Attached files
| file | filename |
|---|---|
| EX-32.2 - CERTIFICATION - GOLDEN GRAIN ENERGY | a322certification13116.htm |
| EX-31.2 - CERTIFICATION - GOLDEN GRAIN ENERGY | a312certification13116.htm |
| EX-31.1 - CERTIFICATION - GOLDEN GRAIN ENERGY | a311certification13116.htm |
| EX-32.1 - CERTIFICATION - GOLDEN GRAIN ENERGY | a321certification13116.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. | |
For the quarterly period ended | January 31, 2016 | |
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 000-51177 | ||
GOLDEN GRAIN ENERGY, LLC
(Exact name of registrant as specified in its charter)
Iowa | 02-0575361 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
1822 43rd Street SW, Mason City, Iowa 50401 | ||||
(Address of principal executive offices) | ||||
(641) 423-8525 | ||||
(Registrant's telephone number, including area code) | ||||
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 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
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of March 14, 2016, there were 18,953,000 Class A membership units outstanding and 920,000 Class B membership units outstanding.
1
INDEX
Page Number | |
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
GOLDEN GRAIN ENERGY, LLC
Balance Sheets
ASSETS | January 31, 2016 | October 31, 2015 | ||||||
(Unaudited) | ||||||||
Current Assets | ||||||||
Cash and equivalents | $ | 7,628,631 | $ | 21,084,029 | ||||
Marketable securities | 13,341,028 | 13,241,062 | ||||||
Accounts receivable | 3,847,227 | 2,717,592 | ||||||
Other receivables | 2,348,094 | 669,930 | ||||||
Derivative instruments | 452,083 | 879,332 | ||||||
Inventory | 8,059,499 | 6,866,505 | ||||||
Prepaid expenses and other | 1,827,928 | 1,578,458 | ||||||
Total current assets | 37,504,490 | 47,036,908 | ||||||
Property and Equipment | ||||||||
Land and land improvements | 12,516,479 | 12,516,479 | ||||||
Building and grounds | 25,761,752 | 25,761,752 | ||||||
Grain handling equipment | 15,329,548 | 15,178,214 | ||||||
Office equipment | 220,527 | 217,424 | ||||||
Plant and process equipment | 85,512,612 | 84,802,333 | ||||||
Construction in progress | 8,710,196 | 5,887,270 | ||||||
148,051,114 | 144,363,472 | |||||||
Less accumulated depreciation | 84,288,127 | 82,232,924 | ||||||
Net property and equipment | 63,762,987 | 62,130,548 | ||||||
Other Assets | ||||||||
Investments | 24,526,518 | 27,334,443 | ||||||
Other assets | 1,585,380 | 1,653,421 | ||||||
Total other assets | 26,111,898 | 28,987,864 | ||||||
Total Assets | $ | 127,379,375 | $ | 138,155,320 | ||||
Notes to the Financial Statements are an integral part of these Statements.
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GOLDEN GRAIN ENERGY, LLC
Balance Sheets
LIABILITIES AND MEMBERS' EQUITY | January 31, 2016 | October 31, 2015 | ||||||
(Unaudited) | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 6,542,868 | $ | 6,324,850 | ||||
Accrued expenses | 1,201,536 | 1,679,336 | ||||||
Other current liabilities | 113,115 | 110,392 | ||||||
Total current liabilities | 7,857,519 | 8,114,578 | ||||||
Long-term Liabilities | ||||||||
Deferred compensation | 283,998 | 278,798 | ||||||
Deferred revenue, net of current portion | 167,843 | 198,164 | ||||||
Total long-term liabilities | 451,841 | 476,962 | ||||||
Commitments and Contingencies | ||||||||
Members' Equity (19,873,000 units issued and outstanding) | 119,070,015 | 129,563,780 | ||||||
Total Liabilities and Members’ Equity | $ | 127,379,375 | $ | 138,155,320 | ||||
Notes to the Financial Statements are an integral part of these Statements.
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GOLDEN GRAIN ENERGY, LLC
Statements of Operations (Unaudited)
Three Months Ended | Three Months Ended | |||||||
January 31, 2016 | January 31, 2015 | |||||||
Revenues | $ | 48,773,123 | $ | 61,048,123 | ||||
Cost of Goods Sold | 46,819,364 | 48,693,853 | ||||||
Gross Profit | 1,953,759 | 12,354,270 | ||||||
Operating Expenses | 998,968 | 1,055,988 | ||||||
Operating Income | 954,791 | 11,298,282 | ||||||
Other Income (Expense) | ||||||||
Other income | 99,204 | 82,864 | ||||||
Interest (expense) | (3,728 | ) | (35,289 | ) | ||||
Equity in net income of investments | 2,367,068 | 3,556,776 | ||||||
Total Other Income | 2,462,544 | 3,604,351 | ||||||
Net Income | $ | 3,417,335 | $ | 14,902,633 | ||||
Basic & diluted net income per unit | $ | 0.17 | $ | 0.75 | ||||
Weighted average units outstanding for the calculation of basic & diluted net income per unit | 19,873,000 | 19,873,000 | ||||||
Distributions Per Unit | $ | 0.70 | $ | 2.60 | ||||
Notes to the Financial Statements are an integral part of these Statements.
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GOLDEN GRAIN ENERGY, LLC
Statements of Cash Flows (Unaudited)
Three Months Ended | Three Months Ended | |||||||
January 31, 2016 | January 31, 2015 | |||||||
Cash Flows from Operating Activities | ||||||||
Net income | $ | 3,417,335 | $ | 14,902,633 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,077,355 | 2,072,672 | ||||||
Unrealized (gain) loss on risk management & marketable securities | 327,283 | (219,460 | ) | |||||
Amortization of deferred revenue | (27,598 | ) | (73,835 | ) | ||||
Change in accretion of interest on grant & note receivable | (16,441 | ) | 16,209 | |||||
Distributions in excess of earnings from investments | 1,298,325 | 6,905,817 | ||||||
Deferred compensation expense | 5,200 | 131,139 | ||||||
Change in assets and liabilities | ||||||||
Accounts receivable | (1,129,635 | ) | 5,815,852 | |||||
Inventory | (1,192,994 | ) | (2,943,183 | ) | ||||
Prepaid expenses and other | (355,704 | ) | (981,262 | ) | ||||
Accounts payable | (318,431 | ) | (54,197 | ) | ||||
Accrued expenses | (477,800 | ) | (530,053 | ) | ||||
Deferred compensation payable | — | (126,014 | ) | |||||
Net cash provided by operating activities | 3,606,895 | 24,916,318 | ||||||
Cash Flows from Investing Activities | ||||||||
Capital expenditures | (3,151,193 | ) | (2,327,466 | ) | ||||
Purchase of marketable securities | (5,000,000 | ) | — | |||||
Proceeds from sale of marketable securities | 5,000,000 | 5,150,000 | ||||||
Net cash (used in) provided by investing activities | (3,151,193 | ) | 2,822,534 | |||||
Cash Flows from Financing Activities | ||||||||
Payments for long-term debt | — | (9,695 | ) | |||||
Distributions to members | (13,911,100 | ) | (51,669,800 | ) | ||||
Payments received on grant receivable | — | 253,112 | ||||||
Net cash (used in) financing activities | (13,911,100 | ) | (51,426,383 | ) | ||||
Net (Decrease) in Cash and Equivalents | (13,455,398 | ) | (23,687,531 | ) | ||||
Cash and Equivalents – Beginning of Period | 21,084,029 | 47,444,566 | ||||||
Cash and Equivalents – End of Period | $ | 7,628,631 | $ | 23,757,035 | ||||
Supplemental Cash Flow Information | ||||||||
Cash paid for interest | $ | 16,648 | $ | 42,502 | ||||
Supplemental Disclosure of Noncash Operating, Investing & Financing Activities | ||||||||
Accounts payable related to construction in process | $ | 536,449 | $ | 396,200 | ||||
Distributions declared and unpaid by equity method investee | 1,509,600 | — | ||||||
Notes to the Financial Statements are an integral part of these Statements.
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
January 31, 2016
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and notes disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements for the year ended October 31, 2015, contained in the Company's annual report on Form 10-K for 2015.
In the opinion of management, the interim condensed financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments.
Nature of Business
Golden Grain Energy, LLC (Golden Grain Energy) is approximately a 110 million gallon annual production ethanol plant near Mason City, Iowa. The Company sells its production of ethanol, distiller grains with solubles and corn oil primarily in the continental United States. The Company also holds several investments in various companies that focus on ethanol production, marketing and/or logistics.
Organization
Golden Grain Energy is organized as an Iowa limited liability company. The members' liability is limited as specified in Golden Grain Energy's operating agreement and pursuant to the Iowa Revised Uniform Limited Liability Company Act.
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. Actual results could differ from those estimates.
Cash and Equivalents
The Company's cash balances are maintained in bank depositories and regularly exceed federally insured limits. The Company has not experienced any losses in connection with these balances. Also included in cash and equivalents are highly liquid investments, that are readily convertible into known amounts of cash, which are subject to an insignificant risk of change in value due to interest rate, quoted price or penalty on withdrawal and have a maturity of three months or less.
Marketable Securities
Marketable securities consist of certificates of deposits with original maturities of greater than three months and mutual funds. Certificates of deposit are considered held to maturity securities, which are measured at cost. Mutual funds are considered trading securities which are measured at fair value using prices obtained from pricing services. Any unrealized or realized gains and losses on the trading securities are recorded as part of other income (expense).
At January 31, 2016, marketable securities consisted of mutual funds invested in intermediate-term municipal and government bonds with an approximate cost and fair market value of $7,812,000 and $7,841,000, respectively, and certificates of deposit all with maturities of less than one year and approximate value of $5,500,000. At October 31, 2015, marketable securities consisted of mutual funds invested in intermediate-term municipal and government bonds with an approximate cost and fair market value of $6,257,000 and $6,241,000, respectively, and certificates of deposit all with maturities of less than one year and an approximate value of $7,000,000. For the periods ended January 31, 2016 and 2015, there was no other-than-temporary impairment recognized. For the three months ended January 31, 2016 and 2015, the Company recorded interest, dividends and net realized and unrealized gains and losses of approximately $99,000 and $83,000, respectively, from these investments part of other income (expense).
Receivables
Credit sales are made primarily to one customer and no collateral is required. The Company carries these accounts receivable at original invoice amount with no allowance for doubtful accounts due to the historical collection rates on these accounts.
Investments
The Company has less than a 20% investment interest in five companies in related industries. These investments are being accounted for by the equity method of accounting under which the Company's share of net income is recognized as income in the Company's income statement and added to the investment account. Distributions or dividends received from the investments are treated as a
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
January 31, 2016
reduction of the investment account. The investments are evaluated for indications of impairment on a regular basis. A loss would be recognized when the fair value is determined to be less than the carrying value.
The fiscal years of Renewable Products Marketing Group, LLC (RPMG) and Guardian Energy Janesville, LLC end on September 30 and the fiscal years of Absolute Energy, LLC, Homeland Energy Solutions, LLC and Lawrenceville Tank, LLC end on December 31. The Company consistently follows the practice of recognizing the net income based on the most recent reliable data. Therefore, the net income which is reported in the Company's income statement for the period ended January 31, 2016, for all companies, is based on the investee's results for the three months ended December 31, 2015.
Revenue and Cost Recognition
Revenue from the sale of the Company's products is recognized at the time title to the goods and all risks of ownership transfer to the customers. This generally occurs upon shipment, loading of the goods or when the customer picks up the goods. Collectability of revenue is reasonably assured based on historical evidence of collectability between the Company and its customers. Interest income is recognized as earned.
Shipping costs incurred by the Company in the sale of ethanol, distiller grains and corn oil are not specifically identifiable and as a result, revenue from the sale of ethanol, distiller grains and corn oil are recorded based on the net selling price reported to the Company from its marketer. Railcar lease costs incurred by the Company in the sale and shipment of distiller grain products are included in cost of goods sold.
Inventory
Inventories are generally valued at the lower of weighted average cost or net realized value. In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonable predictable costs of completion, disposal and transportation.
Effective November 1, 2015, the Company adopted Accounting Standards Update 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, requiring the measurement of inventory at the lower of cost or net realizable value. The adoption of this standard did not have a material effect on the financial statements.
Property & Equipment
Property and equipment are stated at historical cost. Significant additions and betterments are capitalized, while expenditures for maintenance and repairs are charged to operations when incurred. The Company uses the straight-line method of computing depreciation over the estimated useful lives between 3 and 40 years.
The Company reviews its property and equipment for impairment whenever events indicate that the carrying amount of the assets may not be recoverable. If circumstances require a long-lived asset to 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, an 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.
Investment in commodities contracts, derivative instruments and hedging activities
The Company evaluates its contracts to determine whether the contracts are derivative instruments. Certain contracts that meet the definition of a derivative may be exempted from derivative accounting and treated as normal purchases or normal sales if documented as such. 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.
The Company enters into short-term cash, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. The Company occasionally also enters into derivative contracts to hedge its exposure to price risk as it relates to ethanol sales. As part of its risk management process, the Company uses futures and option contracts through regulated commodity exchanges or through the over-the-counter market to manage its risk related to pricing of inventories. All of the Company's derivatives, other than those excluded under the normal purchases and sales exclusion, are designated as non-hedge derivatives, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated or accounted for as hedging instruments.
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
January 31, 2016
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenues in the accompanying financial statements. The fair values of contracts are presented on the accompanying balance sheet as derivative instruments net of cash due from/to broker.
Net income per unit
Basic and diluted earnings per unit are computed using the weighted-average number of Class A and B units outstanding during the period.
Fair Value
Financial instruments include cash and equivalents, certificates of deposit, marketable securities, receivables, accounts payable, accrued expenses and derivative instruments. The fair value of marketable securities and derivative financial instruments is based on quoted market prices. The fair value, determined using level 3 inputs, of other current financial instruments is estimated to approximate carrying value due to the short-term nature of these instruments.
Risks and Uncertainties
The Company has certain risks and uncertainties that it will experience 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 and distiller grains to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. For the three months ended January 31, 2016, ethanol sales accounted for approximately 80% of total revenue, distiller grains sales accounted for approximately 16% of total revenue, and corn oil sales accounted for approximately 4% of total revenue, while corn costs averaged approximately 81% of cost of goods sold.
The Company's operating and financial performance is largely driven by the prices at which ethanol is sold and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets with ethanol selling, in general, 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.
2. INVENTORY
Inventory consisted of the following as of January 31, 2016 and October 31, 2015:
January 31, 2016 | October 31, 2015 | |||||||
Raw Materials | $ | 4,015,687 | $ | 4,032,244 | ||||
Work in Process | 1,157,341 | 1,208,661 | ||||||
Finished Goods | 2,886,471 | 1,625,600 | ||||||
Totals | $ | 8,059,499 | $ | 6,866,505 | ||||
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
January 31, 2016
3. BANK FINANCING
The Company has entered into a master loan agreement with Farm Credit Services of America (FLCA) which includes a revolving term loan with original maximum borrowings of $35,000,000 and maturity on February 1, 2020. Interest on the term loan is payable monthly at 3.15% above the one-month LIBOR (3.58% as of January 31, 2016). The borrowings are secured by substantially all the assets of the Company. The agreement allows for additional reductions in the maximum borrowings at the Company's request. The Company is subject to certain financial covenants including but not limited to minimum working capital and net worth requirements and limitations on distributions. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the loans and/or imposition of fees or penalties. As of January 31, 2016, the Company had no outstanding borrowings and $10 million available to borrow under the credit agreement. As of October 31, 2015, the Company had no borrowings outstanding.
4. RELATED PARTY TRANSACTIONS
The Company purchased corn and materials from members of its Board of Directors or Risk Management Committee that own or manage elevators. Purchases from the related parties during the three months ended January 31, 2016 totaled approximately $24,260,000. Purchases during the three months ended January 31, 2015 totaled approximately $18,984,000. As of January 31, 2016 and October 31, 2015, the amount owed to related parties was approximately $839,000 and $666,000, respectively.
5. COMMITMENTS, CONTINGENCIES AND AGREEMENTS
Ethanol, Distiller Grains and Corn Oil marketing agreements and major customers
The Company has entered into marketing agreements with a marketing company, in which the Company has an investment, for the exclusive rights to market, sell and distribute the entire ethanol, distiller grains and corn oil inventory produced by the Company. The marketing fees are presented net in revenues.
Approximate sales and marketing fees related to the agreements in place are as follows:
Three Months Ended January 31, | ||||||||
2016 | 2015 | |||||||
Sales ethanol, distiller grains & corn oil | $ | 48,873,000 | $ | 61,081,000 | ||||
Marketing fees | 100,000 | 89,000 | ||||||
As of | January 31, 2016 | October 31, 2015 | ||||||
Amount due from RPMG | $ | 3,836,000 | $ | 2,717,000 | ||||
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
January 31, 2016
6. RISK MANAGEMENT
The Company's activities expose it to a variety of market risks, including the effects of changes in commodity prices. These financial exposures are monitored and managed by the Company as an integral part of its overall risk-management program. The Company's risk management program focuses on the unpredictability of financial and commodities markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.
To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange traded futures contracts to reduce its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts and uses exchange traded futures contracts to reduce price risk. Exchange-traded futures contracts are valued at market price. Changes in market price of contracts related to corn and natural gas are recorded in cost of goods sold and changes in market prices of contracts related to sale of ethanol are recorded in revenues.
Unrealized gains and losses on forward contracts are deemed "normal purchases" under derivative accounting guidelines and, therefore, are not marked to market in the Company's financial statements. The following table represents the approximate amount of realized and unrealized gains (losses) and changes in fair value recognized in earnings on commodity contracts for the periods ended January 31, 2016 and 2015 and the fair value of derivatives as of January 31, 2016 and October 31, 2015:
Income Statement Classification | Realized Gain | Change in Unrealized Gain (Loss) | Total Gain | |||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||
Commodity Contracts for the | Revenue | $ | — | $ | — | $ | — | |||||||
three months ended January 31, 2016 | Cost of Goods Sold | 382,000 | 217,000 | 599,000 | ||||||||||
Total | $ | 382,000 | $ | 217,000 | $ | 599,000 | ||||||||
Commodity Contracts for the | Revenue | $ | 141,000 | $ | (85,000 | ) | $ | 56,000 | ||||||
three months ended January 31, 2015 | Cost of Goods Sold | 186,000 | 200,000 | 386,000 | ||||||||||
Total | $ | 327,000 | $ | 115,000 | $ | 442,000 | ||||||||
Balance Sheet Classification | January 31, 2016 | October 31, 2015 | ||||||||
Futures and option contracts through December 2016 | ||||||||||
In gain position | $ | 278,000 | $ | 58,000 | ||||||
In loss position | (241,000 | ) | (237,000 | ) | ||||||
Cash held by broker | 415,000 | 1,058,000 | ||||||||
Current Asset | $ | 452,000 | $ | 879,000 | ||||||
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
January 31, 2016
As of January 31, 2016, the Company had the following approximate outstanding purchase and sale commitments, of which approximately $11,715,000 of the purchase commitments were with related parties.
Commitments Through | Amount | |||||
Sale commitments | ||||||
Corn Oil - fixed price | April 2016 | $ | 1,033,000 | |||
Distiller Grains - fixed price | March 2016 | 2,528,000 | ||||
Purchase commitments | ||||||
Corn - fixed price | December 2016 | $ | 3,233,000 | |||
Corn - basis contract | May 2016 | 18,585,000 | ||||
Natural gas - fixed price | March 2016 | 396,000 | ||||
As of January 31, 2016, the Company has fixed price futures and forward contracts in place for approximately 9% of our anticipated corn needs, 16% of our natural gas needs and 0% of our ethanol sales for the next 12 months with no open positions beyond that period.
As of January 31, 2016, the Company had approximately 36,000 bushels with approximate market value of $126,000 of priced later and deferred payment corn contracts. As of October 31, 2015, the Company had approximately 197,000 bushels with approximate market value of $705,000 of priced later and deferred payment corn contracts.
7. FAIR VALUE MEASUREMENTS
Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1: Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3: Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Marketable Securities: The Company's short-term investments are classified within Level 1 and comprised of short-term liquid investments (e.g. mutual funds), classified as trading securities, which are carried at fair value based on the quoted market prices.
Derivative financial instruments: Commodity futures and exchange-traded commodity options contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from markets such as the CME and NYMEX. Crush swaps are bundled contracts or combined contracts that include a portion of corn, ethanol and natural gas rolled into a single trading instrument. These contracts are reported at fair value utilizing Level 2 inputs and are based on the various trading activity of the components of each segment of the bundled contract.
The following table summarizes financial assets and financial liabilities measured at the approximate fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
January 31, 2016
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Marketable securities | ||||||||||||||||
Assets, January 31, 2016 | $ | 7,841,000 | $ | 7,841,000 | $ | — | $ | — | ||||||||
Assets, October 31, 2015 | 6,241,000 | 6,241,000 | — | — | ||||||||||||
Derivative financial instruments | ||||||||||||||||
January 31, 2016 | ||||||||||||||||
Assets | $ | 278,000 | $ | 260,000 | $ | 18,000 | $ | — | ||||||||
Liabilities | (241,000 | ) | (109,000 | ) | (132,000 | ) | — | |||||||||
October 31, 2015 | ||||||||||||||||
Assets | $ | 58,000 | $ | 33,000 | $ | 25,000 | $ | — | ||||||||
Liabilities | (237,000 | ) | (85,000 | ) | (152,000 | ) | — | |||||||||
8. INVESTMENTS
Condensed, combined unaudited financial information of the Company’s investments in Absolute Energy, Homeland Energy Solutions, Guardian Energy, Lawrenceville Tank and RPMG is as follows (in 000’s):
Balance Sheet | 12/31/2015 | 9/30/2015 | ||||||
Current Assets | $ | 293,971 | $ | 285,879 | ||||
Other Assets | 252,804 | 256,144 | ||||||
Current Liabilities | 167,964 | 142,927 | ||||||
Long-term Debt | 49,350 | 49,241 | ||||||
Members’ Equity | 329,461 | 349,855 | ||||||
Three Months Ended December 31, | ||||||||
Income Statement | 2015 | 2014 | ||||||
Revenue | $ | 184,049 | $ | 221,543 | ||||
Gross Profit | 21,795 | 49,229 | ||||||
Net Income | 17,520 | 44,036 | ||||||
The Company recorded equity in net income of approximately (in 000's):
Three Months Ended January 31, | ||||||||
Equity in Net Income | 2016 | 2015 | ||||||
Absolute Energy | $ | 550 | $ | 1,244 | ||||
Guardian Energy | 1,368 | 1,367 | ||||||
Homeland Energy Solutions | 405 | 990 | ||||||
Other | 44 | (44 | ) | |||||
Total | $ | 2,367 | $ | 3,557 | ||||
During the three months ended January 31, 2016, Guardian Energy made distributions in excess of the equity balance recorded by the Company. The excess distribution was approximately $961,000 and is recorded as part of income for the three months ended January 31, 2016. The following table shows the condensed financial information of Guardian Energy, which represents greater than 10% of the net income during certain periods presented.
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
January 31, 2016
Guardian Energy Condensed Financial Information | ||||||||
Balance Sheet | 12/31/2015 | 9/30/2015 | ||||||
Current Assets | $ | 25,126 | $ | 23,053 | ||||
Other Assets | 46,000 | 47,653 | ||||||
Current Liabilities | 11,707 | 7,918 | ||||||
Long-term Debt | 49,000 | 49,000 | ||||||
Members’ Equity | 10,419 | 13,788 | ||||||
Three Months Ended | ||||||||
Income Statement | 12/31/2015 | 12/31/2014 | ||||||
Revenue | $ | 52,137 | $ | 65,001 | ||||
Gross Profit | 7,290 | 16,354 | ||||||
Net Income | 3,881 | 12,924 | ||||||
The following table (in 000's) shows the condensed financial information of Homeland Energy Solutions. The Company's equitable portion of assets of Homeland Energy Solutions is greater than than 10% of the Company's assets for certain periods presented:
Homeland Energy Solutions Condensed Financial Information | ||||||||
Balance Sheet | 12/31/2015 | 9/30/2015 | ||||||
Current Assets | $ | 76,604 | $ | 80,156 | ||||
Other Assets | 110,388 | 109,910 | ||||||
Current Liabilities | 37,661 | 36,118 | ||||||
Long-term Debt | 350 | 241 | ||||||
Members’ Equity | 148,980 | 153,707 | ||||||
Three Months Ended | ||||||||
Income Statement | 12/31/2015 | 12/31/2014 | ||||||
Revenue | $ | 68,246 | $ | 77,648 | ||||
Gross Profit | 59,872 | 13,887 | ||||||
Net Income | 4,961 | 12,528 | ||||||
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as "may," "will," "should," "anticipate," "believe," "expect," "plan," "future," "intend," "could," "estimate," "predict," "hope," "potential," "continue," or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties, including, but not limited to those listed below and those business risks and factors described elsewhere in this report and our other Securities and Exchange Commission filings.
• | Reduced corn ethanol use requirements in the EPA's renewable volume obligations under the Renewable Fuels Standard for 2014, 2015 and 2016; |
• | The impact lower gasoline prices have on the market price of ethanol and our ability to profitably operate the ethanol plant; |
• | Changes in the availability and price of corn and natural gas; |
• | Any elimination of the renewable fuels use requirements under the RFS; |
• | Our ability to transport our finished goods in order to continue to operate our ethanol plant at capacity; |
• | Our ability to profitably operate the ethanol plant, including the sale of distiller grains and corn oil, and maintain a positive spread between the selling price of our products and our raw material costs; |
• | Lower distillers grains prices which result from the Chinese antidumping investigation; |
• | The ability of the ethanol industry to generate additional demand through higher level blends of ethanol, including E15 and E85; |
• | The effect our hedging activities have on our financial performance and cash flows; |
• | Ethanol, distiller grains and corn oil supply exceeding demand and corresponding price reductions; |
• | Our ability to generate free cash flow to invest in our business, service our debt and satisfy the financial covenants contained in our credit agreement with our lender; |
• | 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; |
• | Changes and advances in ethanol production technology; |
• | Changes in interest rates or the lack of credit availability; and |
• | Our ability to retain key employees and maintain labor relations. |
Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in this report. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements with these cautionary statements. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended in October and the associated quarters of those fiscal years.
Overview
Golden Grain Energy, LLC was formed as an Iowa limited liability company on March 18, 2002, for the purpose of constructing, owning and operating a fuel-grade ethanol plant near Mason City in north central Iowa. Since December 2004, we have been engaged in the production of ethanol and distiller grains at the plant and have produced corn oil since February 2009. References to "we," "us," "our" and the "Company" refer to Golden Grain Energy, LLC. We have capacity to produce approximately 110 million gallons of ethanol per year.
Our revenue is derived primarily from the sale and distribution of our ethanol, distiller grains and corn oil. We market our products through Renewable Products Marketing Group, Inc. ("RPMG"), a professional third party marketer. We are an equity owner of RPMG, LLC, the parent company of RPMG, which allows us to realize favorable marketing fees in the sale of our ethanol, distiller grains and corn oil.
On November 16, 2015, our board of directors declared a distribution of $0.70 per membership unit for members of record as of November 16, 2015. The total amount of the distribution was $13,911,100 which was paid in December 2015.
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On November 30, 2015, the EPA released its final renewable volume obligations for corn-based ethanol under the RFS which is lower than the statutory requirements for 2014, 2015 and 2016. The renewable volume obligations for conventional biofuels, including the corn-based ethanol we produce, is significantly lower than the statutory standard set in the RFS. The RFS required the use of 14.40 billion gallons of conventional biofuels in 2014 and 15 billion gallons in 2015 and 2016. Pursuant to the EPA regulation, the requirement for conventional biofuels in 2014 was 13.61 billion gallons, 14.05 billion gallons in 2015 and 14.5 billion gallons in 2016. This is a significant reduction in each of these years compared to the requirements in the RFS. Further, due to the lower price of gasoline, we do not anticipate that renewable fuels blenders will use more ethanol than is required by the RFS which may result in a significant decrease in ethanol demand. This departure by the EPA from the statutory requirements in the RFS is expected to have a negative impact on ethanol prices and demand, and is expected to result in reduced operating margins in the future. This reduction in ethanol demand is expected to have a material negative impact on our operating performance and financial condition.
Results of Operations
Comparison of the Three Months Ended January 31, 2016 and 2015
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 three months ended January 31, 2016 and 2015:
2016 | 2015 | ||||||||||
Income Statement Data | Amount | % | Amount | % | |||||||
Revenues | $ | 48,773,123 | 100.0 | $ | 61,048,123 | 100.0 | |||||
Cost of Goods Sold | 46,819,364 | 96.0 | 48,693,853 | 79.8 | |||||||
Gross Profit | 1,953,759 | 4.0 | 12,354,270 | 20.2 | |||||||
Operating Expenses | 998,968 | 2.0 | 1,055,988 | 1.7 | |||||||
Operating Income | 954,791 | 2.0 | 11,298,282 | 18.5 | |||||||
Other Income | 2,462,544 | 5.0 | 3,604,351 | 5.9 | |||||||
Net Income | $ | 3,417,335 | 7.0 | $ | 14,902,633 | 24.4 | |||||
Revenues. Our total revenue was lower for our first quarter of 2016 compared to the same period of 2015 due to the lower average prices we received for our products. For our first quarter of 2016, ethanol sales accounted for approximately 80% of our total revenue, distiller grains sales accounted for approximately 16% of our total revenue, and corn oil sales accounted for approximately 4% of our total revenue. For our first quarter of 2015, ethanol sales accounted for approximately 83% of our total revenue, distiller grains sales accounted for approximately 14% of our total revenue, and corn oil sales accounted for approximately 3% of our total revenue.
The average price per gallon we received for our ethanol was approximately 27% lower for our first quarter of 2016 compared to the same period of 2015. Management attributes this decrease, in the average price we received for our ethanol, to lower gasoline and corn prices which typically impacts market ethanol prices. Further, ethanol supply in the market has been higher which has negatively impacted market ethanol prices. Management anticipates that ethanol prices will remain lower due to the current relationship between ethanol supply and demand. Management anticipates that ethanol exports may remain at their current levels due to low ethanol prices, which could provide some price support for ethanol. However, without a significant increase in domestic ethanol demand, ethanol prices may remain low. Further, corn and gasoline prices are expected to remain low which may continue to negatively impact market ethanol prices. Due to the stronger United States Dollar compared to the Brazilian Reis along with very favorable prices for sugarcane based ethanol in the United States, specifically in California, management anticipates increased ethanol imports from Brazil which will further impact ethanol supplies in the United States. If we experience significantly more ethanol imports compared to our ethanol exports, it may result in further ethanol price decreases.
Management believes that ethanol prices were negatively impacted by the EPA's release of the proposed renewable volume obligations for 2014, 2015 and 2016 which reduced the amount of corn-based ethanol which must be used in the United States during those years. Management believes that this reduction has had a negative impact on ethanol demand and prices which may continue through the next two years. This negative impact is especially pronounced due to current low gasoline prices. In the past, many fuel blenders used ethanol because of the difference in price between gasoline and ethanol. This voluntary use of ethanol in excess of the requirements in the RFS has decreased due to the fact that the spread between the price of ethanol and gasoline
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is smaller. Management anticipates continued volatility in the ethanol market as a result of changing gasoline prices which impacts ethanol demand and ultimately prices.
We sold approximately 6% more gallons of ethanol during our first quarter of 2016 compared to the same period of 2015. Management attributes this increase in ethanol sales with increased ethanol production efficiency due to plant improvement projects we implemented during our 2015 fiscal year. Our total ethanol production was approximately 5% higher during our first quarter of 2016 as compared to the same period of 2015. Management anticipates that our ethanol sales and production will be slightly greater during the remaining quarters of our 2016 fiscal year compared to our 2015 fiscal year due to these plant efficiency improvements.
During our first quarter of 2016, we experienced no realized or unrealized gains on our ethanol derivatives. By comparison, we experienced combined realized and unrealized gains on our ethanol derivative instruments of approximately $56,000 during our first quarter of 2015 which increased our revenue.
The average price per ton we received for our dried distillers grains was approximately 12% less for our first quarter of 2016 compared to the same period of 2015. In addition, the average price per ton we received for our modified/wet distillers grains was approximately 2% less for our first quarter of 2016 compared to the same period of 2015. Management attributes these price decreases with lower market corn prices and higher corn supplies after the 2015 harvest. In addition, China started refusing distiller grains from the United States in January 2016 which resulted in lower distiller prices and will result in uncertainty regarding future distiller grains demand. This uncertainty may continue to negatively impact market distiller grains prices. Management anticipates that distiller grains will begin to consistently trade at a relative value of less than 100% of corn for the foreseeable future primarily due to China filing antidumping and countervailing duty claims against the United States distiller grain markets.
Our distiller grains production was approximately 5% greater during our first quarter of 2016 compared to the same period of 2015 due primarily to an increase in ethanol gallons produced but offset by improved ethanol conversion efficiency and increased corn oil production. As we extract more ethanol and corn oil from a bushel of corn, it results in less total tons of distiller grains produced. Management anticipates distiller grains production to be comparable for the remaining quarters of our 2016 fiscal year compared to our first quarter of 2016 due to the net effect of an anticipated increase in total ethanol production, partially offset by improved ethanol conversion rates and corn oil production.
We sold approximately 33% more pounds of corn oil during our first quarter of 2016 compared to the same period of 2015. This increase in corn oil sales resulted from increased ethanol production during the 2016 period along with improved corn oil extraction efficiency. The average price per pound we received for our corn oil was approximately 20% less for our first quarter of 2016 compared to the same period of 2015. Management attributes this decline in corn oil prices with increased corn oil supply in the market which has not been met by corresponding increases in corn oil demand. The biodiesel industry has been impacted by the expiration of the biodiesel blenders' tax credit which was not reinstated until the end of 2015. Since biodiesel production is a major source of corn oil demand, lower biodiesel demand has impacted corn oil prices. However, management believes that corn oil demand will increase during our 2016 fiscal year since the biodiesel blenders' tax credit was recently renewed for 2016. In addition, corn oil prices have been impacted by lower soybean oil prices as soybean oil is a product that typically competes with corn oil, particularly for biodiesel production. Management anticipates relatively stable corn oil prices going forward unless demand increases significantly for biodiesel production.
Cost of Goods Sold. Our cost of goods sold was lower for our first quarter of 2016 compared to the same period of 2015 due primarily to lower corn costs and natural gas costs. Our average cost per bushel of corn was approximately 6% lower during our first quarter of 2016 compared to the same period of 2015. This decrease in our cost per bushel of corn was primarily related to decreased market corn prices. Corn prices have continued to trend lower due to abundant corn supplies and another large corn crop in the fall of 2015. These two factors, in addition to China terminating distiller grain imports, may lead to continued lower corn prices for our 2016 fiscal year.
We consumed approximately 3% more corn during our first quarter of 2016 compared to the same period of 2015 due to increased ethanol production. We were able to improve our corn conversion rate by approximately 1% during our first quarter of 2016 compared to the same period of 2015 which allowed us to produce more of ethanol per bushel of corn. Management anticipates consistent corn consumption during the rest of our 2016 fiscal year, provided we continue to experience profitable operating margins which allow us to operate the ethanol plant at capacity.
Our natural gas costs decreased by approximately 38% during our first quarter of 2016 compared to the same period of 2015. The average price we paid per MMBtu of natural gas was approximately 39% lower during our first quarter of 2016 compared to the same period of 2015. Management attributes this decrease in natural gas prices with lower commodity and energy prices during the 2016 period as well as growing supplies of natural gas and a mild winter. Management anticipates that natural gas
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prices will continue to trade lower than recent history. Our natural gas consumption during our first quarter of 2016 was approximately 3% higher and we experienced approximately a 2% improvement in efficiencies compared to the same period of 2015. Management attributes this increase in our natural gas consumption with increased ethanol production offset by production efficiencies.
We experienced combined realized and unrealized gains of approximately $599,000 for our first quarter of 2016 related to our corn and natural gas derivative instruments which decreased our cost of goods sold. By comparison, we experienced approximately $386,000 of combined realized and unrealized gains for the same period of 2015 related to our corn and natural gas derivative instruments which decreased our cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn and natural gas in cost of goods sold as the changes occur. As corn and natural gas prices fluctuate, the value of our derivative instruments is impacted, which affects our financial performance.
Operating Expenses. Our operating expenses were lower during our first quarter of 2016 compared to the same period of 2015 primary due to less personnel expense during 2016, offset by higher contributions to trade organizations during 2016 as compared to the first fiscal quarter of 2015. Management anticipates that our operating expenses will remain slightly lower during the remaining quarters of our 2016 fiscal year compared to our 2015 fiscal year.
Other Income (Expense). Other income was lower for our first quarter of 2016 compared to the same period of 2015 due to a decrease in our portion of the net income generated by our investments. Our investments are in other companies involved in the ethanol industry which experienced less favorable operating margins during our first quarter of 2016. We had less interest expense during our first quarter of 2016 compared to the same period of 2015 due to less outstanding borrowing on our revolving loan. We had more other income during our first quarter of 2016 compared to the same period of 2015 due to an increase in income from marketable securities.
Changes in Financial Condition for the Three Months Ended January 31, 2016
Current Assets. We had less cash and equivalents at January 31, 2016 compared to October 31, 2015. This decrease in our cash position is due primarily to nearly $14 million in distributions we paid to our members during December 2015. The increase in our accounts receivable at January 31, 2016 compared to October 31, 2015 was due to the timing of our product shipments and payments at the end of our first fiscal quarter of 2016 compared to the end of our 2015 fiscal year. The value of our inventory was greater at January 31, 2016 compared to October 31, 2015 primarily due to increased finished goods inventory we had on hand at the end of our first fiscal quarter. The increase in other receivable at January 31, 2016 compared to October 31, 2015 was due to a distribution receivable from one of our investments in another ethanol facility.
Property and Equipment. The net value of our property and equipment was higher at January 31, 2016 compared to October 31, 2015 due to an increase in capital projects offset by depreciation. We had approximately $8.7 million in construction in progress at January 31, 2016 related to various capital projects we were conducting during our 2015 and 2016 fiscal years, the largest of which is our water treatment facility.
Other Assets. Our other assets were lower at January 31, 2016 compared to October 31, 2015 due to a decrease in the value of our various investments caused by distributions received in excess of earnings recorded for the three months ended January 31, 2016.
Current Liabilities. Our accounts payable at January 31, 2016 were comparable to October 31, 2015. Our accrued expenses were lower at January 31, 2016 compared to October 31, 2015 due to payment of employee benefits as it relates to bonuses for our 2015 fiscal year, which are partially based on net income and therefore are not expected to be as high in 2016 as they were in 2015.
Long-term Liabilities. Our long-term liabilities were similar at January 31, 2016 and October 31, 2015.
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 at capacity for the next 12 months and beyond. As of January 31, 2016, we had $10 million available pursuant to our revolving term loan and approximately $21 million in cash and equivalents and marketable securities.
We do not currently anticipate any significant purchases of property and equipment that would require us to secure additional capital in the next 12 months. We expect to fund our current capital projects using cash we have on hand as well as our
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revolving line of credit. However, management continues to evaluate conditions in the ethanol industry and explore opportunities to improve the efficiency and profitability of our operations which may require capital expenditures.
We commenced a program of investing our excess cash in short-term liquid investments which allows us to access the cash when we need it and preserve our capital while limiting our loss exposure. Only a portion of our cash balances are federally insured when they are deposited with our bank. As a result, our plan is intended to decrease the risk we face when we were concentrating our cash balances with one financial institution.
The following table shows our cash flows for the three months ended January 31, 2016 and 2015:
Three Months Ended January 31, | |||||||
2016 | 2015 | ||||||
Net cash provided by operating activities | $ | 3,606,895 | $ | 24,916,318 | |||
Net cash (used in) provided by investing activities | (3,151,193 | ) | 2,822,534 | ||||
Net cash (used in) financing activities | (13,911,100 | ) | (51,426,383 | ) | |||
Cash Flow From Operations
Our cash flows from operations for the three months ended January 31, 2016 were lower compared to the same period of 2015 due primarily to decreased net income in addition to a decrease in distributions received from our investments and timing of payments of working capital components.
Cash Flow From Investing Activities
We used more cash for investing activities during our three months ended January 31, 2016 compared to the same period of 2015 due to having less sales of marketable securities during the 2016 period. During the 2016 period, we had more capital expenditures compared to the 2015 period due to our plant improvement projects.
Cash Flow From Financing Activities.
During our three months ended January 31, 2016, we used significantly less cash for financing activities related to less distributions paid to members.
Short-Term and Long-Term Debt Sources
We have a credit facility with Farm Credit Services of America "Farm Credit" with an initial availability of $35 million, which currently has availability of $10 million. In exchange for this credit facility, we executed a mortgage in favor of Farm Credit covering all of our real property and granted Farm Credit a security interest in all of our equipment and other assets. In the event we default on our loans with Farm Credit, Farm Credit may foreclose on our assets, including both our real property and our machinery and equipment.
Variable Line of Credit
We have a long-term revolving line of credit. Interest on this loan accrues at 3.15% above the One-Month London Interbank Offered Rate (LIBOR). The interest rate is subject to weekly adjustment. We may elect to enter into a fixed interest rate on this loan at various times throughout the term of the loan as provided in the loan agreements. During the first fiscal quarter of 2016, we executed an amendment to our credit agreements with Farm Credit which adjusted our loan covenants related to issuing distributions to our members and changed the terms of our revolving line of credit. We will have $10 million available pursuant to this long-term revolving line of credit until it matures on February 1, 2020. We agreed to pay an annual fee of 0.5% of the unused portion of this loan. As of January 31, 2016, we had $0 outstanding on this loan with an accrued interest rate of 3.58% per year. As of January 31, 2016, we had $10 million available to be drawn on this loan.
Administrative Agency Agreement
As part of the Farm Credit loan closing, we entered into an Administrative Agency Agreement with CoBank, ACP ("CoBank"). CoBank purchased a participation interest in the Farm Credit loans and was appointed the administrative agent for
19
the purpose of servicing the loans. As a result, CoBank will act as the agent for Farm Credit with respect to our loans. We agreed to pay CoBank an annual fee of $5,000 as the agent for Farm Credit.
Covenants
Our credit agreements with Farm Credit are subject to numerous covenants requiring us to maintain various financial ratios. As of January 31, 2016, we were in compliance with all of our loan covenants with Farm Credit. Based on current management projections, we anticipate that we will be in compliance with our loan covenants for the next 12 months and beyond.
Grants and Government Programs
In December 2006, we received the first payment from our semi-annual economic development grants equal to the amount of the tax assessments imposed on our ethanol plant by Cerro Gordo County, the county in which our ethanol plant is located. Based on our 2009 assessment, the total amount of these grants is expected to be approximately $9 million, which will be paid semi-annually over a 10-year period with the final payment being made in 2019.
Critical Accounting Policies
Management uses estimates and assumptions in preparing our financial statements in accordance with U.S. generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Of the significant accounting policies described in the notes to our financial statements, we believe that the following are the most critical:
Revenue Recognition
Revenue from the sale of our products is recognized at the time title to the goods and all risks of ownership transfer to the customers. The time of transfer is defined in the specific sales agreement; however, it generally occurs upon shipment, loading of the goods or when the customer picks up the goods. Collectability of revenue is reasonably assured based on historical evidence of collectability between us and our customers. Interest income is recognized as earned.
Shipping costs incurred by us in the sale of ethanol and corn oil are not specifically identifiable and as a result, revenue from the sale of ethanol and corn oil are recorded based on the net selling price reported to us from our marketer. Shipping costs incurred by us in the sale of distiller grain products are included in cost of goods sold.
Investment in Commodities Contracts, Derivative Instruments and Hedging Activities
We evaluate contracts to determine whether the contracts are derivative instruments. Certain contracts that meet the definition of a derivative may be exempted from derivative accounting and treated as normal purchases or normal sales if documented as such. 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.
We enter into short-term cash, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. We occasionally also enter into derivative contracts to hedge our exposure to price risk as it relates to ethanol sales. As part of our risk management process, we use futures and option contracts through regulated commodity exchanges or through the over-the-counter market to manage our risk related to pricing of inventories. All of our derivatives, other than those excluded under the normal purchases and sales exclusion, are designated as non-hedge derivatives, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated or accounted for as hedging instruments.
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenues in the accompanying financial statements. The fair values of contracts are presented on the accompanying balance sheet as derivative instruments.
Investments
The Company has less than a 20% investment interest in five companies in related industries. These investments are being accounted for by the equity method of accounting under which the Company's share of net income is recognized as income
20
in the Company's income statement and added to the investment account. Distributions or dividends received from the investments are treated as a reduction of the investment account. The investments are evaluated for indications of impairment on a regular basis. A loss would be recognized when the fair value is determined to be less than the carrying value.
Off-Balance Sheet Arrangements.
We currently have no off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to the impact of market fluctuations associated with commodity prices as discussed below. We have no exposure to interest rate changes as we did not have any amounts outstanding on our variable interest rate loans as of January 31, 2016. 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, natural gas and ethanol. 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.
Commodity Price Risk
We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distiller grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.
As of January 31, 2016, we had price protection in place for approximately 9% of our anticipated corn needs, 16% of our natural gas needs and 0% of our ethanol sales 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 January 31, 2016, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from January 31, 2016. The results of this analysis, which may differ from actual results, are as follows:
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) | Unit of Measure | Hypothetical Adverse Change in Price | Approximate Adverse Change to Income | ||||||||
Natural Gas | 2,510,000 | MMBTU | 10% | $ | 641,000 | ||||||
Ethanol | 115,000,000 | Gallons | 10% | 14,594,000 | |||||||
Corn | 35,306,000 | Bushels | 10% | 12,551,000 | |||||||
Liability Risk
We participate, along with other plants in the industry, in a group captive insurance company (Captive). The Captive insures losses related to workman's compensation, commercial property and general liability. The Captive reinsures catastrophic losses for all participants, including the Company, in excess of predetermined amounts. Our 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. These 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 over the amount in the collateral fund.
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Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Executive Vice President and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
Our management, including our Executive Vice President (the principal executive officer), Curtis Strong, along with our Chief Financial Officer (the principal financial officer), Christine Marchand, 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 Securities Exchange Act of 1934, as amended) as of January 31, 2016. 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.
For the fiscal quarter ended January 31, 2016, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
The following risk factor is provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K. The risk factor set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section for the fiscal year ended October 31, 2015, included in our annual report on Form 10-K.
Distillers grains demand and prices may be negatively impacted by the Chinese antidumping and countervailing duty investigation. China is the world's largest importer of distillers grains produced in the United States. On January 12, 2016, the Chinese government announced that it will commence an antidumping and countervailing duty investigation related to distillers grains imported from the United States. During the investigation, it is likely that distillers grains exports to China will be reduced, regardless of whether China ends up instituting a tariff on distillers grains produced in the United States and exported to China. Further, if China introduces a tariff on distillers grains produced in the United States and exported to China, it could remove the largest source of export demand for distillers grains. This antidumping and countervailing duty investigation could significantly decrease demand and prices for distillers grains produced in the United States. This potential reduction in demand along with lower domestic corn prices could negatively impact our ability to profitably operate the ethanol plant.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information
None.
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Item 6. Exhibits.
(a) | The following exhibits are filed as part of this report. |
Exhibit No. | Exhibit | ||
31.1 | Certificate Pursuant to 17 CFR 240.13a-14(a)* | ||
31.2 | Certificate Pursuant to 17 CFR 240.13a-14(a)* | ||
32.1 | Certificate Pursuant to 18 U.S.C. Section 1350* | ||
32.2 | Certificate Pursuant to 18 U.S.C. Section 1350* | ||
101 | The following financial information from Golden Grain Energy, LLC's Quarterly Report on Form 10-Q for the quarter ended January 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of January 31, 2016 and October 31, 2015, (ii) Statements of Operations for the three months ended January 31, 2016 and 2015, (iii) Statements of Cash Flows for the three months ended January 31, 2016 and 2015, and (iv) the Notes to Condensed Financial Statements.** | ||
* 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.
GOLDEN GRAIN ENERGY, LLC | |||
Date: | March 14, 2016 | /s/ Curtis Strong | |
Curtis Strong | |||
Executive Vice-President | |||
(Principal Executive Officer) | |||
Date: | March 14, 2016 | /s/ Christine Marchand | |
Christine Marchand | |||
Chief Financial Officer | |||
(Principal Financial and Accounting Officer) | |||
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