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EX-31.1 - EX-31.1 - Granite Falls Energy, LLCgfe-20160131ex311c2a8d4.htm
EX-31.2 - EX-31.2 - Granite Falls Energy, LLCgfe-20160131ex312aa768d.htm
EX-32.1 - EX-32.1 - Granite Falls Energy, LLCgfe-20160131ex3215bdafb.htm
EX-32.2 - EX-32.2 - Granite Falls Energy, LLCgfe-20160131ex322412d90.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the transition period from               to               .

 

COMMISSION FILE NUMBER 000-51277

 

GRANITE FALLS ENERGY, LLC

(Exact name of registrant as specified in its charter)

 

 

 

 

Minnesota

 

41-1997390

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

15045 Highway 23 SE, Granite Falls, MN 56241-0216

(Address of principal executive offices)

 

(320) 564-3100

(Registrant's telephone number, including area code)

 

Indicate by check mark 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.

Yes    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).

Yes    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 

Accelerated Filer  

Non-Accelerated Filer

Smaller Reporting Company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes    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 16, 2016 there were 30,606 membership units outstanding.

 


 

2


 

PART IFINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

GRANITE FALLS ENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

    

January 31, 2016

    

October 31, 2015

 

 ASSETS

    

(Unaudited)

    

 

 

Current Assets

 

 

 

 

 

 

 

Cash

 

$

6,556,314

 

$

12,696,536

 

Restricted cash

 

 

411,790

 

 

 

Accounts receivable

 

 

5,283,744

 

 

9,667,472

 

Inventory

 

 

12,425,999

 

 

12,212,025

 

Commodity derivative instruments

 

 

171,813

 

 

677,149

 

Prepaid expenses and other current assets

 

 

1,921,807

 

 

259,862

 

Total current assets

 

 

26,771,467

 

 

35,513,044

 

 

 

 

 

 

 

 

 

Property and Equipment, net

 

 

83,943,748

 

 

84,304,162

 

 

 

 

 

 

 

 

 

Goodwill

 

 

1,372,473

 

 

1,372,473

 

 

 

 

 

 

 

 

 

Other Assets

 

 

809,865

 

 

821,402

 

 

 

 

 

 

 

 

 

Total Assets

 

$

112,897,553

 

$

122,011,081

 

 

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS' EQUITY

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Checks drawn in excess of bank balance

 

$

5,341,768

 

$

1,836,682

 

Current maturities of long-term debt

 

 

584,674

 

 

517,957

 

Accounts payable

 

 

2,976,438

 

 

4,643,130

 

Corn payable to FCE

 

 

1,225,656

 

 

1,486,247

 

Commodity derivative instruments

 

 

 —

 

 

1,114

 

Accrued expenses

 

 

693,685

 

 

654,550

 

Total current liabilities

 

 

10,822,221

 

 

9,139,680

 

 

 

 

 

 

 

 

 

Long-Term Debt, less current portion

 

 

7,536,806

 

 

6,711,975

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Members' Equity

 

 

 

 

 

 

 

Members' equity attributable to Granite Falls Energy, LLC consists of 30,606 units authorized,  issued, and outstanding

 

 

74,973,246

 

 

84,602,607

 

Non-controlling interest

 

 

19,565,280

 

 

21,556,819

 

Total members' equity

 

 

94,538,526

 

 

106,159,426

 

Total Liabilities and Members' Equity

 

$

112,897,553

 

$

122,011,081

 

 

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

 

3


 

GRANITE FALLS ENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

 

January 31, 2016

 

January 31, 2015

 

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

Revenues

$

51,001,654

 

$

58,692,502

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

49,568,777

 

 

53,064,397

 

 

 

 

 

 

 

 

Gross Profit

 

1,432,877

 

 

5,628,105

 

 

 

 

 

 

 

 

Operating Expenses

 

1,400,846

 

 

1,423,387

 

 

 

 

 

 

 

 

Operating Income

 

32,031

 

 

4,204,718

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

Other income, net

 

67,679

 

 

46,974

 

Interest income

 

2,799

 

 

3,648

 

Interest expense

 

(75,964)

 

 

(70,467)

 

Total other expense, net

 

(5,486)

 

 

(19,845)

 

 

 

 

 

 

 

 

Net Income

 

26,545

 

 

4,184,873

 

 

 

 

 

 

 

 

Less:Net Income Attributable to Non-controlling Interest

 

15,019

 

 

417,781

 

 

 

 

 

 

 

 

Net Income Attributable to Granite Falls Energy, LLC

$

11,526

 

$

3,767,092

 

 

 

 

 

 

 

 

Weighted Average Units Outstanding - Basic and Diluted

 

30,606

 

 

30,606

 

 

 

 

 

 

 

 

Amounts attributable to Granite Falls Energy, LLC:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Per Unit - Basic and Diluted

$

0.38

 

$

123.08

 

 

 

 

 

 

 

 

Distributions Per Unit - Basic and Diluted

$

315

 

$

1,050

 

 

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

 

 

4


 

GRANITE FALLS ENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

 

    

January 31, 2016

    

January 31, 2015

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

26,545

 

$

4,184,873

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,408,849

 

 

2,396,780

 

Change in fair value of commodity derivative instruments

 

 

(306,912)

 

 

608,373

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

 

(411,790)

 

 

(552,425)

 

Commodity derivative instruments

 

 

811,134

 

 

494,540

 

Accounts receivable

 

 

4,383,728

 

 

4,905,034

 

Inventory

 

 

(213,974)

 

 

(2,683,440)

 

Prepaid expenses and other current assets

 

 

(1,661,945)

 

 

(291,310)

 

Accounts payable

 

 

(1,669,322)

 

 

2,549,228

 

Accrued expenses

 

 

39,135

 

 

(13,336)

 

Net Cash Provided by Operating Activities

 

 

3,405,448

 

 

11,598,317

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Payments for capital expenditures

 

 

(2,294,859)

 

 

(4,168,127)

 

Net Cash Used in Investing Activities

 

 

(2,294,859)

 

 

(4,168,127)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Proceeds from checks drawn in excess of bank balance

 

 

3,505,086

 

 

3,425,828

 

Proceeds from long-term debt

 

 

4,613,122

 

 

3,354,979

 

Payments on long-term debt

 

 

(3,721,574)

 

 

(145,567)

 

Distributions to non-controlling interests

 

 

(2,006,558)

 

 

(4,621,340)

 

Member distributions paid

 

 

(9,640,887)

 

 

(32,136,300)

 

Net Cash Used in Financing Activities

 

 

(7,250,811)

 

 

(30,122,400)

 

 

 

 

 

 

 

 

 

Net Decrease in Cash

 

 

(6,140,222)

 

 

(22,692,210)

 

 

 

 

 

 

 

 

 

Cash - Beginning of Period

 

 

12,696,536

 

 

27,209,010

 

 

 

 

 

 

 

 

 

Cash - End of Period

 

$

6,556,314

 

$

4,516,800

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest expense

 

$

75,964

 

$

70,467

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Noncash Investing and Financing Activities

 

 

 

 

 

 

 

Capital expenditures and construction in process included in accounts payable

 

$

164,491

 

$

272,954

 

 

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

5


 

Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2016

 

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

The accompanying condensed consolidated unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and 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 consolidated financial statements for the year ended October 31, 2015, contained in the Company’s annual report on Form 10-K.

 

In the opinion of management, the condensed consolidated unaudited financial statements reflect all adjustments consisting of normal recurring accruals that we consider necessary to present fairly the Company’s results of operations, financial position and cash flows. The results reported in these condensed consolidated unaudited financial statements should not be regarded as necessarily indicative of results that may be expected for any other quarter or for the fiscal year.

 

Nature of Business

 

Granite Falls Energy, LLC (GFE or the Company) is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers' grains, and crude corn oil near Granite Falls, Minnesota and sells these products, pursuant to marketing agreements, throughout the continental United States and on the international market. GFE's plant has an approximate annual production capacity of 60 million gallons, but is currently permitted to produce up to 70 million gallons of undenatured ethanol on a twelve month rolling sum basis.

 

Heron Lake BioEnergy, LLC (HLBE) is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers' grains, and crude corn oil near Heron Lake, Minnesota and sells these products, pursuant to marketing agreements, throughout the continental United States. HLBE's plant has an approximate annual production capacity of 60 million gallons, but is permitted to produce approximately 72.3 million gallons of undenatured ethanol on a twelve month rolling sum basis. Additionally, HLBE, through a majority owned subsidiary, operates a natural gas pipeline that provides natural gas to HLBE's ethanol production facility and other customers.

 

Principles of Consolidation

 

The accompanying condensed consolidated unaudited financial statements consolidate the operating results and financial position of GFE, and its 50.6% owned subsidiary, HLBE (through GFE's 100% ownership of Project Viking, LLC). Given the Company’s control over the operations of HLBE and its majority voting interest, the Company consolidates the condensed consolidated unaudited financial statements of HLBE with GFE's condensed consolidated unaudited financial statements. The remaining 49.4% ownership of HLBE is included in the condensed consolidated unaudited financial statements as a non-controlling interest. HLBE, through its wholly owned subsidiary, HLBE Pipeline Company, LLC, owns 73% of Agrinatural Gas, LLC ("Agrinatural"). Given HLBE’s control over the operations of Agrinatural and its majority voting interest, HLBE consolidates the financial statements of Agrinatural with its consolidated unaudited financial statements, with the equity and earnings attributed to the remaining 27% noncontrolling interest. All intercompany balances and transactions are eliminated in consolidation.

 

6


 

Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2016

 

Accounting Estimates

 

Management uses estimates and assumptions in preparing these condensed consolidated unaudited financial statements in accordance with generally accepted accounting principles in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for the following significant matters, among others: economic lives of property, plant, and equipment, valuation of commodity derivatives, inventory, and inventory purchase and sale commitments, and the assumptions used in the impairment analysis of long-lived assets and goodwill. Actual results may differ from previously estimated amounts, and such differences may be material to our condensed consolidated unaudited 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.

 

Revenue Recognition

 

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

 

In accordance with the Company's agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales price as earned. These fees and commissions are recorded net of revenues, as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products. Shipping costs paid by the Company to the marketer in the sale of ethanol are not specifically identifiable and, as a result, are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of distillers' grains and corn oil are included in cost of goods sold.

 

Inventory

 

Inventory is stated at the lower of cost or net realizable value in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2015-11 issued in July 2015.  Cost for all inventories is determined using the first in first out method (FIFO).  Net realizable value is the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation.  Inventory consists of raw materials, work in process, finished goods, and spare parts.  Corn is the primary raw material along with other raw materials.  Finished goods consist of ethanol, distillers' grains, and corn oil.

 

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 on the balance sheets at fair value.

 

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

 

7


 

Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2016

 

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 condensed consolidated unaudited financial statements.

 

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

 

The Company has adopted authoritative guidance related to “Derivatives and Hedging,” and has included the required enhanced quantitative and qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses from derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. See further discussion in Note 4.

 

Correction Of An Immaterial Error

 

The Company revised the condensed consolidated unaudited statement of cash flows for the three months ended January 31, 2015, to correct for a non-cash acquisition of property and equipment resulting in an increase in cash provided by operating activities of $3,359,225 and a corresponding decrease in net cash provided by investing activities. 

 

 

2.   RISKS AND UNCERTAINTIES

 

The Company has certain risks and uncertainties that it experiences during volatile market conditions. These volatilities can have a severe impact on operations.  The Company's revenues are derived from the sale and distribution of ethanol, distillers' grains, corn oil, and natural gas to customers primarily located in the United States. Corn for the production process is supplied to our plant primarily from local agricultural producers and from purchases on the open market.  Ethanol sales typically average 75 - 85% of total revenues and corn costs typically average 65 - 85% of cost of goods sold.

 

The Company's operating and financial performance is largely driven by the prices at which they sell ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, and unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. Our largest cost of production is corn.  The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and our risk management program used to protect against the price volatility of these commodities.

 

 

8


 

Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2016

 

3.   INVENTORY

 

Inventories consist of the following:

 

 

 

 

 

 

 

 

 

 

    

January 31, 2016

    

October 31, 2015

 

 

 

(Unaudited)

 

 

 

Raw materials

 

$

2,563,324

 

$

4,504,388

 

Supplies

 

 

2,565,663

 

 

2,631,452

 

Work in process

 

 

1,323,125

 

 

1,445,084

 

Finished goods

 

 

5,973,887

 

 

3,631,101

 

Totals

 

$

12,425,999

 

$

12,212,025

 

 

The Company performs a lower of cost or net realizable value analysis on inventory to determine if the market values of certain inventories are less than their carrying value, which is attributable primarily to decreases in market prices of corn and ethanol. Based on the lower of cost or net realizable value analysis, the Company recorded a loss on ethanol inventories of approximately $353,000 and $0 for the three month periods ended January 31, 2016 and 2015, respectively.

 

 

4.   DERIVATIVE INSTRUMENTS

 

As of January 31, 2016, the total notional amount of the Company's outstanding corn derivative instruments was approximately 3,835,000 bushels, comprised of 880,000 and 2,955,000 bushel equivalent positions held by GFE and HLBE, respectively, that were entered into to hedge forecasted corn purchases through December 2016. 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.

 

As of January 31, 2016, the total notional amount of the Company’s outstanding ethanol derivative instruments was approximately 1,680,000 gallons, comprised of approximately 840,000 and 840,000 gallon equivalent positions held by GFE and HLBE, respectively, that were entered into to hedge forecasted ethanol sales through March 2016.

 

The following tables provide details regarding the Company's derivative instruments at January 31, 2016, none of which were designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance Sheet location

    

Assets

    

Liabilities

 

Corn contracts - GFE

 

Commodity derivative instruments

 

$

30,700

 

$

 —

 

Corn contracts - HLBE

 

Commodity derivative instruments

 

 

111,363

 

 

 —

 

Ethanol contracts - GFE

 

Commodity derivative instruments

 

 

14,875

 

 

 —

 

Ethanol contracts - HLBE

 

Commodity derivative instruments

 

 

14,875

 

 

 

Totals

 

 

 

$

171,813

 

$

 —

 

 

In addition, at January 31, 2016, the Company maintained approximately $412,000 of restricted cash, comprised of approximately $49,000 held by GFE and $363,000 held by HLBE related to margin requirements for the Company’s commodity derivative instrument positions.

 

The following tables provide details regarding the Company's derivative instruments at October 31, 2015, none of which were designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance Sheet location

    

Assets

    

Liabilities

 

Corn contracts - GFE

 

Commodity derivative instruments

 

$

 —

 

$

1,114

 

Corn contracts - HLBE

 

Commodity derivative instruments

 

 

677,149

 

 

 

Totals

 

 

 

$

677,149

 

$

1,114

 

 

At October 31, 2015, the Company did not have any cash collateral (restricted cash) related to commodity derivatives held by a broker.

9


 

Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2016

 

 

The following tables provide details regarding the gains and losses from Company's derivative instruments in statements of operations, none of which are designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of

 

Three Months Ended January 31, 

 

 

    

Operations Location

    

2016

    

2015

 

Corn contracts

 

Cost of Goods Sold

 

$

195,998

 

$

(608,373)

 

Ethanol contracts

 

Revenues

 

 

78,556

 

 

 —

 

Natural gas contracts

 

Cost of Goods Sold

 

 

32,358

 

 

 —

 

Total gain (loss)

 

 

 

$

306,912

 

$

(608,373)

 

 

 

 

5.   FAIR VALUE

 

The following table provides information on those derivative assets and liabilities measured at fair value on a recurring basis at January 31,  2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

Carrying Amount in

 

Quoted Prices in Active

 

Significant Other

 

Significant Unobservable

 

Financial Asset:

 

Balance  Sheet

 

Markets (Level 1)

 

Observable Inputs (Level 2)

 

Inputs (Level 3)

 

Commodity Derivative Instruments

 

$

171,813

 

$

171,813

 

$

 

$

 

 

The following table provides information on those derivative liabilities measured at fair value on a recurring basis at October 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

Carrying Amount in Balance

 

Quoted Prices in Active

 

Significant Other

 

Significant Unobservable

 

Financial Asset:

 

Sheet

 

Markets (Level 1)

 

Observable Inputs (Level 2)

 

Inputs (Level 3)

 

Commodity Derivative Instruments

 

$

677,149

 

$

677,149

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity Derivative Instruments

 

$

1,114

 

$

1,114

 

$

 

$

 

 

The Company determines 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.

 

 

6.   DEBT FACILITIES

 

Debt financing consists of the following:

 

 

 

 

 

 

 

 

 

 

 

January 31, 2016

 

October 31, 2015

 

HERON LAKE BIOENERGY:

 

 

(unaudited)

 

 

 

 

Revolving term loan to lending institution, see terms below

 

$

5,776,421

 

$

4,822,777

 

Assessments payable

 

 

1,954,059

 

 

1,963,405

 

Note payable to electrical company

 

 

125,000

 

 

143,750

 

Note payable to noncontrolling interest member of Agrinature

 

 

266,000

 

 

300,000

 

Totals

 

 

8,121,480

 

 

7,229,932

 

Less amounts due within one year

 

 

584,674

 

 

517,957

 

Net long-term debt

 

$

7,536,806

 

$

6,711,975

 

 

10


 

Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2016

 

Granite Falls Energy:

 

GFE has a revolving term loan facility, under which GFE could initially borrow, repay, and re-borrow in an amount up to $18,000,000.  However, the amount available for borrowing under this facility reduces by $2,000,000 semi-annually, beginning September 1, 2014, with final payment due March 1, 2018.  The amount available on this facility was $12,000,000 at January 31, 2016 and at October 31, 2015. The amount available under this facility was further reduced at March 1, 2016 to $10,000,000.  The interest rate is based on the bank's "One Month LIBOR Index Rate," plus 3.05%. GFE had no outstanding balance on this loan on January 31, 2016 or October 31, 2015. 

 

The Company's credit facility requires GFE to comply with certain financial covenants that require minimum debt service coverage and working capital requirements. As of January 31, 2016 and October 31, 2015, GFE was in compliance with these financial covenants and expects to be in compliance throughout fiscal 2016.  The credit facility is secured by substantially all assets of the Company. There are no savings account balance collateral requirements as part of this credit facility.

 

Heron Lake BioEnergy:

 

HLBE has a revolving term loan with a lender initially totaling $28,000,000.  Under the terms of the credit facility, the revolving term loan commitment is scheduled to decline by $3,500,000 annually, starting March 1, 2015 and continues each anniversary thereafter until maturity.  Therefore, the amount available on this facility at January 31, 2016 was $24,500,000 reduced again at March 1, 2016 to $21,000,000.  Amounts borrowed by HLBE under the revolving term loan and repaid or prepaid may be re-borrowed at any time prior to the March 1, 2022 maturity date.  Interest on the revolving term loan accrues at a variable rate equal to 3.25% above the One-Month London Interbank Offered Rate ("LIBOR") Index rate. HLBE 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. HLBE also agreed to pay an unused commitment fee on the unused portion of the revolving term loan commitment at the rate of 0.50% per annum. The revolving term loan is subject to a prepayment fee for any prepayment on the term loan prior to July 1, 2016 due to refinancing. The credit facility contains customary covenants.  The loan is secured by substantially all of HLBE's assets including a subsidiary guarantee.  The outstanding balance on the revolving term loan totaled approximately $5,776,000 and $4,823,000 at January 31, 2016, and October 31, 2015, respectively.  The interest rate on the revolving term loan was 3.69% and 3.45% at January 31, 2016, and October 31, 2015, respectively.

 

As part of the credit facility closing, HLBE entered into an Administrative Agency Agreement with CoBank, ACP ("CoBank").  CoBank purchased a participation interest in the AgStar loans and was appointed the administrative agent for the purpose of servicing the loans.  As a result, CoBank will act as the agent for AgStar with respect to the credit facility.

 

In October 2003, HLBE entered into an industrial water supply development and distribution agreement with the City of Heron Lake, Jackson County, and Minnesota Soybean Processors. In consideration of this agreement, HLBE and Minnesota Soybean Processors are allocated equally the debt service on $735,000 in water revenue bonds that were issued by the City to support this project that mature in February 2019. The parties have agreed that, prior to the scheduled expiration of the agreement, they will negotiate in good faith to replace the agreement with a further agreement regarding the wells and related facilities. In May 2006, HLBE entered into an industrial water supply treatment agreement with the City of Heron Lake and Jackson County. Under this agreement, HLBE pays monthly installments over 24 months starting January 1, 2007 equal to one years' debt service on approximately $3.6 million in water revenue bonds, which will be returned to HLBE if any funds remain after final payment in full on the bonds and assuming HLBE complies with all payment obligations under the agreement. As of January 31, 2016 and October 31, 2015, there were a total of approximately 1,954,000 and $1,963,000, respectively, in outstanding water revenue bonds. HLBE classifies its obligations under these bonds as assessments payable. The interest rates on the bonds range from 0.50% to 8.73%.

 

11


 

Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2016

 

Estimated annual maturities of debt at January 31, 2016, are as follows based on the most recent debt agreements:

 

 

 

 

 

 

2016

    

$

584,674

 

2017

 

 

462,086

 

2018

 

 

333,015

 

2019

 

 

307,709

 

2020

 

 

326,798

 

After 2020

 

 

6,107,198

 

Total debt

 

$

8,121,480

 

 

 

 

7.   LEASES

 

GFE leases equipment, primarily rail cars, under operating leases through 2025. Rent expense for these leases was approximately $894,000 and approximately $595,000 for the three months ended ended January 31,  2016 and 2015, respectively.

 

HLBE leases equipment, primarily rail cars, under operating leases through 2017.  Rent expense for these leases was approximately $533,000 and approximately $519,000 for the three months ended January 31,  2016 and 2015, respectively.

 

 

8.   MEMBERS' EQUITY

 

GFE has one class of membership units.   The units have no par value and have identical rights, obligations and privileges.  Income and losses are allocated to all members based upon their respective percentage of units held. As of January 31,  2016 and October 31, 2015, GFE had 30,606 membership units authorized, issued, and outstanding.

 

In December 2014, the Board of Governors of GFE declared a cash distribution of $1,050 per unit or approximately $32,136,000, for unit holders of record as of December 18, 2014.  The distribution was paid in January 2015.

 

In December 2015, the Board of Governors of GFE declared a cash distribution of $315 per unit, or approximately $9,641,000,  for unit holders of record as of December 17, 2015. The distribution was paid in January 2016.

 

In December 2014, the Board of Governors of HLBE declared a cash distribution of $0.12 per unit or approximately $9,352,000 for unit holders of record as of December 18, 2014, of which approximately $4,621,000 was made to the non-controlling interest members of HLBE.  The distribution was paid in January 2015.

 

In December 2015, the Board of Governors of HLBE declared a cash distribution of $0.05 per unit, or approximately $3,897,000,  for unit holders of record as of December 17, 2015. The distribution was paid in January 2016.

 

 

9.   COMMITMENTS AND CONTINGENCIES

 

Corn Storage and Grain Handling Agreement and Purchase Commitments

 

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

 

On January 31,  2016, GFE had 380,000 bushels of stored corn totaling approximately $1,300,000 with FCE.  At January 31, 2016, GFE had no forward corn purchase commitments.

12


 

Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2016

 

 

On January 31,  2016, HLBE had cash and basis contracts for forward corn purchase commitments for approximately 4,597,000 bushels for deliveries through December 2016.

 

Ethanol Contracts

 

At January 31,  2016, GFE had forward contracts to sell approximately $2,166,000 of ethanol for various delivery periods from February 2016 through March 2016 which approximates 15% of its anticipated ethanol sales during that period.

 

At January 31,  2016, HLBE had forward contracts to sell approximately $2,100,000 of ethanol for various delivery periods from February 2016 through March 2016 which approximates 15% of its anticipated ethanol sales during that period.

 

Distillers' Grain Contracts

 

At January 31,  2016, GFE had forward contracts to sell approximately $666,000 of distillers' grain for deliveries in February 2016 which approximates 43% of its anticipated distillers' grain sales during that period.

 

At January 31,  2016, HLBE had forward contracts to sell approximately $95,000 of distillers' grains for delivery in February 2016 which approximates 6% of its anticipated distillers' grain sales during that period.

 

Natural Gas

 

At January 31,  2016, GFE had forward basis contracts to buy natural gas for deliveries in February 2016 through March 2016, which approximates 75% of its anticipated natural gas purchases during this period.

 

At January 31,  2016, HLBE had no forward contracts to buy natural gas.

 

Corn Oil

 

At January 31, 2016, GFE had forward contracts to sell approximately $217,000 of corn oil for delivery through March 2016.

 

At January 31, 2016, HLBE had forward contracts to sell approximately $391,000 of corn oil for delivery through May 2016.

 

Construction in Progress

 

On April 8, 2015, GFE executed a construction agreement with an unrelated contractor to construct an additional 750,000 bushel grain storage bin.  The grain storage expansion project is expected to cost approximately $2.7 million and is expected to be completed during the first half of our 2016 fiscal year.

 

On July 31,  2015, HLBE placed a purchase order with an unrelated party for a new regenerative thermal oxidizer and made a down payment of approximately $375,000 to secure the order.  The total commitment approximates $1.9 million and is expected to be completed during the latter part of fiscal year 2016. 

 

 

13


 

 

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

 

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three months ended January 31, 2016, compared to the same periods of the prior fiscal year. This discussion should be read in conjunction with the condensed consolidated unaudited financial statements and related notes in Item 1 of this report and the information contained in the Company's annual report on Form 10-K for the fiscal year ended October 31, 2015.

 

Disclosure Regarding Forward-Looking Statements

 

The SEC encourages companies to disclose forward-looking information so investors can better understand future prospects and make informed investment decisions. As such, we have historical information, as well as forward-looking statements regarding our business, financial condition, results of operations, performance and prospects in this report.  All statements that are not historical or current facts are forward-looking statements. In some cases,  you can identify forward-looking statements by terms such as “anticipates”, “believes”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”, “potential”, “predicts”, “projects”, “should”, “will”, “would”, and similar expressions. 

 

Forward-looking statements are subject to a number of known and unknown risks, uncertainties and other factors, many of which may be beyond our control, and may cause actual results, performance or achievements to differ materially from those projected in, expressed or implied by forward-looking statements. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us are described more particularly in the “Risk Factors” section of our annual report on Form 10-K for the year ended October 31, 2015 and of this report on Form 10-Q. These risks and uncertainties include, but are not limited to, the following:

·

Reductions or eliminations in the corn-based ethanol use requirement in the federal Renewable Fuels Standard (“RFS”);

·

Lower distillers grains prices which result from the Chinese antidumping investigation;

·

Ethanol may trade at a premium to gasoline at times, causing a disincentive for discretionary blending of ethanol beyond the rates required to comply with the RFS.  Consequently, there may be a negative impact on ethanol pricing and demand;

·

Fluctuations in the price of crude oil and gasoline;

·

Changes in the availability and price of corn and natural gas;

·

Our operating margins can have fluctuated in the past and could become negative due to spread between the selling price of our products and our raw material costs;

·

Our plant may experience technical difficulties and not produce the gallons of ethanol expected;

·

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 fund our operations, invest in our business and service our debt;

·

Changes in the environmental regulations or our ability to comply with with the environmental regulations that apply to our plant and our operations;

·

Changes in our business strategy, capital improvements or development plans;

·

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, including changes in legislation benefiting renewable fuels;

·

Competition from alternative fuels and alternative fuel additives;

·

Changes in interest rates or the lack of credit availability; and

·

Changes and advances in ethanol production technology.

 

14


 

We believe our expectations regarding future events are based on reasonable assumptions; however, these assumptions may not be accurate or account for all risks and uncertainties. Consequently, forward-looking statements are not guaranteed. Actual results may vary materially from those expressed or implied in our forward-looking statements. In addition, we are not obligated and do not intend to update our forward-looking statements as a result of new information unless it is required by applicable securities laws. We caution investors not to place undue reliance on forward-looking statements, which represent management’s views as of the date of this report. We qualify all of our forward-looking statements by these cautionary statements.

 

Available Information

 

Our website address is www.granitefallsenergy.com.  Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available, free of charge, on our website under the link "SEC Compliance", as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this quarterly report on Form 10-Q.

 

Industry and Market Data

 

Much of the information in this report regarding the ethanol industry, including government regulation relevant to the industry is from information published by the Renewable Fuels Association (“RFA”), a national trade association for the United States ethanol industry, and information about the market for our products and competition is derived from publicly available information from governmental agencies or publications and other published independent sources.  Although we believe our third-party sources are reliable, we have not independently verified the information.

 

Overview

 

Granite Falls Energy, LLC is a Minnesota limited liability company.  References to we,  us,  our,  Granite Falls Energy,  GFE, and the Company refer to Granite Falls Energy, LLC. Our business consists primarily of the production and sale of ethanol and its co-products (wet, modified wet and dried distillers’ grains, corn oil and corn syrup) locally, and throughout the continental United States. 

 

Our production operations are carried out at our ethanol plant located in Granite Falls, Minnesota and at the ethanol plant operated by our majority owned subsidiary, Heron Lake BioEnergy, LLC (Heron Lake BioEnergy or HLBE), near Heron Lake, Minnesota.  As of January 31, 2016, we control approximately 50.6% of HLBE's outstanding membership units through our wholly owned subsidiary, Project Viking, L.L.C.  

 

The GFE ethanol plant has an approximate annual production capacity of 60 million gallons of denatured ethanol, but is currently permitted to produce up to 70 million gallons of undenatured ethanol on a twelve month rolling sum basis. The HLBE plant has an approximate annual production capacity of 60 million gallons of denatured ethanol, but is currently permitted to produce up to 72 million gallons of undenatured ethanol on a twelve month rolling sum basis.  We intend to continue working toward increasing production at both the GFE and HLBE plants to take advantage of the additional production allowed pursuant to our permits so long as we believe it is profitable to do so.

 

We market and sell the products produced at the GFE and HLBE plants primarily using third party marketers. The markets in which our products are sold may be local, regional, national, and international and depend primarily upon the efforts of third party marketers. We have contracted with Eco-Energy, LLC to market all of the ethanol produced at our ethanol plants.  We also independently market a small portion of the ethanol production at the GFE plant as E-85 to local retailers.  We have contracted with Renewable Products Marketing Group, LLC (“RPMG”) to market the distillers grains produced at the GFE plant and with Gavilon Ingredients, LLC to market distillers grains produced at the HLBE plant. We have contracted with RPMG to market all of corn oil produced at our ethanol plants. HLBE also occasionally independently markets and sells excess corn syrup from the distillation process at the Heron Lake plant to local livestock feeders.

 

15


 

Our cost of goods sold consists primarily of costs relating to the corn and natural gas supplies necessary to produce ethanol and distillers' grains for sale at our ethanol plants. Farmers Cooperative Elevator (“FCE”) is the exclusive supplier of corn to the GFE plant.  HLBE generally does not have long-term, fixed price contracts for the purchase of corn. Typically, HLBE purchases its corn directly from grain elevators, farmers, and local dealers within approximately 80 miles of Heron Lake, Minnesota.

 

At the GFE plant, we pay Center Point Energy/Minnegasco a per unit fee to move the natural gas through the pipeline, and we have guaranteed to move a minimum of 1,500,000 MMBTUs annually through December 31, 2025, which is the ending date of the agreement.  We also have an agreement with U.S. Energy Services, Inc. to procure contracts with various natural gas vendors on our behalf to supply the natural gas necessary to operate the Granite Falls plant.

 

HLBE has a facilities agreement with Northern Border Pipeline Company, which allows HLBE to access an existing interstate natural gas pipeline located approximately 16 miles north of its plant.  HLBE has entered into a firm natural gas transportation agreement with its majority owned subsidiary, Agrinatural.  HLBE also has an agreement with Constellation NewEnergy—Gas Division, LLC to supply the natural gas necessary to operate the Heron Lake plant.

 

We have entered into a management services agreement with HLBE pursuant to which our chief executive officer, chief financial officer, and commodity risk manager also hold those same offices with HLBE.  The initial term of the management services agreement expires in July 2016, but automatically renews for successive one-year terms unless either party gives the other party written notice of termination prior to expiration of the then current term. The management services agreement may also be terminated by either party for cause under certain circumstances.

 

HLBE also owns a controlling 73% interest in Agrinatural Gas, LLC ("Agrinatural"), which is a natural gas distribution and sales company located in Heron Lake, Minnesota that owns approximately 187 miles of natural gas pipeline and provides natural gas to HLBE’s ethanol plant and other commercial, agricultural and residential customers through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company.  Agrinatural's revenues are generated through natural gas distribution fees and sales.

 

Reportable Operating Segments

 

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our revenues from operations come from three primary sources: sales of fuel ethanol, sales of distillers' grains and sales of corn oil at GFE's ethanol plant and HLBE's ethanol plant.  Therefore, we have determined that based on the nature of the products and production process and the expected financial results, the Company’s operations at its ethanol plant and HLBE's plant, including the production and sale of ethanol and its co-products, are aggregated into one reporting segment.

 

Additionally, we also realize relatively immaterial revenue from natural gas pipeline operations at Agrinatural, HLBE's majority owned subsidiary.  The intercompany transactions between HLBE and Agrinatural resulting from the firm natural gas transportation agreement between the two companies are eliminated in consolidation. After intercompany eliminations, revenues from Agrinatural represent less than less than 1% of our consolidated revenues and have little to no impact on the overall performance of the Company.  Therefore, our management does not separately review Agrinatural's operating performance information.  Rather, management reviews Agrinatural's natural gas pipeline financial data on a consolidated basis with our ethanol production operations segment. Additionally, management believes that the presentation of separate operating performance information for Agrinatural's natural gas pipeline operations would not provide meaningful information to a reader of the Company’s condensed consolidated unaudited financial statements.

 

We currently do not have or anticipate we will have any other lines of business or other significant sources of revenue other than the sale of ethanol and its co-products, which include distillers' grains and non-edible corn oil.

 

16


 

Plan of Operations for the Next Twelve Months

 

Over the next twelve months, we will continue our focus on operational improvements at our ethanol plant. These operational improvements include exploring methods to improve ethanol yield per bushel and increasing production output at our plant to take full advantage of our permitted production capacity, reducing our operating costs, and optimizing our margin opportunities through prudent risk-management policies.

 

We expect to have sufficient cash generated by continuing operations and availability on current credit facilities to fund our operations.  However, should we experience unfavorable operating conditions in the ethanol industry that prevent us from profitably operating the ethanol plants, we may need to seek additional funding.

At the GFE plant, we have commenced construction of an an additional grain bin, which once complete will expand the GFE plant’s grain storage by approximately 750,000 bushels.  The grain storage expansion project is expected to cost approximately $2.7 million. In connection with this project, GFE executed a construction agreement dated April 8, 2015 with Buresh Building Systems, Inc.  The grain storage expansion project commenced initial site work in August 2015 and is expected to be completed during the first half of our 2016 fiscal year.

 

Several upscaling projects will be required to increase the HLBE plant's current production capacity and take full advantage of the additional production allowed under its air permit. One such project includes replacing HLBE's existing regenerative thermal oxidizer ("RTO").  The total cost for the RTO project is estimated to be approximately $1.9 million and HLBE has made a down payment on the RTO equipment of approximately $375,000 to secure the order. Once installed, the new RTO will improve emissions control at the HLBE plant and allow HLBE to continue to maintain applicable regulatory compliance. Completion of the HLBE RTO project is expected during the latter part of fiscal year 2016.

 

In addition, we anticipate continuing to conduct routine maintenance and repair activities at the GFE and HLBE ethanol plants. We anticipate using cash we generate from our operations and, as needed, our credit facilities to finance these plant upgrade projects. GFE’s corn storage expansion project and HLBE’s RTO replacement project are being funded from current earnings from operations and we do not expect that we require additional capital to fund these projects.

 

Trends and Uncertainties Impacting Our Operations

 

Our results of operation are affected and will continue to be affected by factors such as (a) volatile and uncertain commodity prices, especially prices for corn, ethanol, distillers' grains and natural gas; (b) availability of corn that is, in turn, affected by trends such as corn acreage, weather conditions, and yields on existing and new acreage diverted from other crops; and (c) the supply and demand for ethanol, which is affected by acceptance of ethanol as a substitute for fuel, public perception of the ethanol industry, government incentives and regulation, and competition from new and existing construction, among other things.  Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices and that declining crude oil prices, as well as proposed decreases in the renewable fuel standard volume obligations, will have a significant impact on the market price of ethanol and our profitability over the next twelve months.

 

The Renewable Fuel Standard

 

The RFS has been, and we expect will continue to be, a significant factor impacting ethanol usage.  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. Under the RFS, the Environmental Protection Agency (“EPA”) is supposed to pass an annual 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 (“RVOs”). On November 30, 2015, the EPA released the long-delayed final renewable volume obligations for corn-based ethanol for 2014 through 2016. The final RVO’s for corn-based ethanol blending for 2016 are 14.5 billion gallons, well below the original statutory blending requirements of 15 billion gallons set by the RFS and the current annual U.S. corn-based ethanol production capacity 15.1 billion gallons. Many in the ethanol industry believe EPA’s reduction of RVOs from the statutory requirements is not supported by the law and will have a significant negative impact on the ethanol industry. Management anticipates that there will be legal challenges to the EPA's final renewable volume obligation release.

 

Beyond the federal mandates, there are limited markets for ethanol. Further, opponents of ethanol such as large oil companies will likely continue their efforts to repeal or reduce the RFS through lawsuits or lobbying of Congress. If

17


 

such efforts are successful in further reducing or repealing the blending requirements of the RFS, a significant decrease in ethanol demand may result and could have a material adverse effect on our results of operations, cash flows and financial condition, unless additional demand from exports or discretionary or E85 blending develops.

 

Environmental and Other Regulations

 

Our business subjects us to various federal, state, and local environmental laws and regulations.  These laws and regulations require us to obtain and comply with numerous permits to construct and operate our ethanol plant, including water, air and other environmental permits. 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. Additionally, any changes that are made to the ethanol plant or its operations must be reviewed to determine if amended permits need to be obtained in order to implement these changes.

 

In particular, the Minnesota Pollution Control Agency (“MPCA”) has issued an air emission permit that established the applicable limits for each type of emission generated by our ethanol plants.  On July 10, 2015, MPCA approved a major amendment to HLBE’s air emission permit which increased its permitted production capacity from approximately 60 million gallons to approximately 72 million gallons of undenatured fuel-grade ethanol on a twelve-month rolling sum basis. In addition to increasing HLBE’s permitted capacity, the amendment also authorized equipment flexibility for various facility processes and increased various emission limits to accommodate the increase in ethanol production capacity, among other changes.  However, in connection with RTO replacement project, HLBE expects to file an application for an amendment of its air emissions permit with the MPCA in the near term to allow for the replacement under its current permit.  HLBE may incur additional costs related to ensure compliance with its permit once amended. 

 

Other factors that may affect our future results of operation include those risks discussed below and in “PART II - Item 1A. Risk Factors” of this report and “PART I - Item 1. Business” and “PART I - Item 1A. Risk Factors” of our annual report on Form 10-K for the fiscal year ended October 31, 2015. 

 

Results of Operations for the Three Months Ended January 31, 2016 and 2015

 

The following table shows summary information from the results of our operations and the approximate percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our condensed consolidated unaudited statements of operations for the three months ended January 31, 2016 and 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

2015

Income Statement Data

    

Amount

    

%  

    

 

Amount

    

%  

 

Revenue

 

$

51,001,654

 

100.0

%  

 

$

58,692,502

 

100.0

%

Cost of Goods Sold

 

 

49,568,777

 

97.2

%  

 

 

53,064,397

 

90.4

%

Gross Profit

 

 

1,432,877

 

2.8

%  

 

 

5,628,105

 

9.6

%

Operating Expenses

 

 

1,400,846

 

2.7

%  

 

 

1,423,387

 

2.4

%

Operating Income

 

 

32,031

 

0.1

%  

 

 

4,204,718

 

7.2

%

Other Expense, net

 

 

(5,486)

 

(0.0)

%  

 

 

(19,845)

 

 —

%

Net Income

 

 

26,545

 

0.1

%  

 

 

4,184,873

 

7.2

%

Less: Net Income attributable to Non-controlling interest

 

 

15,019

 

0.0

%  

 

 

417,781

 

0.7

%

Net Income attributable to Granite Falls Energy, LLC

 

$

11,526

 

0.0

%  

 

$

3,767,092

 

6.5

%

 

Revenues

 

Revenues from the sales of fuel ethanol, distillers' grains and corn oil represented approximately 98.9% and 99.2% of our total revenues for the three months ended January 31, 2016 and 2015, respectively.  The remaining approximately 1.1% and 0.8% miscellaneous other revenue for the three months ended January 31, 2016 and 2015, respectively, is made up of incidental sales of corn syrup at HLBE's plant and revenues from natural gas pipeline operations at Agrinatural, net of intercompany eliminations.

 

18


 

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our condensed consolidated unaudited statements of operations for the three months ended January 31, 2016:

 

 

 

 

 

 

 

 

 

    

 

 

    

Percentage of

 

 

 

 

 

Total

Revenue Sources

 

Amount

 

Revenues

Ethanol sales

 

$

40,118,190

 

78.7

%

Distillers grains sales

 

 

8,530,909

 

16.7

%

Corn oil sales

 

 

1,814,904

 

3.5

%

Miscellaneous other

 

 

537,651

 

1.1

%

Total Revenues

 

$

51,001,654

 

100.0

%

 

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our condensed consolidated unaudited statements of operations for the three months ended January 31, 2015:

 

 

 

 

 

 

 

 

 

    

 

 

    

Percentage of

 

 

 

 

 

Total

Revenue Sources

 

Amount

 

Revenues

Ethanol sales

 

$

47,886,778

 

81.6

%

Distillers grains sales

 

 

8,794,787

 

15.0

%

Corn oil sales

 

 

1,512,266

 

2.6

%

Miscellaneous other

 

 

498,671

 

0.8

%

Total Revenues

 

$

58,692,502

 

100.0

%

 

Our total revenues decreased by 13.1% for the three months ended January 31, 2016 as compared to the three months ended January 31, 2015.  Management attributes this decrease in revenues due primarily to decreases in the average prices received for our ethanol and distillers' grains from period to period.

 

Ethanol

 

Total consolidated revenues from ethanol sales decreased by 16.2% for the three months ended January 31, 2016 as compared to the same period in 2015, due primarily to a 19.4% decrease in the average price received from period to period. This decrease was partially offset by an increase of 3.9% in the total number of gallons sold during the three months ended January 31, 2016 as compared to the three months ended January 31, 2015.

 

This increase in the number of gallons sold during the 2016 period is attributable to an increase of approximately 15.1% in the number of gallons sold from the HLBE plant during the three months ended January 31, 2016 as compared to the three months ended January 31, 2015, which was offset by a 6.0% decrease in the number of gallons sold at the GFE plant from period to period.  HLBE produced and sold more ethanol gallons during three months ended January 31, 2016 as compared to the same period of 2015 primarily due to increased production in the current period and system pressure fluctuations we experienced during the first half of the quarter ended January 31, 2015 which impacted HLBE’s ability to maintain production rates during the 2015 period.

 

The decline in average market price for the three months ended January 31, 2016, as compared to the three months ended January 31, 2015, is due to several factors.  Industry-wide production outpaced domestic consumption and net exports during the quarter causing an increase in domestic ethanol stocks resulting in lower ethanol prices. In addition, ethanol prices were also depressed by lower unleaded gasoline and crude oil prices as well as lower corn prices. The reduction of the volume obligations set forth in the RFS by the EPA in November 2015 also had a negative effect on ethanol prices. 

 

Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. In addition, management anticipates that ethanol prices will remain lower during our 2016 fiscal year due to anticipated low crude oil and unleaded gasoline prices. Continued low prices or further declines in the crude oil and unleaded gasoline markets could have a significant negative impact on the market price of ethanol and our profitability particularly if domestic ethanol stocks remain high or further increase.

19


 

Ethanol exports have provided some support for ethanol prices, especially as ethanol prices have been reduced.  However, we could experience a decrease in U.S. ethanol exports due to the premium on the price of ethanol as compared to unleaded gasoline. As a result, ethanol exports may decrease which may contribute to growth in domestic ethanol stocks and a decrease in U.S. domestic ethanol prices unless additional demand from domestic discretionary blending or other foreign markets develop.  The EPA's reduction of the RVOs set forth in the RFS may limit demand for ethanol beyond obligated blending requirements negatively impacting ethanol prices throughout 2016 and potentially after that time. Operating conditions deteriorated towards the end of 2015 fiscal year and through our first fiscal quarter.  Management expects margins will remain tight through fiscal year 2016 and possibly negative at times during our second fiscal quarter which could have a material adverse effect on our results of operations, cash flows and financial condition.

 

Management anticipates that our ethanol production during our 2016 fiscal year will be higher than during our 2015 fiscal year due to increased permitted production capacity and capital improvement projects we have been undertaking designed to increase our production capacity. However, if the ethanol industry experiences unfavorable operating margins during our 2016 fiscal year, it is possible that we may be forced to reduce production based on these market conditions.

 

At January 31, 2016, ethanol derivative instruments resulted in a gain of approximately $79,000 during the three months ended January 31, 2016, which increased our revenue.  We had no gain or loss on ethanol derivative instruments during the three months ended January 31, 2015.

 

Distillers' Grains

 

Total revenue from the sales of distillers' grains decreased by 3.0% during the three months ended January 31, 2016 compared to the same period of 2015.  The decline in distillers' grains revenues is primarily attributable to an 1.7% decrease from period to period in the average price received for distillers' grains for both plants. The effect of the decrease in average distillers' grains price was further enhanced by a 1.4% decrease in the aggregate tons of distillers' grains sold during the three months ended January 31, 2016 as compared to the same period in 2015.  This decrease in tons sold is due to a 6.8% decrease in the volume of distillers' grains sold at the GFE plant which was partially mitigated by a 5.1% increase in distillers' grains sales at the HLBE plant. The decrease in distillers' grains sales at the GFE plant during the first fiscal quarter of 2016 was primarily attributable to decrease from period to period in the amount of dried distillers grains produced at the GFE plant, which resulted in fewer tons sold at the GFE plant.

 

HLBE produced and sold more total tons of distillers’ grains during the three months ended January 31, 2016 compared to the same period of 2015 due to increased total production during the first quarter of our 2016 fiscal year. This increase in tons sold from period to period was a result of HLBE’s increased production capcity during the three months ended January 31, 2016, as well as the system pressure fluctuations it experienced during the three months ended January 31, 2015 discussed above. Since distillers’ grains are a co-product of the ethanol production process, when ethanol production increases, distillers’ grains production increases as well.

 

The decline in the average price received for our distillers’ grains was due primarily to increased corn and soybeans supplies, which resulted lower market corn and soybean meal prices during the three months ended January 31, 2016. Since distillers’ grain are primarily used as an animal feed substitute for corn and soybean meal, the price of distillers’ grain is impacted by these competing products.    Management anticipates continued lower corn and soybean prices which may result in continued low or declining distillers’ grain prices.

 

In addition, management anticipates distillers’ grains prices will be lower during the remainder of our 2016 fiscal year as a result of the Chinese antidumping and countervailing duty investigation.  This investigation may lead to a decrease in distillers’ grains exports to China in the near term and may result in the imposition of tariffs by the Chinese in the future. 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 result in excess distillers’ grains supplies in the United States and could negatively impact our results of operations.

 

20


 

Corn Oil

 

Total corn oil sales increased by 20.0% for the three months ended January 31, 2016 compared to the same period of 2015.  Management attributes this increase to a 47.4% increase in the volume of corn oil sold for the three months ended January 31, 2016 compared to the same period in 2015, which was partially offset by 18.6% reduction in the average corn oil price.

 

The increase in pounds sold from period to period was attributable to an 98.5% and 9.7% increase in the volumes sold at the HLBE plant and GFE plant, respectively.  The increase at the HLBE plant a result of HLBE’s increased production capcity during the three months ended January 31, 2016, and improved corn oil extraction efficiencies. The GFE and HLBE plants produced and sold more total corn oil for the three months ended January 31, 2016 compared to the same period in 2015, due to increased production and improved corn oil extraction efficiencies.  The HLBE plant also saw significant growth in corn oil sales from the prior period the system pressure fluctuations it experienced during the three months ended January 31, 2015 discussed above. Management anticipates that the corn oil production our ethanol plants will continue to be higher during our 2016 fiscal year compared to our 2015 fiscal year.

 

Corn oil prices have been impacted by oversupply and lower soybean oil prices, a product that typically competes with corn oil, particularly for biodiesel production. Biodiesel production is a major source of corn oil demand.  Management anticipates corn oil prices may rebound during our 2016 fiscal year since the biodiesel blenders’ tax credit was renewed for 2016 which may lead to increased biodiesel production and increased corn oil prices. However, management believes that corn oil production capacity still exceeds demand which may continue to negatively impact corn oil prices. Unless additional demand can be created, management anticipates continued lower corn oil prices during our 2016 fiscal year.

 

Cost of Goods Sold

 

Our costs of goods sold include, among other things, the cost of corn and natural gas (which are the two largest single components of costs of goods sold), as well as processing ingredients, electricity, and wages, salaries and benefits of production personnel.

 

The following table shows the costs of corn and natural gas and the approximate percentage of costs of those components to total costs of goods sold in our condensed consolidated unaudited statements of operations for the three months ended January 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

Amount

 

Percentage of Cost of Goods Sold

Corn costs

 

$

38,977,940

 

78.6

%

Natural gas costs

 

 

2,646,941

 

5.3

%

All other components of costs of goods sold

 

 

7,943,896

 

16.1

%

Total Cost of Goods Sold

 

$

49,568,777

 

100.0

%

 

The following table shows the costs of corn and natural gas and the approximate percentage of costs of those components to total costs of goods sold in our condensed consolidated unaudited statements of operations for the three months ended January 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 Amount

 

Percentage of Cost of Goods Sold

Corn costs

 

$

41,148,928

 

77.5

%

Natural gas costs

 

 

4,311,918

 

8.1

%

All other components of costs of goods sold

 

 

7,603,551

 

14.4

%

Total Cost of Goods Sold

 

$

53,064,397

 

100.0

%

 

Our costs of goods sold decreased 6.6% for the three month period ended January 31, 2016 compared the same period of 2015.  However, cost of goods sold as a percentage of revenues increased for the three month period ended January 31, 2016 compared the same period of 2015 due to the narrowing of the margin between the price of ethanol and the price of corn.

 

21


 

Corn

 

Corn costs decreased 5.3% for the quarter ended January 31, 2016 as compared to the same period of 2015, as our average price paid per bushel of corn, net of hedging activity, decreased by 6.9% from period to period. However, corn cost comprised a larger portion of our cost of goods sold from period to period representing 78.6% and 77.5% of our cost of goods sold for the quarters ended January 31, 2016 and 2015, respectively.

 

The decrease in corn prices was primarily driven by the strong corn harvest in the fall of 2015 resulting in a significant increase in the supply of corn available to the market. Management anticipates that corn prices will remain relatively stable during our 2016 fiscal year due to ample corn supplies and relatively stable corn demand. These lower corn prices could impact the amount of corn which is planted during 2016 which could result in higher corn prices later in our 2016 fiscal year.

 

From time to time we enter into forward purchase contracts for our commodity purchases and sales. At January 31, 2016, we had forward corn purchase contracts for various delivery periods through December 2016. Our corn derivative positions resulted in gains of approximately $196,000 for the three months ended January 31, 2016, which decreased cost of goods sold, compared to losses of approximately $608,000 related to corn derivative instruments for the same period of 2015, which increased cost of goods sold for the 2015 period.  We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur.  As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance.  We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged.

 

Natural Gas

 

For the three month period ended January 31, 2016, we experienced a decrease of 38.6% in our overall natural gas costs compared to the same period of 2015.  The decrease in natural gas costs was due to plentiful supply, resulting in lower natural gas prices for the three months ended January 31, 2016 as compared to the three months ended January 31, 2015.  Additionally, winter was milder, resulting in lower natural gas demand during the three months ended January 31, 2016 as compared to the same period of 2015.  Management anticipates that natural gas prices will continue to hold steady, unless there are major supply disruptions due to production problems or catastrophic weather events, as natural gas production has replenished stock shortages from last year and is currently exceeding demand.

 

Our natural gas derivative positions resulted in a gain of approximately $32,000 during the three months ended January 31, 2016, which decreased our cost of goods sold. In comparision, we had no gain or loss on natural gas derivative instruments during the three months ended January 31, 2015.

 

Operating Expenses

 

Operating expenses include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees and similar costs.  Our operating expenses decreased by 1.6% for the three months ended January 31, 2016 compared to the same period ended 2015. Despite the decrease from period to period, operating expenses, as a percentage of total revenues, increased slightly to 2.7% for the three months ended January 31, 2016, as compared to 2.4% for three months ended January 31, 2015. Although we are focused on increasing operating efficiencies, these expenses generally do not vary with the level of production at the plant.  We expect that going forward our operating expenses will remain relatively steady.

 

Operating Income

 

We had income from operations of approximately $32,000 for the three months ended January 31, 2016, compared to income from operations of approximately $4.2 million for the three months ended January 31, 2015. This decrease in our operating income is primarily due to decreased operating margins due to lower average prices received for our products and the narrowing of our net operating margins at our plants.

 

22


 

Other Expense, Net

 

Our other expense, net, for the three months ended January 31, 2016 was approximately $5,000, compared to a net expense of approximately $20,000 for the three months ended January 31, 2015.  Other expense, net consists primarily of interest expense on our credit facilities.  Interest expense for the three months ended January 31, 2016 was approximately $76,000 compared to approximately $70,000 for the same period of 2015, reflecting the increase in borrowings on HLBE's credit facilities for the three months ended January 31, 2016. Offsetting our interest expense, we other income of approximately $68,000 during the three months ended January 31, 2016, compared to approximately $47,000 of other income for the three months ended January 31, 2015. 

 

Changes in Financial Condition at January 31, 2016

 

The following table highlights our financial condition at January 31, 2016 and October 31, 2015:

 

 

 

 

 

 

 

 

 

 

    

January 31, 2016

    

October 31, 2015

 

 

 

(unaudited)

 

 

 

Current Assets

 

$

26,771,467

 

$

35,513,044

 

Total Assets

 

$

112,897,553

 

$

122,011,081

 

Current Liabilities

 

$

10,822,221

 

$

9,139,680

 

Long-Term Debt

 

$

7,536,806

 

$

6,711,975

 

Members' Equity attributable to Granite Falls Energy, LLC

 

$

74,973,246

 

$

84,602,607

 

Non-controlling Interest

 

$

19,565,280

 

$

21,556,819

 

 

Total assets were approximately $112.9 million at January 31, 2016, a 7.5% decrease from our total assets at October 31, 2015.  The decrease in our total assets is primarily due to a 24.6% decrease in total current assets at January 31, 2016 compared to October 31, 2015.  The change in our current assets is due to significant decreases in cash on hand during the three months ended January 31, 2016.  At January 31, 2016, our cash on hand was approximately was approximately $6.1 million less than cash on hand at October 31, 2015, due to decreased profitability during the period and payment of distributions to members in January 2016.  In addition, also contributing to the reduction in our current assets at January 31, 2016 was a decrease of approximately $4.4 million in accounts receivable and a decrease in the value of our commodity derivative instruments of approximately $505,000. Our trade accounts receivable decreased due to primarily to timing of shipments. Offsetting these decreases were increases of approximately $412,000 in restricted cash related to cash held in our margin account for our hedging transactions,  approximately $214,000 in inventory as a result of having more corn and ethanol on hand at January 31, 2016, and approximately $1.7 million in prepaid expenses at January 31, 2016 compared to October 31, 2015. 

 

Total current liabilities totaled approximately $10.8 million at January 31, 2016, an increase of approximately $1.7 million from October 31, 2015.  This increase was mainly due to an increase of approximately $3.5 million in checks drawn in excess of bank balance at January 31, 2016 compared to October 31, 2015. Our outstanding checks drawn in excess of our bank balance represents any checks that we have issued which have not yet been cashed which exceed the cash we have in our bank account.  Checks that we issue are paid from our revolving term loans and any cash that we generate is used to pay down our lines of credit with our primary lender. Offsetting the increase in checks drawn in excess of bank balance was a decrease of approximately $1.7  million in our accounts payable and a decrease of $261,000 in corn payable to FCE at January 31, 2016 as compared to October 31, 2015.  The decrease in our accounts payable and corn payable to FCE is due primarily to lower corn prices during the quarter which reduced the amount of our corn payable at January 31, 2016.  

 

Our long-term debt increased approximately $892,000 at January 31, 2016 compared to October 31, 2015.  The increase is due to increased borrowings by HLBE on its AgStar debt facilities to finance a portion of distributions made to HLBE unit holders in January 2016.

 

Members’ equity attributable to Granite Falls Energy, LLC at January 31, 2016 compared to October 31, 2015 decreased by $9.6 million. The decrease was related to the distribution to our members of approximately $9.6 million during January 2016. 

 

Noncontrolling interest totaled approximately $19.6 million at January 31, 2016.  This is directly related to recognition of the 49.4% noncontrolling interest in HLBE at January 31, 2016.

23


 

LIQUIDITY AND CAPITAL RESOURCES

 

Our principal sources of liquidity consist of cash provided by operations, cash and equivalents on hand, and available borrowings under our credit facilities.  Our principal uses of cash are to pay operating expenses of the plants, to make debt service payments on long-term debt, and to make distribution payments to our members.  We expect to have sufficient cash generated by continuing operations and current lines of credit to fund our operations for the next twelve months.

 

We do not currently anticipate any significant purchases of property and equipment that would require us to secure additional capital in the next twelve months. 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 additional capital to supplement cash generated from operations and our current credit facilities. The grain storage expansion project at the GFE plant the the RTO replacement project at the HLBE plant are being funded from current earnings from operations and we do not expect that we require additional capital to fund these projects.

 

Cash Flows

 

The following table shows our cash flows for the three months ended January 31, 2016 and 2015: 

 

 

 

 

 

 

 

 

 

 

    

2016

 

2015

 

 

 

(unaudited)

 

(unaudited)

 

Net cash provided by operating activities

 

$

3,405,448

 

$

11,598,317

 

Net cash used in investing activities

 

$

(2,294,859)

 

$

(4,168,127)

 

Net cash used in financing activities

 

$

(7,250,811)

 

$

(30,122,400)

 

Net decrease in cash

 

$

(6,140,222)

 

$

(22,692,210)

 

 

Operating Cash Flows

 

Our cash flows from operations were approximately $8.2 million lower for the three months ended January 31, 2016 compared to the three months ended January 31, 2015.  This decrease from period to period was due primarily to a $4.2 million decrease in our net income. During the three months ended January 31, 2016, we also had less accounts receivable and increased prepaid expenses, which reduced our cash flows from operationsAdditionally, our accounts payable decreased by $1.7 million for three months ended January 31, 2016,  as compared to an increase of $2.5 million for three months ended January 31, 2015.

 

Investing Cash Flows

 

Cash used in investing activities was approximately $2.3 million for the three months ended January 31, 2016, compared to approximately $4.2 million for the three months ended January 31, 2015. This $1.9 million decrease was due primarily to reduced capital expenditures for the three months ended January 31, 2016 for construction in progress.  During the three months ended January 31, 2016, we used cash at the GFE plant for our grain bin storage expansion and at HLBE plant for our RTO replacement project. During the three months ended January 31, 2016, we used cash at the HLBE plant to purchase a condenser and sieve beads to remediate the system pressure fluctuations HLBE experienced during the first fiscal quarter. 

 

Financing Cash Flows

 

Cash used in financing activities was approximately $22.9 million less for the three months ended January 31, 2016 compared to the same period of 2015. For the three months ended January 31, 2016, we made payments of approximately $9.6 million in distributions to our unit holders, approximately $2.0 million to non-controlling interests, and approximately $3.7 million on HLBE’s long-term debt, which were offset by approximately $4.6 million in proceeds from HLBE’s long-term debt and approximately $3.5 million provided by checks drawn in excess of bank balance.  In comparison, for the same period in 2015, we had proceeds of of approximately $3.4 million on HLBE’s long-term debt, approximately $3.4 million provided by checks drawn in excess of bank balance and made payments of approximately $32.1 million in distributions to our unit holders and $4.6 million to non-controlling interests.

 

24


 

Indebtedness

 

Granite Falls Energy

 

We have a credit facility with United FCS consisting of a long-term revolving term loan. Our credit facility with United FCS is secured by substantially all our assets. There are no savings account balance collateral requirements as part of this credit facility.  CoBank serves as administrative agent for this credit facility.

 

The Company's credit facility with United FCS is subject to numerous covenants requiring us to maintain various financial ratios. As of January 31, 2016, we were in compliance with these financial covenants and expect to be in compliance throughout fiscal 2016. 

 

Under the Company's long-term revolving term loan, we could initially borrow, repay, and re-borrow up to $18.0 million. However, the amount available for borrowing under this facility reduces by $2.0 million every six months, beginning September 1, 2014, with the final reduction on March 1, 2018.  Therefore, at January 31, 2016, the amount we may borrow under this facility was $14.0 million.  The amount available under this facility was further reduced at March 1, 2016 to $12.0 million in accordance with the loan terms. The interest rate for this facility is based on the bank's "One Month LIBOR Index Rate" plus 3.05%. The facility is available through March 31, 2018.  As of January 31, 2016 and October 31, 2015, there was no outstanding balance on the revolving term loan.

 

Heron Lake BioEnergy

 

AgStar Revolving Term Note

 

HLBE has a credit facility with AgStar Financial Services, FCLA ("AgStar") which consists of a revolving term loan with a maturity date of March 1, 2022.  The credit facility is secured by all of HLBE's real property, equipment and other assets.   CoBank serves as administrative agent for this credit facility. 

 

The HLBE credit facility is subject to numerous covenants requiring HLBE to maintain various financial ratios.  As of January 31, 2016, HLBE was in compliance with these financial covenants and management expects HLBE will continue to be in compliance throughout fiscal 2016.

 

Under the AgStar revolving term note, HLBE may borrow, repay, and re-borrow up to $28.0 million.  However, the maximum principal amount of this loan decreases by $3.5 million annually starting on March 1, 2015 and continuing each anniversary thereafter until maturity.  The amount available under this facility at January 31, 2016 was $24.5 million.  The amount available under this facility was further reduced at March 1, 2016 to $21.0 million in accordance with the loan terms.

 

Interest on this loan accrues at 3.25% above the One-Month London Interbank Offered Rate (LIBOR) Index rate.  HLBE 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.  The revolving term loan is subject to an annual fee of 0.5% of the unused portion of this loan.  The revolving term loan is also subject to a prepayment fee for any prepayment on the loan prior to July 1, 2016 due to refinancing.  At January 31, 2016, HLBE had approximately approximately $5.7 million outstanding on this loan at January 31, 2016, and $4.8 million at October 31, 2015.  The interest rate at January 31, 2016 and October 31, 2015 was 3.69% and 3.45%, respectively.

 

Other HLBE Credit Arrangements

 

In addition to HLBE's primary credit arrangement with AgStar, HLBE has other material credit arrangements and debt obligations.

 

In October 2003, HLBE entered into an industrial water supply development and distribution agreement with the City of Heron Lake, Jackson County, and Minnesota Soybean Processors. In consideration of this agreement, HLBE and Minnesota Soybean Processors are allocated equally the debt service on $735,000 in water revenue bonds that were issued by the City to support this project that mature in February 2019. The parties have agreed that, prior to the scheduled expiration of the agreement, they will negotiate in good faith to replace the agreement with a further agreement regarding the wells and related facilities.

25


 

In May 2006, HLBE entered into an industrial water supply treatment agreement with the City of Heron Lake and Jackson County. Under this agreement, HLBE pays monthly installments over 24 months starting January 1, 2007 equal to one years' debt service on approximately $3.6 million in water revenue bonds, which will be returned to HLBE if any funds remain after final payment in full on the bonds and assuming HLBE complies with all payment obligations under the agreement.

 

There was a total of approximately $2.0 million in outstanding water revenue bonds at January 31, 2016 and October 31, 2015. HLBE classifies its obligations under these bonds as assessments payable. The interest rates on the bonds range from 0.50% to 8.73%.

 

To fund the purchase of the distribution system and substation for the plant, HLBE entered into a loan agreement with Federated Rural Electric Association pursuant to which HLBE borrowed $600,000 by a secured promissory note. Under the note HLBE is required to make monthly payments to Federated Rural Electric Association of $6,250 consisting of principal and an annual fee of 1% beginning on October 10, 2009. In exchange for this loan, Federated Rural Electric Association was granted a security interest in the distribution system and substation for the plant. The balance of this loan was approximately $125,000 and $144,000 at January 31, 2016, and October 31, 2015, respectively.

 

HLBE also has a note payable to the noncontrolling owner of Agrinatural in the amount of in the amount of $266,000 and $300,000 at January 31, 2016 and October 31, 2015, respectively. Interest on the note is the One-Month LIBOR rate plus 4.0% and the note is due on demand.

 

Agrinatural

 

Original Agrinatural Credit Facility

 

On July 29, 2014, HLBE has entered into an intercompany loan agreement and related loan documents with Agrinatural, its majority owned subsidiary (the Original Agrinatural Credit Facility). Under the Original Agrinatural Credit Facility, the Company agreed to make a five-year term loan in the principal amount of $3.05 million to Agrinatural for use by Agrinatural to repay approximately $1.4 million of its outstanding debt and provide approximately $1.6 million of working capital to Agrinatural. The Original Agrinatural Credit Facility contains customary financial and non-financial affirmative covenants and negative covenants for loans of this type and size.

 

On March 30, 2015, HLBE entered into an allonge (the “Allonge”) to the July 29, 2014 note with Agrinatural. Under the terms of the Allonge, HLBE and Agrinatural agreed to increase the principal amount of the Original Agrinatural Credit Facility to approximately $3.06 million, defer commencement of repayment of principal until May 1, 2015, decrease the monthly principal payment to $36,000 per month and shorten maturity of the Original Agrinatural Credit Facility to May 1, 2019.

 

Interest on the Original Agrinatural Credit Facility was not amended and continues to accrue at a variable rate equal to the One-Month LIBOR rate plus 4.0%, with the interest rate capped and not to exceed 6.0% per annum.  Accrued interest is due and payable on a monthly basis. Except as otherwise provided in the Allonge, all of the terms and conditions contained in the Original Agrinatural Credit Facility remain in full force and effect.

 

In exchange for the loan agreement, Agrinatural executed a security agreement granting HLBE a first lien security interest in all of Agrinatural's equipment and assets and a collateral assignment assigning HLBE all of Agrinatural's interests in its contracts, leases, easements and other agreements. In addition, Rural Energy Solutions, LLC, the noncontrolling owner of Agrinatural (RES), executed a guarantee under which RES guaranteed full payment and performance of 27% of Agrinatural's obligations to HLBE.

 

The balance of this loan was approximately $2.7 million at January 31, 2016 and $2.8 million at October 31, 2015.

 

26


 

Additional Agrinatural Credit Facility

 

On March 30, 2015, HLBE entered into a second intercompany loan agreement and related loan documents (the Additional Agrinatural Credit Facility) with Agrinatural. Under the Additional Agrinatural Credit Facility, HLBE agreed to make a four-year term loan in the principal amount of $3.5 million to Agrinatural for use by Agrinatural to repay its outstanding trade debt and provide working capital.  The Additional Agrinatural Credit Facility contains customary financial and non-financial affirmative covenants and negative covenants for loans of this type and size.

 

Interest on the additional term loan accrues at a variable rate equal to the One-Month LIBOR rate plus 4.0%, with the interest rate capped and not to exceed 6.0% per annum.  Prior to May 1, 2015, Agrinatural is required to pay only monthly interest on the term loan.  Commencing May 1, 2015, Agrinatural is required to make monthly installments of principal plus accrued interest. The entire principal balance and accrued and unpaid interest on the term loan is due and payable in full on May 1, 2019.

 

In exchange for the Additional Agrinatural Credit Facility, Agrinatural executed a security agreement granting HLBE a first lien security interest in all of Agrinatural's equipment and assets and a collateral assignment assigning HLBE all of Agrinatural's interests in its contracts, leases, easements and other agreements. In addition, RES executed a guarantee under which RES guaranteed full payment and performance of 27% of Agrinatural's obligations to HLBE under the Additional Agrinatural Credit Facility.

 

The balance of this loan was approximately $3.1 million at January 31, 2016 and $3.2 million at October 31, 2015.

 

Critical Accounting Policies and Estimates

 

Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.  We believe that of our significant accounting policies summarized in Note 1 to our condensed consolidated unaudited financial statements included with this Form 10-Q.  At January 31, 2016, our critical accounting estimates continue to include those described in our annual report on Form 10-K for the fiscal year ended October 31, 2015. Management has not changed the method of calculating and using estimates and assumptions in preparing our condensed consolidated unaudited financial statements in accordance with generally accepted accounting principles in the United States of America.

 

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

 

Interest Rate Risk

 

We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from our credit facilities with United FCS, PCA and HLBE's credit facilities with AgStar Financial Services, PCA. The specifics of these credit facilities are discussed in greater detail in “Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Indebtedness.”

 

27


 

As of January 31,  2016, GFE had no exposure to interest rate risk as we had no amounts outstanding on our credit facility with United FCS, PCA. As of January 31, 2016, HLBE’s exposure to interest rate risk results primarily from its credit facilities with AgStar, as well as its note payable to the noncontrolling owner of Agrinatural.   Below is a sensitivity analysis we prepared regarding HLBE's income exposure to changes in interest rates for its credit facility with AgStar. The sensitivity analysis below shows the anticipated effect on our income from a 10% adverse change in interest rates for a one-year period.

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding Variable

    

 

    

 

 

    

 

 

 

 

Rate Debt at

 

Interest Rate at

 

Interest Rate Following 10%

 

Approximate Adverse

 

January 31, 2016

 

January 31, 2016

 

Adverse Change

 

Change to Income

 

$

6,042,000

 

3.69

%  

 

4.06

%  

 

$

22,000

 

 

Commodity Price Risk

 

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

 

As of  January 31, 2016, GFE had price protection in place for approximately 4% of its anticipated corn needs and approximately 4% of its ethanol sales for the next 12 months. As of  January 31, 2016, HBLE had price protection in place for approximately 15% of its anticipated corn needs and approximately 4% of its ethanol sales for the next 12 months. Through these contracts we hope to minimize risk from future market price fluctuations and basis fluctuations. As input prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us.

 

A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the fair value of our corn and natural gas prices and average ethanol price as of 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 both of the GFE and HLBE plants for a one year period from January 31,  2016.  

 

The results of this sensitivity analysis, which may differ from actual results, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Volume Requirements for the next

 

Hypothetical Adverse Change in

 

 

 

 

 

 

12 months (net of forward and futures

 

Price as of

 

Approximate Adverse Change to

 

 

 

contracts)

 

January 31, 2016

 

Income

 

Ethanol

 

127,442,000

 

10

%

 

$

16,083,000

 

Corn

 

41,250,000

 

10

%

 

$

13,961,000