payable
$
3,143,834

 
$
3,634,513

Accounts payable-corn
6,058,527

 
3,003,673

Accrued expenses
2,891,129

 
1,843,249

Commodity derivative instruments
1,287,147

 
197,431

Derivative instruments - interest rate swap

 
681,233

Current maturities of long-term debt

 
3,789,265

Total current liabilities
13,380,637

 
13,149,364



 

Long-Term Debt

 
24,154,710



 

Commitments and Contingencies

 



 

Members’ Equity

 

Member contributions, net of cost of raising capital, 14,606 units authorized, issued and outstanding
70,912,213

 
70,912,213

Accumulated other comprehensive loss

 
(681,233
)
Retained earnings
82,093,215

 
61,245,022

Total members' equity
153,005,428

 
131,476,002



 

Total Liabilities and Members’ Equity
$
166,386,065

 
$
168,780,076



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


38


CARDINAL ETHANOL, LLC
Statements of Operations and Comprehensive Income


 
Fiscal Year Ended
 
Fiscal Year Ended
 
Fiscal Year Ended

 
September 30, 2014
 
September 30, 2013
 
September 30, 2012

 

 

 

Revenues
 
$
337,355,515

 
$
357,611,814

 
$
321,194,387


 

 

 

Cost of Goods Sold
 
244,414,762

 
324,122,396

 
311,971,054


 

 

 

Gross Profit
 
92,940,753

 
33,489,418

 
9,223,333


 

 

 

Operating Expenses
 
4,945,382

 
4,697,637

 
4,680,729


 

 

 

Operating Income
 
87,995,371

 
28,791,781

 
4,542,604


 

 

 

Other Income (Expense)
 

 

 

Interest income
 
9,187

 
15,640

 
2,808

Interest expense
 
(728,470
)
 
(2,459,592
)
 
(2,824,100
)
Miscellaneous income (expense)
 
(14,414
)
 
7,595

 
130,668

Total
 
(733,697
)
 
(2,436,357
)
 
(2,690,624
)

 

 

 

Net Income
 
$
87,261,674

 
$
26,355,424

 
$
1,851,980

 
 
 
 

 

Weight Average Units Outstanding - basic and diluted
 
14,606

 
14,606

 
14,606


 

 

 

Net Income Per Unit - basic and diluted
 
$
5,974.37

 
$
1,804.42

 
$
126.80

 
 
 
 

 

Distributions Per Unit
 
$
4,547

 
$
382

 
$
430

 
 
 
 
 
 
 
Comprehensive Income:
 


 

 

Net income
 
$
87,261,674

 
$
26,355,424

 
$
1,851,980

Gain on derivative instruments included in other comprehensive income
 
681,233

 
1,405,525

 
1,396,011

Comprehensive Income
 
$
87,942,907

 
$
27,760,949

 
$
3,247,991



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






39


CARDINAL ETHANOL, LLC
Statements of Cash Flows

Fiscal Year Ended
 
Fiscal Year Ended
 
Fiscal Year Ended

September 30, 2014
 
September 30, 2013
 
September 30, 2012
 

 

 
 
Cash Flows from Operating Activities
 
 
 
 
 
Net income
$
87,261,674

 
$
26,355,424

 
$
1,851,980

Adjustments to reconcile net income to net cash from operations:

 

 
 
Depreciation and amortization
8,720,946

 
8,735,816

 
8,657,575

Change in fair value of commodity derivative instruments
1,629,858

 
(4,579,828
)
 
6,089,789

(Gain)/loss on disposal of fixed asset
(1,000
)
 
12,279

 
562

Non-cash dividend income
(243,716
)
 

 
(21,161
)
Change in operating assets and liabilities:

 

 
 
Restricted cash
974,032

 
1,744,448

 
(1,244,778
)
Trade accounts receivables
(908,714
)
 
928,373

 
(2,685,118
)
Miscellaneous receivable
93,040

 
93,506

 
278,889

Inventories
2,899,043

 
(994,758
)
 
2,403,314

Prepaid and other current assets
18,452

 
(254,654
)
 
142,023

Deposits
80,000

 

 
192,250

Derivative instruments
(2,221,432
)
 
3,742,249

 
(415,720
)
Accounts payable
(490,679
)
 
869,621

 
309,081

Accounts payable-corn
3,054,854

 
(3,857,937
)
 
2,801,640

Accrued expenses
973,634

 
635,835

 
(357,216
)
Net cash provided by operating activities
101,839,992

 
33,430,374

 
18,003,110



 

 
 
Cash Flows from Investing Activities

 

 
 
Capital expenditures
(3,450,085
)
 
(619,720
)
 
(1,131,855
)
Payments for construction in process
(518,174
)
 
(323,163
)
 
(99,461
)
Proceeds from sale of equipment
1,000

 
259,762

 

   Net cash used for investing activities
(3,967,259
)
 
(683,121
)
 
(1,231,316
)


 

 
 
Cash Flows from Financing Activities

 

 
 
Distributions paid
(66,413,482
)
 
(5,579,492
)
 
(6,280,580
)
Payments for capital lease obligations

 

 
(2,010
)
Payments on long-term debt
(27,943,975
)
 
(3,634,004
)
 
(20,608,333
)
Net cash used for financing activities
(94,357,457
)
 
(9,213,496
)
 
(26,890,923
)


 

 
 
Net Increase (Decrease) in Cash
3,515,276

 
23,533,757

 
(10,119,129
)


 

 
 
Cash – Beginning of Period
24,216,700

 
682,943

 
10,802,072



 

 
 
Cash – End of Period
$
27,731,976

 
$
24,216,700

 
$
682,943


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





40


CARDINAL ETHANOL, LLC
Statements of Cash Flows

Fiscal Year Ended
 
Fiscal Year Ended
 
Fiscal Year Ended

September 30, 2014
 
September 30, 2013
 
September 30, 2012
 
 
 
 
 
 
Supplemental Cash Flow Information

 

 
 
Interest paid
$
1,255,531

 
$
2,521,245

 
$
3,115,561



 

 
 
Supplemental Disclosure of Noncash Investing and Financing Activities

 

 
 
Construction costs included in accrued expenses
$
74,246

 
$
374,671

 
$

Gain on derivative instruments included in other comprehensive income
$
681,233

 
$
1,405,525

 
$
1,396,011

Equipment purchase price adjustment included in accounts payable
$

 
$

 
$
107,213

Capital expenditures included in accrued expenses and accounts receivable
$

 
$

 
$
17,533


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



41


CARDINAL ETHANOL, LLC
Statements of Changes in Members' Equity

 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
Other
 
 
Member
 
 Retained
 
Comprehensive
 
 
Contributions
 
 Earnings
 
Loss
Balance - September 30, 2011
 
$
70,912,213

 
$
44,897,689

 
$
(3,482,769
)
 
 
 
 
 
 
 
Net income for year ended September 30, 2012
 

 
1,851,980

 

 
 
 
 
 
 
 
Member Distributions
 

 
(6,280,578
)
 

 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
Gain on derivative instruments included in other comprehensive income
 

 

 
1,396,011

 
 
 
 
 
 
 
Balance - September 30, 2012
 
70,912,213

 
40,469,091

 
(2,086,758
)
 
 
 
 
 
 
 
Net income for year ended September 30, 2013
 

 
26,355,424

 

 
 
 
 
 
 
 
Members Distributions
 

 
(5,579,492
)
 

 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
Gain on derivative instruments included in other comprehensive income
 

 

 
1,405,525

 
 
 
 
 
 
 
Balance - September 30, 2013
 
70,912,213

 
61,245,023

 
(681,233
)
 
 
 
 
 
 
 
Net income for year ended September 30, 2014
 

 
87,261,674

 


 

 

 

Members Distributions
 

 
(66,413,482
)
 


 

 

 

Other comprehensive income
 

 

 

Gain on derivative instruments included in other comprehensive income
 

 

 
681,233


 

 

 

Balance - September 30, 2014
 
$
70,912,213

 
$
82,093,215

 
$


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


42


CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2014 and 2013



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Cardinal Ethanol, LLC, (the “Company”) is an Indiana limited liability company currently producing fuel-grade ethanol, distillers grains, corn oil and carbon dioxide near Union City, Indiana and sells these products throughout the continental United States. During the fiscal years ended September 30, 2014 and 2013, the Company produced approximately 116 million and 111 million gallons of ethanol, respectively.

Fiscal Reporting Period

The Company has adopted a fiscal year ending September 30 for reporting financial operations and a year ending December 31 for tax return purposes.

Accounting Estimates

Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for the following significant matters, among others; the useful lives of fixed assets, the valuation of basis and delay price contracts on corn purchases, derivatives, inventory, patronage dividends, long-lived assets and inventory purchase commitments. Actual results may differ from previously estimated amounts, and such differences may be material to the financial statements. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made.

Cash

The Company maintains its accounts primarily at two financial institutions. At times throughout the year the Company's cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation.

Restricted Cash

As a part of its commodities hedging activities, the company is required to maintain cash balances with our commodities trading companies for initial and maintenance margins on a per futures contract basis. Changes in the market value of contracts may increase these requirements. As the futures contracts expire, the margin requirements also expire. Accordingly, we record the cash maintained with the traders in the margin accounts as restricted cash. Since this cash is immediately available to us upon request when there is a margin excess, we consider this restricted cash to be a current asset.

Trade Accounts Receivable

Credit terms are extended to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral. Accounts receivable are recorded at their estimated net realizable value. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company's credit terms. Amounts considered uncollectible are written off. The Company's estimate of the allowance for doubtful accounts is based on historical experience, its evaluation of the current status of receivables, and unusual circumstances, if any. At September 30, 2014 and 2013, the Company determined that an allowance for doubtful accounts was not necessary.

Inventories

Inventories consist of raw materials, work in process, finished goods and parts. Corn is the primary raw material. Finished goods consist of ethanol, dried distiller grains and corn oil. Inventories are stated at the lower of weighted average cost or market. Market is based on current replacement values except that it does not exceed net realizable values and it is not less than net realizable values reduced by allowances from normal profit margins.



43


CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2014 and 2013




Property, Plant and Equipment

Property, plant, and equipment are stated at cost. Depreciation is provided over estimated useful lives by use of the straight line depreciation method. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. Construction in process expenditures will be depreciated using the straight-line method over their estimated useful lives once the assets are placed into service.

 
Minimum years
Maximum years
Land improvements
15
20
Office building
10
40
Office equipment
5
5
Process and grain handling equipment
10
20
Plant buildings
15
40

Long-Lived Assets

The Company reviews its long-lived assets, such as property, plant and equipment and financing costs, subject to depreciation and amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

Financing Costs

Costs associated with the issuance of loans are classified as financing costs. Financing costs are amortized over the term of the related debt by use of the effective interest method, beginning when Company draws on the loans. Amortization for the years ended September 30, 2014, 2013 and 2012 was approximately $0, $176,000 and $167,000, respectively.

Investments

Investments consist of the capital stock and patron equities of the Company's distillers grains marketer. The investments are stated at the lower of cost or fair value and adjusted for non cash patronage equities received. Patronage dividends are recognized when received and included within revenue in the statements of operations and comprehensive income.

Revenue Recognition

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

In accordance with the Company's agreements for the marketing and sale of ethanol and related products, marketing fees, commissions and freight due to the marketers are deducted from the gross sales price at the time incurred. Commissions were approximately $2,382,000, $1,783,000 and $2,841,000 for the years ended September 30, 2014, 2013 and 2012, respectively. Freight was approximately $8,786,000, $6,816,000 and $8,493,000 for the years ended September 30, 2014, 2013 and 2012, respectively. Revenue is recorded net of these commissions and freight as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products.



44


CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2014 and 2013



Derivative Instruments

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

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

Additionally, the Company is required to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as “normal purchases or normal sales”. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from accounting and reporting requirements, and therefore, are not marked to market in our financial statements.

Fair Value of Financial Instruments

The Company follows guidance for accounting for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring and nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 inputs are unobservable inputs for the asset or liability.

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

The carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximates fair value at September 30, 2014 and 2013 due to the short maturity nature of these instruments. The fair value of derivative instruments and debt is disclosed in Note 7.

Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value on our balance sheets, the Company has elected not to record any other assets or liabilities at fair value. No events occurred during the fiscal years ended September 30, 2014, or 2013 that required adjustment to the recognized balances of assets or liabilities, which are recorded at fair value on a nonrecurring basis.

Environmental Liabilities

The Company's operations are subject to environmental laws and regulations adopted by various governmental entities in the jurisdiction in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its location. Accordingly, the Company has adopted policies, practices and procedures in the areas of pollution control, occupational health, and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability, which could result from such events. Environmental liabilities are recorded when the liability is probable and the costs can be reasonably estimated. No liabilities were recorded at September 30, 2014 or 2013.

45


CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2014 and 2013




Cost of Goods Sold

We include corn procurement costs including inbound freight, warehousing, inspection and hedging costs in our cost of goods sold. We also include ethanol and co-product conversion costs such as costs of denaturant, chemicals, natural gas and other utilities, wages and benefits, repairs and maintenance, other production costs and an allocation for production related depreciation in cost of goods sold.

Operating Expenses

Operating expenses are administrative and non-production related costs of running the business. These include executive and administrative salaries, wages and benefits, advertising, insurance, taxes, fees, subscriptions and other similar expenses. We include an allocation for depreciation related to non-production long-lived assets in this category.

Net Income per Unit

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

Income Taxes

Cardinal Ethanol LLC is treated as a partnership for federal and state income tax purposes and generally does not incur income taxes.  Instead, their income or losses are included in the income tax returns of the members and partners.  Accordingly, no provision or liability for federal or state income taxes has been included in these financial statements.  The Company had no significant uncertain tax positions as of September 30, 2014 or 2013. Differences between the financial statement basis of assets and tax basis of assets is related to capitalization and amortization of organization and start-up costs for tax purposes, whereas these costs are expensed for financial statement purposes.  In addition, the Company uses the modified accelerated cost recovery system method (MACRS) for tax depreciation instead of the straight-line method that is used for book depreciation, which also causes temporary differences. For years before 2010, the Company is no longer subject to U.S. Federal income tax examinations.

2. CONCENTRATIONS

Two major customers accounted for approximately 98% and 97% of the outstanding accounts receivable balance at September 30, 2014 and September 30, 2013, respectively. These same two customers also accounted for approximately 96%, 96% and 97% of revenue for the year ended September 30, 2014, 2013 and 2012, respectively.


46


CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2014 and 2013



3.  INCOME TAXES
 
The differences between financial statement basis and tax basis of assets and liabilities at September 30, 2014 and 2013 are as follows:
 
2014
 
2013
Financial statement basis of assets
$
166,386,065

 
$
168,780,076

Organization and start-up costs
1,976,610

 
1,976,610

Book to tax depreciation and amortization
(91,132,667
)
 
(92,227,825
)
Book to tax derivative instruments
(1,690,531
)
 
(9,241
)
Capitalized inventory
18,000

 
50,000

Income tax basis of assets
$
75,557,477

 
$
78,569,620

 
 
 
 
Financial statement basis of liabilities
$
13,380,637

 
$
37,304,074

Interest rate swap

 
(681,233
)
Book to tax derivative instruments
(1,287,147
)
 
(197,431
)
Accrued employee benefits
(788,808
)
 
(483,314
)
Income tax basis of liabilities
$
11,304,682

 
$
35,942,096


4. MEMBERS' EQUITY

The Company has one class of membership units, which include certain transfer restrictions as specified in the operating agreement and pursuant to applicable tax and securities laws. Income and losses are allocated to all members based upon their respective percentage of units held.

Distribution dates and amounts for the fiscal year ended September 30, 2012 are listed in the table below:

Date Declared
 
Distribution Declared Per Unit
 
Total Distribution Amount
 
Month Distribution Paid
January 17, 2012
 
$
430

 
$
6,280,578

 
February 2012

Distribution dates and amounts for the fiscal year ended September 30, 2013 are listed in the table below:

Date Declared
 
Distribution Declared Per Unit
 
Total Distribution Amount
 
Month Distribution Paid
May 21, 2013
 
$
160

 
$
2,336,960

 
June 2013
July 16, 2013
 
222

 
3,242,532

 
August 2013
Totals
 
$
382

 
$
5,579,492

 
 

Distribution dates and amounts for the fiscal year ended September 30, 2014 are listed in the table below:


47


CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2014 and 2013



Date Declared
 
Distribution Declared Per Unit
 
Total Distribution Amount
 
Month Distribution Paid
November 14, 2013
 
$
475

 
$
6,937,850

 
December 2013
February 11, 2014
 
1,072

 
15,657,632

 
February 2014
May 20, 2014
 
1,500

 
21,909,000

 
May 2014
August 19, 2014
 
1,500

 
21,909,000

 
August 2014
Totals
 
$
4,547

 
$
66,413,482

 
 

Subsequent to year end, the board of directors declared a cash distribution. The date and amounts are listed in the table below:

Date Declared
 
Distribution Declared Per Unit
 
Total Distribution Amount
 
Month Distribution Paid
November 18, 2014
 
$
1,700

 
$
24,830,200

 
November 2014


5.  INVENTORIES

Inventories consist of the following as of September 30, 2014 and September 30, 2013:

 
September 30, 2014
 
September 30, 2013
 Raw materials
$
2,860,060

 
$
2,454,803

 Work in progress
1,316,664

 
2,382,833

 Finished goods
1,316,482

 
3,756,410

 Spare parts
1,932,193

 
1,730,396

 Total
$
7,425,399

 
$
10,324,442


In the ordinary course of business, the Company enters into forward purchase contracts for its commodity purchases and sales. At September 30, 2014, the Company had forward corn purchase contracts at various fixed prices for various delivery periods through January 2016 for a total commitment of approximately $14,042,000. Approximately $2,459,000 of the forward corn purchases were with related parties. Given the uncertainty of future ethanol and corn prices, the Company could incur a loss on the outstanding corn purchase contracts in future periods. Management has evaluated these forward contracts using a methodology similar to that used in the lower of cost or market evaluation with respect to inventory valuation, and has determined that no impairment existed at September 30, 2014. At September 30, 2014, the Company has a total commitment of approximately $394,000 of forward, fixed price natural gas purchase contracts through October 2014. In addition, the Company has forward dried distiller grains sales contracts of approximately 105,000 tons at various fixed prices for various delivery periods through June 2015.

6. DERIVATIVE INSTRUMENTS

The Company enters into corn, ethanol and natural gas derivative instruments, which are required to be recorded as either assets or liabilities at fair value in the balance sheet. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item. The Company must designate the hedging instruments based upon the exposure being hedged as a fair value hedge, a cash flow hedge or a hedge against foreign currency exposure. The Company formally documents, designates, and assesses the effectiveness of transactions that receive hedge accounting initially and on an on-going basis.


48


CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2014 and 2013



Commodity Contracts

The Company enters into commodity-based derivatives, for corn, ethanol and natural gas in order to protect cash flows from fluctuations caused by volatility in commodity prices and to protect gross profit margins from potentially adverse effects of market and price volatility on commodity based purchase commitments where the prices are set at a future date. These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. The changes in the fair market value of ethanol derivative instruments are included as a component of revenue.  The changes in the fair market value of corn and natural gas derivative instruments are included as a component of cost of goods sold.

The table below shows the underlying quantities of corn, ethanol and natural gas resulting from the short (selling) positions and long (buying) positions that the Company had to hedge its forward corn contracts, corn inventory, ethanol sales and natural gas purchases. Corn positions are traded on the Chicago Board of Trade and ethanol and natural gas positions are traded on the New York Mercantile Exchange and Chicago Board of Trade. These derivatives have not been designated as an effective hedge for accounting purposes. Corn, ethanol and natural gas derivatives are forecasted to settle for various delivery periods through March 2016, April 2015 and December 2014, respectively, as of September 30, 2014.

The following table indicates the bushels of corn under derivative contracts as of September 30, 2014 and September 30, 2013:
 
September 30, 2014
 
September 30, 2013
Short
1,695,000

 
2,115,000

Long
4,460,000

 
6,105,000


The following table indicates the gallons of ethanol under derivative contracts as of September 30, 2014 and September 30, 2013:
 
September 30, 2014
 
September 30, 2013
Short
30,660,000

 
2,310,000

Long
11,970,000

 
6,636,000


The following table indicates the MMBTUs of natural gas under derivative contracts as of September 30, 2014 and September 30, 2013:
 
September 30, 2014
 
September 30, 2013
Short
150,000

 

Long

 



Interest Rate Contract

The Company previously managed part of its floating rate debt using an interest rate swap associated with the "Fixed Rate Note" as defined in our loan agreement. Please see Note 8 below. The Company entered into a fixed rate swap to alter its exposure to the impact of changing interest rates on its results of operations and future cash outflows for interest. Fixed rate swaps are used to reduce the Company's risk of the possibility of increased interest costs. Interest rate swap contracts were therefore used by the Company to separate interest rate risk management from the debt funding decision.

On October 8, 2013, the Company terminated the interest rate swap and therefore at September 30, 2014, the Company had no amount outstanding on the swap agreement.

The following table provides balance sheet details regarding the Company's derivative financial instruments at September 30, 2014:

49


CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2014 and 2013



Instrument
Balance Sheet Location
 
Assets
 
Liabilities
 
 
 
 
 
 
Ethanol derivative contracts
Commodity Derivative Instruments - Current
 
$
1,690,531

 
$

Corn derivative contracts
Commodity Derivative Instruments - Current
 
$

 
$
1,277,147

Natural gas derivative contracts
Commodity Derivative Instruments - Current
 
$

 
$
10,000


As of September 30, 2014 the Company had approximately $885,000 of cash collateral (restricted cash) related to ethanol and corn derivatives held by two brokers.

The following table provides balance sheet details regarding the Company's derivative financial instruments at September 30, 2013:
Instrument
Balance Sheet Location
 
Assets
 
Liabilities
 
 
 
 
 
 
Interest rate swap
Derivative Instruments - Current
 
$

 
$
681,233

Ethanol derivative contracts
Commodity Derivative Instruments - Current
 
$
9,241

 
$

Corn derivative contracts
Commodity Derivative Instruments - Current
 
$

 
$
197,431


As of September 30, 2013 the Company had approximately $1,859,000 of cash collateral (restricted cash) related to ethanol and corn derivatives held by two brokers. Subsequent to the fiscal year ended September 30, 2013, the Company had a margin call and paid $498,000 to the brokers in order to maintain their minimum maintenance requirements.

The following tables provide details regarding the gains and (losses) from the Company's derivative instruments in other comprehensive income and statement of operations for the fiscal years ended September 30, 2014:
Derivatives in Cash Flow Hedging Relationship
Amount of Gain Recognized In OCI on Derivative
Location of Loss Reclassified From Accumulated OCI into Income
Amount of Gain Reclassified From Accumulated OCI into Income on Derivative
Location of Gain Recognized in Income
Amount of Gain or (Loss) Recognized in Income on Derivative (ineffective portion)
Interest rate swap
$
18,636
 
Interest expense
$
681,233
 
Interest expense
$
 

The amount of gain reclassified from accumulated other comprehensive income into net income on derivatives included a reclassification of $681,233 into earnings as interest expense resulting from the termination of the interest rate swap agreement.

The following tables provide details regarding the gains and (losses) from the Company's derivative instruments in other comprehensive income and statement of operations for the fiscal years ended September 30, 2013:
Derivatives in Cash Flow Hedging Relationship
Amount of Loss Recognized In OCI on Derivative
Location of Loss Reclassified From Accumulated OCI into Income
Amount of Gain Reclassified From Accumulated OCI into Income on Derivative
Location of Gain Recognized in Income
Amount of Gain or (Loss) Recognized in Income on Derivative (ineffective portion)
Interest rate swap
$
(53,663
)
Interest expense
$
1,459,188
 
Interest expense
$
 

The following table provides details regarding the gains and (losses) from the Company's derivative instruments in the statements of operations, none of which are designated as hedging instruments for the fiscal year ended September 30, 2014:


50


CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2014 and 2013



Instrument
Statement of Operations Location
Amount
Corn Derivative Contracts
Cost of Goods Sold
$
(5,015,169
)
Ethanol Derivative Contracts
Revenues
3,334,054

Natural Gas Derivative Contracts
Cost of Goods Sold
51,257

Totals
 
$
(1,629,858
)

The following table provides details regarding the gains and (losses) from the Company's derivative instruments in the statements of operations, none of which are designated as hedging instruments for the fiscal year ended ended September 30, 2013:

Instrument
Statement of Operations Location
Amount
Corn Derivative Contracts
Cost of Goods Sold
$
4,610,942

Ethanol Derivative Contracts
Revenues
(55,761
)
Natural Gas Derivative Contracts
Cost of Goods Sold
24,647

Totals
 
$
4,579,828


7. FAIR VALUE MEASUREMENTS
 
The following table provides information on those assets and liabilities measured at fair value on a recurring basis as of September 30, 2014:

Derivatives
Carrying Amount
Fair Value
Level 1
Level 2
Level 3
Corn Derivative Contracts
$
(1,277,147
)
$
(1,277,147
)
$
(1,277,147
)
$

$

Ethanol Derivative Contracts
$
1,690,531

$
1,690,531

$
1,690,531

$

$

Natural Gas Derivative Contracts
$
(10,000
)
$
(10,000
)
$
(10,000
)
$

$


The following table provides information on those assets and liabilities measured at fair value on a recurring basis as of September 30, 2013:

Derivatives
Carrying Amount
Fair Value
Level 1
Level 2
Level 3
Interest Rate Swap Liability
$
(681,233
)
$
(681,233
)
$

$
(681,233
)
$

Corn Derivative Contracts
$
(197,431
)
$
(197,431
)
$
(197,431
)
$

$

Ethanol Derivative Contracts
$
9,241

$
9,241

$
9,241

$

$


We determine the fair value of the interest rate swap shown in the table above by using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each instrument. The analysis reflects the contractual terms of the swap agreement, including the period to maturity and uses observable market-based inputs and uses the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. We determine the fair value of commodity derivative instruments by obtaining fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade market and New York Mercantile Exchange.

Financial Instruments Not Measured at Fair Value

The estimated fair value of the company's long-term debt, including the short-term portion, at September 30, 2014 and 2013 approximated the carrying value of approximately $0 and $27,900,000, respectively. Fair value was estimated using estimated market interest rates at September 30, 2014 and 2013, which are level 2 inputs. The fair values and carrying values consider the terms of the related debt and exclude the impacts of discounts and derivative/hedging activity.

51


CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2014 and 2013




8.  BANK FINANCING

On December 19, 2006, the Company entered into a definitive loan agreement with a financial institution for a construction loan of up to $83,000,000, a short-term revolving line of credit of $10,000,000 and letters of credit of $3,000,000. In connection with this agreement, the Company also entered into an interest rate swap agreement fixing the interest rate on $41,500,000 of debt. In April 2009, the construction loan was converted into three separate term loans: a fixed rate note, a variable rate note, and a long term revolving note. The fixed rate note is applicable to the interest rate swap agreement. The term loans had a maturity of five years with a ten-year amortization and were set to mature on April 8, 2014.

On June 10, 2013, the Company closed on a new loan agreement which replaces the earlier agreement. The agreement establishes two new notes, the Declining Revolving Note (Declining Note) and the Revolving Credit Note in exchange for liens on all property (real and personal, tangible and intangible) which include, among other things, a mortgage on the property, a security interest on commodity trading accounts, and assignment of material contracts. On October 8, 2013, we executed a First Amendment of the First Amended and Restated Construction Loan Agreement (the "First Amendment") with our lender. The First Amendment amends the date upon which the Declining Revolving Credit note begins to revolve, from April 8, 2014 to October 8, 2013.

On February 27, 2014, the Company executed a Second Amendment of the First Amended and Restated Construction Loan Agreement (the "Second Amendment") with our lender. The Second Amendment reduces the maximum availability of the Declining Note from approximately $26,000,000 to $5,000,000. In addition, the Company will now be required to make monthly interest payments on the Declining Note rather than the quarterly principal and interest payments previously required. The Second Amendment also deleted the requirements that the Company make excess cash flow payments and maintain a certain fixed charge coverage ratio, increased the maximum annual capital expenditures limit from $4,000,000 to $5,000,000 and removed all restrictions on redemptions of membership units and distributions to members. Finally, the Second Amendment extended the termination date of the Revolving Credit Note from June 11, 2014 to February 28, 2015.

Declining Note

The Declining Note had an initial principal balance of $28,889,410 and incorporated an interest rate swap from the earlier loan agreement which was set to expire on April 8, 2014. The interest rate swap fixed the interest rate at 8.11% per year until expiration. On October 8, 2013, the interest rate swap was terminated. The amount paid upon termination of the interest rate swap was $662,597. In addition, we paid $10,958,643 towards the balance of the Declining Note on October 8, 2013 and an additional$16,985,332 towards the Declining Note to pay the balance in full on October 17, 2013. The interest rate on the Declining Note is now based on the 3-month LIBOR plus three hundred basis points. The interest rate at September 30, 2014 was 3.24%. There were no borrowings outstanding on the Declining Note at September 30, 2014. The fair value of the interest rate swap at September 30, 2014 was $0 and was $681,233 at September 30, 2013 and is included in current liabilities on the balance sheet (Note 6).

Revolving Credit Note

The Revolving Credit Note has a limit of $15,000,000 supported by a borrowing base made up of the Company's corn, ethanol, dried distillers grain and corn oil inventories reduced by accounts payable associated with those inventories having a priority. It is also supported by the eligible accounts receivable and commodity trading account excess margin funds. The interest rate on the Revolving Credit Note is based on the 1-month LIBOR plus three hundred basis points. The interest rate at September 30, 2014 was 3.16%. There were no borrowings outstanding on the Revolving Credit Note at September 30, 2014 or September 30, 2013.

These loans are subject to protective covenants, which require the Company to maintain various financial ratios. The covenants include a working capital requirement of $15,000,000, and a capital expenditures covenant that allows the Company $5,000,000 of expenditures per year without prior approval. 
 

52


CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2014 and 2013



9. LEASES

At September 30, 2014, the Company had the following commitments for payments of rentals under operating leases which at inception had a non-cancellable term of more than one year:

 
 
Total
October 1, 2014 to September 30, 2015
 
$
1,172,964

October 1, 2015 to September 30, 2016
 
1,172,964

October 1, 2016 to September 30, 2017
 
1,172,964

October 1, 2017 to September 30, 2018
 
1,171,870

October 1, 2018 to September 30, 2019
 
97,200

Total minimum lease commitments
 
$
4,787,962


10. COMMITMENTS AND CONTINGENCIES

Marketing Agreement

The Company entered into an agreement with an unrelated company for the purpose of marketing and selling all the distillers grains the Company is expected to produce. The buyer agrees to remit a fixed percentage rate of the actual selling price to the Company for distiller's dried grain solubles and wet distiller grains. The agreement may be terminated by either party at its unqualified option, by providing written notice of not less than 120 days to the other party.

The Company entered into an agreement with an unrelated company to sell all of the ethanol the Company produces at the plant. The Company agrees to pay a commission of a fixed percent of the net purchase price for marketing and distribution. In July 2009, the initial term of the agreement was extended to eight years and the commission increased in exchange for reducing the payment terms from 20 days to 7 days after shipment. In November, 2012, the Company amended this agreement to extend the initial term of the agreement to eleven years, expiring in 2019, in exchange for capping the commissions at $1,750,000 per year.

Utility Agreement

The Company entered into a natural gas services contract with an initial term of ten years and automatic renewals for up to three consecutive one year periods. Under the contract, the Company agrees to pay a fixed transportation charge per therm delivered for the first five years. For the remaining five years, the fixed transportation charge will be increased by the compounded inflation rate (as determined by the Consumer Price Index). The contract commenced in November 2008 when plant operations began.

The Company has a commitment to buy electricity from a utility. The Company pays the utility company monthly pursuant to their standard rates.

Development Agreement

In September 2007, the Company entered into a development agreement with Randolph County Redevelopment Commission (“the Commission”) to promote economic development in the area. Under the terms of this agreement, beginning in January 2008 through December 2028, the money the Company pays toward property tax expense is allocated to an expense and an acquisition account. The funds in the acquisition account can be used by the Commission to purchase equipment, at the Company's direction, for the plant. At September 30, 2014, there is approximately $222,000 in this account. However, as the Company does not have title to or control over the funds in the acquisition account, no amounts have been recorded in the balance sheet relating to this account.

Tax abatement

In October 2006, the real estate that the plant was developed on was determined to be an economic revitalization area, which qualified the Company for tax abatement. The abatement period is for a 10 year term, with an effective date beginning calendar year end 2009 for the property taxes payable in calendar year 2011. The program allows for 100% abatement of property taxes

53


CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2014 and 2013



beginning in year 1, and then decreases on a ratable scale so that in year 11 the full amount of property taxes are due and payable. The Company must apply annually and meet specified criteria to qualify for the abatement program.

Carbon Dioxide Agreement

In March 2010, the Company entered into an agreement with an unrelated party to sell the raw carbon dioxide gas produced as a byproduct at the Company's ethanol production facility. As part of the agreement, the unrelated company leased a portion of the Company's property to construct a carbon dioxide liquefaction plant. The Company shall supply raw carbon dioxide to the plant at a rate sufficient for production of 150 tons of liquid carbon dioxide per day and will receive a price of $5.00 per ton of liquid carbon dioxide shipped, with price incentives for increased production levels specified in the contract. The Company shall be paid for a minimum of 40,000 tons each year or approximately $200,000 annually. The initial term of the agreement is for a period of ten years commencing on the start-up date of the plant, but no later than June 1, 2010 and will automatically renew for two additional five year terms thereafter unless otherwise terminated pursuant to the agreement. The carbon dioxide liquefaction plant began operations in June 2010. In November 2011, the Company amended this agreement to allow for an expansion of the carbon dioxide liquefaction plant. Under the amendment, the Company shall be paid for a new minimum of 98,700 tons each year or approximately $493,500 annually. The amendment took effect in September 2012.

Legal Proceedings and Contingencies

The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. While the ultimate outcome of these matters is not presently determinable, it is in the opinion of management that the resolution of outstanding claims will not have a material adverse effect on the financial position or results of operations of the Company. Due to the uncertainties in the settlement process, it is at least reasonably possible that management's view of outcomes will change in the near term.

In February 2010, a lawsuit against the Company was filed by another unrelated party claiming the Company's operation of the oil separation system is a patent infringement. In connection with the lawsuit, in February 2010, the agreement for the construction and installation of the tricanter oil separation system was amended. In this amendment the manufacturer and installer of the tricanter oil separation system indemnifies the Company against all claims of infringement of patents, copyrights or other intellectual property rights from the Company's purchase and use of the tricanter oil system and agrees to defend the Company in the lawsuit filed at no expense to the Company. On October 23, 2014, the court granted summary judgment finding that all of the patents claimed were invalid and that the Company had not infringed. However, this ruling is subject to appeal. The manufacturer has, and the Company expects it will continue, to vigorously defend itself and the Company in these lawsuits and in any appeal filed. If the ruling was to be successfully appealed, the Company estimates that damages sought in this litigation if awarded would be based on a reasonable royalty to, or lost profits of, the plaintiff. If the court deems the case exceptional, attorney's fees may be awarded and are likely to be $1,000,000 or more. The manufacturer has also agreed to indemnify the Company for these fees. However, in the event that damages are awarded, if the manufacturer does not fully indemnify the Company for any reason, the Company could be liable. In addition, the Company may need to cease use of its current oil separation process and seek out a replacement or cease oil production altogether.

11. EMPLOYEE BENEFIT PLAN

The Company has a defined contribution plan available to all of its qualified employees. The Company contributes up to 100% of the contributions of the employee up to 3% of the eligible salary of each employee and an additional 50% of the contributions of the employee up to 5%, for a total contribution by the Company of 4%. The plan is a safe harbor plan where the Company match is guaranteed prior to the beginning of the year. Employees are eligible after six months of service. The Company contributed approximately $97,000, $77,000 and $73,000 to the defined contribution plan during the years ended September 30, 2014, 2013 and 2012, respectively.

12. UNCERTAINTIES IMPACTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS

The Company has certain risks and uncertainties that it experiences during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol, distillers grains and corn oil to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. Ethanol sales average approximately 78% of total revenues and corn costs average 79% of total cost of goods sold.

54


CARDINAL ETHANOL, LLC
Notes to Audited Financial Statements
September 30, 2014 and 2013




The Company's operating and financial performance is largely driven by prices at which the Company sells ethanol, distillers grains and corn oil, and the related cost of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies and programs, and the unleaded gasoline markets and the petroleum markets, although, since 2005, the prices of ethanol and gasoline began a divergence with ethanol selling for less than gasoline at the wholesale level. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.

13.    QUARTERLY FINANCIAL DATA (UNAUDITED)

Summary quarterly results are as follows:

  
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Fiscal year ended September 30, 2014
 
 
 
 
 
 
 
Revenues
$
83,572,765

 
$
73,065,869

 
$
98,631,414

 
$
82,085,467

Gross profit
23,655,549

 
18,236,113

 
30,533,700

 
20,515,391

Operating income
22,434,684

 
17,150,777

 
29,360,504

 
19,049,406

Net income
21,737,799

 
17,152,209

 
29,364,504

 
19,007,162

Basic and diluted earnings per unit
$
1,488.28

 
$
1,174.33

 
$
2,010.44

 
$
1,301.33


  
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Fiscal year ended September 30, 2013
 
 
 
 
 
 
 
Revenues
$
85,083,385

 
$
89,769,233

 
$
95,598,868

 
$
87,160,328

Gross profit (loss)
1,662,161

 
8,098,414

 
11,195,787

 
12,533,056

Operating income (loss)
592,238

 
6,897,956

 
9,907,490

 
11,394,097

Net income (loss)
(61,975
)
 
6,269,242

 
9,301,752

 
10,846,405

Basic and diluted earnings (loss) per unit
$
(4.24
)
 
$
429.22

 
$
636.84

 
$
742.60


  
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Fiscal year ended September 30, 2012
 
 
 
 
 
 
 
Revenues
$
87,476,615

 
$
77,692,498

 
$
69,530,510

 
$
86,494,764

Gross profit
8,834,094

 
3,457,382

 
(872,970
)
 
(2,195,173
)
Operating income
7,677,558

 
2,406,546

 
(2,333,749
)
 
(3,207,751
)
Net income (loss)
6,899,308

 
1,827,743

 
(3,011,583
)
 
(3,863,488
)
Basic and diluted earnings (loss) per unit
$
472.36

 
$
125.14

 
$
(206.19
)
 
$
(264.51
)

The above quarterly financial data is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of the selected data for these periods presented have been included.

55


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Boulay PLLP has been our independent auditor since the Company's inception and is the Company's independent auditor at the present time. We have had no disagreements with our auditor.

ITEM 9A.  CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures

Our management is responsible for maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. In addition, the disclosure controls and procedures must ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial and other required disclosures.

Our management, including our Chief Executive Officer (the principal executive officer), Jeff Painter, along with our Chief Financial Officer (the principal financial officer), William Dartt, have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of September 30, 2014.  Based on this review and evaluation, these officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission; and to ensure that the information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

Inherent Limitations Over Internal Controls

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
 
    (i)    pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
 
    (ii)    provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
 
    (iii)    provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management's Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control-Integrated Framework

56


issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of September 30, 2014.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. As we are a non-accelerated filer, management's report is not subject to attestation by our registered public accounting firm pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 that permit us to provide only management's report in this annual report.
 
Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fourth quarter of our 2014 fiscal year, which were identified in connection with management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting

ITEM 9B.    OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The information required by this Item is incorporated by reference from the definitive proxy statement for our 2015 Annual Meeting of Members to be filed with the Securities and Exchange Commission within 120 days after the end of our 2014 fiscal year. This proxy statement is referred to in this report as the 2015 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
 
The information required by this Item is incorporated by reference from the 2015 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBER MATTERS
 
The information required by this Item is incorporated by reference from the 2015 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 
The information required by this Item is incorporated by reference from the 2015 Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated by reference from the 2015 Proxy Statement.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

The following exhibits and financial statements are filed as part of, or are incorporated by reference into, this report:
 
(1)
Financial Statements

The financial statements appear beginning at page 36 of this report.

(2)
Financial Statement Schedules

All supplemental schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.

57



 (3)    Exhibits

Exhibit No.
Exhibit
 
Filed Herewith
 
Incorporated by Reference
3.1
Articles of Organization of the registrant.
 
 
 
Exhibit 3.1 to the registrant's registration statement on Form SB-2 (Commission File 333-131749) filed on February 10, 2006.
3.1A
Name Change Amendment
 
 
 
Exhibit 3.1A to the registrant's registration statement on Form SB-2 (Commission File 333-131749) filed on February 10, 2006.
3.2
Second Amended and Restated Operating Agreement of the registrant
 
 
 
Exhibit 3.2 to the registrant's registration statement on Form SB-2 (Commission File 333-131749) filed on February 10, 2006.
4.1
Form of Membership Unit Certificate.
 
 
 
Exhibit 4.2 to the registrant's registration statement on Form SB-2 (Commission File 333-131749) filed on February 10, 2006.
10.1
Energy Management Agreement dated January 23, 2006 between Cardinal Ethanol, LLC and U.S. Energy Services, Inc.

 
 
 
Exhibit 10.9 to the registrant's registration statement on Form SB-2 (Commission File 333-131749) filed on February 10, 2006.
10.2
Distiller's Grain Marketing Agreement dated December 13, 2006 between Cardinal Ethanol, LLC and Commodity Specialist Company.
 
 
 
Exhibit 10.19 to the registrant's Form 10-KSB filed with the Commission on December 22, 2006.
10.3
Ethanol Purchase and Sale Agreement dated December 18, 2006 between Cardinal Ethanol, LLC and Murex N.A., Ltd.
 
 
 
Exhibit 10.21 to the registrant's Form 10-KSB filed with the Commission on December 22, 2006.
10.4
Construction Loan Agreement dated December 19, 2006 between Cardinal Ethanol, LLC and First National Bank of Omaha.
 
 
 
Exhibit 10.22 to the registrant's Form 10-KSB filed with the Commission on December 22, 2006.
10.5
Construction Note dated December 19, 2006 between Cardinal Ethanol, LLC and First National Bank of Omaha.
 
 
 
Exhibit 10.23 to the registrant's Form 10-KSB filed with the Commission on December 22, 2006.
10.6
Revolving Note dated December 19, 2006 between Cardinal Ethanol, LLC and First National Bank of Omaha.
 
 
 
Exhibit 10.24 to the registrant's Form 10-KSB filed with the Commission on December 22, 2006.
10.7
Letter of Credit Promissory Note and Continuing Letter of Credit Agreement dated December 19, 2006 between Cardinal Ethanol, LLC and First National Bank of Omaha.
 
 
 
Exhibit 10.25 to the registrant's Form 10-KSB filed with the Commission on December 22, 2006.
10.8
Construction Loan Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement dated December 19, 2006 between Cardinal Ethanol, LLC and First National Bank of Omaha.
 
 
 
Exhibit 10.26 to the registrant's Form 10-KSB filed with the Commission on December 22, 2006.
10.9
Security Agreement dated December 19, 2006 between Cardinal Ethanol, LLC and First National Bank of Omaha.
 
 
 
Exhibit 10.27 to the registrant's Form 10-KSB filed with the Commission on December 22, 2006.
10.10
Master Agreement dated December 19, 2006 between Cardinal Ethanol, LLC and First National Bank of Omaha.
 
 
 
Exhibit 10.28 to the registrant's Form 10-KSB filed with the Commission on December 22, 2006.

58


10.11
Employment Agreement dated January 22, 2007 between Cardinal Ethanol, LLC and Jeff Painter.
 
 
 
Exhibit 10.29 to the registrant's Form 10-QSB filed with the Commission on February 14, 2007.
10.12
Long Term Transportation Service Contract for Redelivery of Natural Gas between Ohio Valley Gas Corporation and Cardinal Ethanol, LLC dated March 20, 2007.
 
 
 
Exhibit 10.32 to the registrant's Form 10-QSB filed with the Commission on May 15, 2007.
10.13
Agreement between Indiana Michigan Power Company and Cardinal Ethanol, LLC dated April 18, 2007.
 
 
 
Exhibit 10.33 to the registrant's Form 10-QSB filed with the Commission on May 15, 2007.
10.14
Risk Management Agreement entered into between Cardinal Ethanol, LLC and John Stewart & Associates, Inc. dated July 16, 2007.
 
 
 
Exhibit 10.34 to the registrant's Form 10-QSB filed with the Commission on August 3, 2007.
10.15
Consent to Assignment and Assumption of Marketing Agreement between Commodity Specialists Company and Cardinal Ethanol, LLC dated August 28, 2007.
 
 
 
Exhibit 10.37 to the registrant's Form 10-KSB filed with the Commission on December 17, 2007.
10.16
Tricanter Installation and Purchase Agreement between ICM, Inc. and Cardinal Ethanol, LLC dated June 27, 2008.
 
 
 
Exhibit 10.1 to the registrant's Form 10-QSB filed with the Commission on August 14, 2008
10.17
Corn Oil Extraction Note between First National Bank of Omaha and Cardinal Ethanol, LLC dated July 31, 2008.
 
 
 
Exhibit 10.2 to the registrant's Form 10-QSB filed with the Commission on August 14, 2008
10.18
First Amendment of Construction Loan Mortgage between First National Bank of Omaha and Cardinal Ethanol, LLC dated July 31, 2008.
 
 
 
Exhibit 10.3 to the registrant's Form 10-QSB filed with the Commission on August 14, 2008
10.19
Third Amendment of Construction Loan Agreement between First National Bank of Omaha and Cardinal Ethanol, LLC dated July 31, 2008.
 
 
 
Exhibit 10.4 to the registrant's Form 10-QSB filed with the Commission on August 14, 2008.
10.20
Fixed Rate Note between First National Bank of Omaha and Cardinal Ethanol, LLC dated April 8, 2009.
 
 
 
Exhibit 10.1 to the registrant's Form 10-Q filed with the Commission on May 20, 2009.
10.21
Long Term Revolving Note between First National Bank of Omaha and Cardinal Ethanol, LLC dated April 8, 2009.
 
 
 
Exhibit 10.2 to the registrant's Form 10-Q filed with the Commission on May 20, 2009.
10.22
Variable Rate Note between First National Bank of Omaha and Cardinal Ethanol, LLC dated April 8, 2009.
 
 
 
Exhibit 10.3 to the registrant's Form 10-Q filed with the Commission on May 20, 2009.
10.23
Corn Oil Extraction Term Note between First National Bank of Omaha and Cardinal Ethanol, LLC dated April 8, 2009.
 
 
 
Exhibit 10.4 to the registrant's Form 10-Q filed with the Commission on May 20, 2009.
10.24
Amendment No 1 to Ethanol Purchase and Sale Agreement between Murex N.A., LTD and Cardinal Ethanol, LLC dated July 2, 2009.
 
 
 
Exhibit 99.1 to the registrant's Form 8-K filed with the Commission on July 7, 2009.
10.25
Results Guarantee Agreement between Pavilion Technologies and Cardinal Ethanol, LLC dated September 30, 2009.
 
 
 
Exhibit 10.6 to the registrant's Form 10-K filed with the Commission on December 28, 2009.
10.26
Amendment to Tricanter Purchase and Installation Agreement between ICM, Inc. and Cardinal Ethanol, LLC dated February 16, 2010.
 
 
 
Exhibit 10.1 to the registrant's Form 10-Q filed with the Commission on May 14, 2010.

59


10.27
Carbon Dioxide Purchase and Sale Agreement between EPCO Carbon Dioxide Products, Inc. and Cardinal Ethanol, LLC dated March 8, 2010.
 
 
 
Exhibit 10.2 to the registrant's Form 10-Q filed with the Commission on May 14, 2010.
10.28
Construction Agreement between LAH Development, LLC and Cardinal Ethanol, LLC dated May 11, 2010.
 
 
 
Exhibit 10.3 to the registrant's Form 10-Q filed with the Commission on May 14, 2010.
10.29
Non-Exclusive Co2 Facility Site Lease Agreement between EPCO Carbon Dioxide Products, Inc and Cardinal Ethanol, LLC dated August 11, 2010.
 
 
 
Exhibit 10.1 to the registrant's Form 10-Q filed with the Commission on August 12, 2010.
10.30
Ninth Amendment of Construction Loan Agreement between First National Bank of Omaha and Cardinal Ethanol, LLC dated May 25, 2011.
 
 
 
Exhibit 10.1 to the registrant's Form 10-Q filed with the Commission on August 10, 2011.
10.31
Sixth Amended and Restated Revolving Promissory Note between First National Bank of Omaha and Cardinal Ethanol, LLC dated May 25, 2011.
 
 
 
Exhibit 10.2 to the registrant's Form 10-Q filed with the Commission on August 10, 2011.
10.32
Employee Bonus Plan for 2011/2012.
 
 
 
Exhibit 10.34 to the registrant's Form 10-K filed with the Commission on December 13, 2011
10.33
Amendment No. 2 to Ethanol Purchase and Sale Agreement between Cardinal Ethanol, LLC and Murex N.A., LTD. dated November 22, 2011.
 
 
 
Exhibit 10.35 to the registrant's Form 10-K filed with the Commission on December 13, 2011
10.34
First Amendment to Carbon Dioxide Purchase and Sale Agreement between EPCO Carbon Dioxide Products, Inc. and Cardinal Ethanol, LLC dated November 22, 2011.
 
 
 
Exhibit 10.36 to the registrant's Form 10-K filed with the Commission on December 13, 2011
10.35
Seventh Amended and Restated Revolving Promissory Note between Cardinal Ethanol, LLC and First National Bank of Omaha dated February 14, 2012.
 
 
 
Exhibit 10.1 to the registrant's Form 10-Q filed with the Commission on May 4, 2012.
10.36
Tenth Amendment of Construction Loan Agreement between Cardinal Ethanol, LLC and First National Bank of Omaha dated February 14, 2012.
 
 
 
Exhibit 10.2 to the registrant's Form 10-Q filed with the Commission on May 4, 2012.
10.37
Eleventh Amendment of Construction Loan Agreement between Cardinal Ethanol, LLC and First National Bank of Omaha dated November 20, 2012.
 
 
 
Exhibit 10.37 to the registrant's Form 10-K filed with the Commission on December 13, 2012
10.38
Employee Bonus Plan for 2012/2013
 
 
 
Exhibit 10.38 to the registrant's Form 10-K filed with the Commission on December 13, 2012
10.39
Eighth Amended and Restated Revolving Promissory Note between Cardinal Ethanol, LLC and First National Bank of Omaha dated February 12, 2013.

 
 
 
Exhibit 10.1 to the registrant's Form 10-Q filed with the Commission on February 11, 2013
10.40
Twelfth Amendment of Construction Loan Agreement between Cardinal Ethanol, LLC and First National Bank of Omaha dated February 12, 2013.

 
 
 
Exhibit 10.2 to the registrant's Form 10-Q filed with the Commission on February 11, 2013

60


10.41
Thirteenth Amendment of the Construction Loan Agreement between First National Bank of Omaha and Cardinal Ethanol, LLC dated May 10, 2013
 
 
 
Exhibit 10.1 to the registrant's Form 10-Q filed with the Commission on May 15, 2013
10.42
Ninth Amended and Restated Revolving Promissory Note between First National Bank of Omaha and Cardinal Ethanol, LLC dated May 10, 2013
 
 
 
Exhibit 10.2 to the registrant's Form 10-Q filed with the Commission on May 15, 2013
10.43
First Amended and Restated Construction Loan Agreement between First National Bank of Omaha and Cardinal Ethanol, LLC dated June 10, 2013.
 
 
 
Exhibit 10.1 to the registrant's Form 10-Q filed with the Commission on August 7, 2013
10.44
Second Amended and Restated Security Agreement between First National Bank of Omaha and Cardinal Ethanol, LLC dated June 10, 2013.
 
 
 
Exhibit 10.2 to the registrant's Form 10-Q filed with the Commission on August 7, 2013
10.45
First Amended and Restated Security Agreement and Assignment of Hedging Accounts between First National Bank of Omaha and Cardinal Ethanol, LLC dated June 10, 2013.
 
 
 
Exhibit 10.3 to the registrant's Form 10-Q filed with the Commission on August 7, 2013
10.46
First Amended and Restated Security Agreement and Assignment of Hedging Accounts between First National Bank of Omaha and Cardinal Ethanol, LLC dated June 10, 2013.
 
 
 
Exhibit 10.4 to the registrant's Form 10-Q filed with the Commission on August 7, 2013
10.47
Declining Revolving Credit Note between First National Bank of Omaha and Cardinal Ethanol, LLC dated June 10, 2013.
 
 
 
Exhibit 10.5 to the registrant's Form 10-Q filed with the Commission on August 7, 2013
10.48
Revolving Credit Note between First National Bank of Omaha and Cardinal Ethanol, LLC dated June 10, 2013.
 
 
 
Exhibit 10.6 to the registrant's Form 10-Q filed with the Commission on August 7, 2013
10.49
First Amended and Restated Construction Loan Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement between First National Bank of Omaha and Cardinal Ethanol, LLC dated June 10, 2013.
 
 
 
Exhibit 10.7 to the registrant's Form 10-Q filed with the Commission on August 7, 2013
10.50
Termination Agreement between First National Bank of Omaha and Cardinal Ethanol, LLC dated October 8, 2013.

 
 
 
Exhibit 10.50 to the registrant's Form10-K filed with the Commission on November 27, 2013.
10.51
First Amendment of First Amended and Restated Construction Loan Agreement between First National Bank of Omaha and Cardinal Ethanol, LLC dated October 8, 2013.
 
 
 
Exhibit 10.51 to the registrant's Form10-K filed with the Commission on November 27, 2013.
10.51
Employee Bonus Plan for 2013/2014
 
 
 
Exhibit 10.51 to the registrant's Form10-K filed with the Commission on November 27, 2013.
10.52
Second Amendment of First Amended and Restated Construction Loan Agreement between First National Bank of Omaha and Cardinal Ethanol, LLC dated February 27, 2014.
 
 
 
Exhibit 10.1 to the registrant's Form10-Q filed with the Commission on May 6, 2014.

61


10.53
First Amended and Restated Declining Revolving Credit Note between First National Bank of Omaha and Cardinal Ethanol, LLC dated February 27, 2014.
 
 
 
Exhibit 10.2 to the registrant's Form10-Q filed with the Commission on May 6, 2014.
10.54
Employee Bonus Plan, Amended and Restated for Fiscal Year 2014-15
 
X
 
 
14.1
Code of Ethics of Cardinal Ethanol, LLC.
 
 
 
Exhibit 14.1 to the registrant's Form 10-K filed with the Commission on December 13, 2012
31.1
Certificate Pursuant to 17 CFR 240.13a-14(a)
 
X
 
 
31.2
Certificate Pursuant to 17 CFR 240.13a-14(a)
 
X
 
 
32.1
Certificate Pursuant to 18 U.S.C. Section 1350
 
X
 
 
32.2
Certificate Pursuant to 18 U.S.C. Section 1350
 
X
 
 
101
The following financial information from Cardinal Ethanol, LLC's Annual Report for the Fiscal Year Ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of September 30, 2014 and September 30, 2013, (ii) Condensed Statements of Operations for fiscal years ended September 30, 2014, 2013 and 2012, (iii) Statements of Cash Flows for the fiscal years ended September 30, 2014, 2013, and 2012, (iv) Statements of Changes in Members' Equity, and (iv) the Notes to Financial Statements.**
 
 
 
 

(+)     Confidential Treatment Requested.
(X)    Filed herewith
(**)    Furnished herewith

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
CARDINAL ETHANOL, LLC
 
 
 
 
Date:
November 25, 2014
 
/s/ Jeffrey L. Painter
 
 
 
Jeffrey L. Painter
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
November 25, 2014
 
/s/ William Dartt
 
 
 
William Dartt
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)
    

62


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the foregoing persons on behalf of the registrant and in the capacities and on the dates indicated.

Date:
November 25, 2014
 
/s/ Robert Davis
 
 
Robert Davis. Chairman and Director
 
 
 
Date:
November 25, 2014
 
/s/ Dale Schwieterman
 
 
Dale Schwieterman, Director
 
 
 
Date:
November 25, 2014
 
/s/ Tom Chalfant
 
 
Tom Chalfant, Vice Chairman and Director
 
 
 
Date:
November 25, 2014
 
/s/ J. Phillip Zicht
 
 
J. Phillip Zicht, Director
 
 
 
Date:
November 25, 2014
 
/s/ Ralph Brumbaugh
 
 
Ralph Brumbaugh, Director
 
 
 
Date:
November 25, 2014
 
/s/ Thomas C. Chronister
 
 
Thomas C. Chronister, Secretary and Director
 
 
 
Date:
November 25, 2014
 
/s/ David Matthew Dersch,
 
 
David Matthew Dersch, Director
 
 
 
Date:
November 25, 2014
 
/s/ Cyril G. LeFevre
 
 
Cyril G. LeFevre, Director
 
 
 
Date:
November 25, 2014
 
/s/ C. Allan Rosar
 
 
C. Allan Rosar, Director
 
 
 
Date:
November 25, 2014
 
/s/ William Garth
 
 
William Garth, Director
 
 
 
Date:
November 25, 2014
 
/s/ Robert Baker
 
 
Robert Baker, Director
 
 
 
Date:
November 25, 2014
 
/s/ Lewis M. Roch III
 
 
Lewis M.Roch III, Director


63