SOUTHWEST IOWA RENEWABLE ENERGY, LLC - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 SIRE 20160630 - SOUTHWEST IOWA RENEWABLE ENERGY, LLC	sire-20160630x10qex322.htm
EX-32.1 - EXHIBIT 32.1 SIRE 20160630 - SOUTHWEST IOWA RENEWABLE ENERGY, LLC	sire-20160630x10qex321.htm
EX-31.2 - EXHIBIT 31.2 SIRE 20160630 - SOUTHWEST IOWA RENEWABLE ENERGY, LLC	sire-20160630x10qex312.htm
EX-31.1 - EXHIBIT 31.1 SIRE 20160630 - SOUTHWEST IOWA RENEWABLE ENERGY, LLC	sire-20160630x10qex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)



ý	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ending June 30, 2016

o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission file number 000-53041



SOUTHWEST IOWA RENEWABLE ENERGY, LLC
(Exact name of registrant as specified in its charter)

Iowa	20-2735046
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10868 189th Street, Council Bluffs, Iowa	51503
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number (712) 366-0392

Securities registered under Section 12(b) of the Exchange Act:	None.

Title of each class	Name of each exchange on which registered

Securities registered under Section 12(g) of the Exchange Act:
Series A Membership Units
(Title of class)

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 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 x No o

Indicate by check mark whether the registrant has submitted electronically on its corporate Website, 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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

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

As of June 30, 2016, the Company had 8,993 Series A, 3,334 Series B and 1,000 Series C Membership Units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE—None

TABLE OF CONTENTS



Item No.	Item Matter	PAGE NO.
	PART 1 – FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS	1
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	14
Item 3.	QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISKS	25
Item 4.	CONTROLS AND PROCEDURES	25
	PART II – OTHER INFORMATION	25
Item 1.	LEGAL PROCEEDINGS	25
Item 1A.	RISK FACTORS	25
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	26
Item 3.	DEFAULTS UPON SENIOR SECURITIES	26
Item 4.	MINE SAFETY DISCLOSURES	26
Item 5.	OTHER INFORMATION	26
Item 6.	Exhibits	26
	SIGNATURES	27
	CERTIFICATIONS	SEE EXHIBITS 31 AND 32

PART I – FINANCIAL STATEMENTS

Item 1. Financial Statements

SOUTHWEST IOWA RENEWABLE ENERGY, LLC Balance Sheets (Dollars in thousands)

ASSETS	June 30, 2016			September 30, 2015
	(Unaudited)
Current Assets
Cash and cash equivalents	$	3,016		$	3,030
Restricted cash	—			305
Accounts receivable	477			348
Accounts receivable, related party	13,303			3,416
Derivative financial instruments	1,534			819
Inventory	13,431			14,298
Prepaid expenses and other	656			327
Total current assets	32,417			22,543

Property, Plant and Equipment
Land	2,064			2,064
Plant, building and equipment	217,034			213,552
Office and other equipment	1,200			1,128
	220,298			216,744
Accumulated depreciation	(96,144		)	(87,324		)
Net property, plant and equipment	124,154			129,420

Other Assets
Financing costs, net of accumulated amortization of $144 and $90, respectively	293			347
Other assets	2,157			2,166
	2,450			2,513
Total Assets	$	159,021		$	154,476

Notes to Financial Statements are an integral part of this statement

SOUTHWEST IOWA RENEWABLE ENERGY, LLC Balance Sheets (Dollars in thousands)

LIABILITIES AND MEMBERS' EQUITY	June 30, 2016		September 30, 2015
	(Unaudited)
Current Liabilities
Accounts payable	$	2,022	$	3,910
Accounts payable, related party	180		741
Derivative financial instruments	3,039		659
Accrued expenses	5,803		6,144
Accrued expenses, related parties	412		133
Current maturities of notes payable	6,511		6,506
Total current liabilities	17,967		18,093

Long Term Liabilities
Notes payable, less current maturities	35,008		29,227
Other long-term liabilities	6,125		5,840
Total long term liabilities	41,133		35,067

Members' Equity
Members' capital, 13,327 Units issued and outstanding	87,165		87,165
Accumulated earnings	12,756		14,151
Total members' equity	99,921		101,316

Total Liabilities and Members' Equity	$	159,021	$	154,476

Notes to Financial Statements are an integral part of this statement

SOUTHWEST IOWA RENEWABLE ENERGY, LLC Statements of Operations (Dollars in thousands except for net income per unit) (Unaudited)

	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015

Revenues	$	58,128		$	58,235		$	165,449		$	186,243
Cost of Goods Sold
Cost of goods sold-non hedging	56,287			51,238			162,129			165,336
Realized & unrealized hedging losses (gains)	614			(752		)	385			(2,561		)
	56,901			50,486			162,514			162,775

Gross Margin	1,227			7,749			2,935			23,468

General and administrative expenses	1,104			1,256			3,273			3,771

Operating Income (Loss)	123			6,493			(338		)	19,697

Interest expense and other income, net	396			402			697			1,388
Change in fair value of put option liability	—			—			360			600
Loss from debt extinguishment	—			—			—			4,700

Net Income (Loss)	$	(273	)	$	6,091		$	(1,395	)	$	13,009

Weighted average units outstanding - basic	13,327			13,327			13,327			13,327
Weighted average units outstanding - diluted	13,327			14,039			13,327			16,522
Income (loss) per unit - basic	$	(20.48	)	$	457.04		$	(104.67	)	$	976.14
Income (loss) per unit - diluted	$	(20.48	)	$	433.86		$	(104.67	)	$	847.84

Notes to Financial Statements are an integral part of this statement

SOUTHWEST IOWA RENEWABLE ENERGY, LLC Statements of Cash Flows (Dollars in thousands)

(Unaudited)
	Nine Months Ended			Nine Months Ended
	June 30, 2016			June 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(1,395	)	$	13,009
Adjustments to reconcile to net cash provided by operating activities:
Depreciation	8,820			8,624
Amortization	54			53
Loss from debt extinguishment	—			4,700
Change in fair value of put option liability	360			600
Change in other assets, net	9			—
(Increase) decrease in current assets:
Accounts receivable	(10,016		)	729
Inventories	867			(3,142		)
Prepaid expenses and other	(329		)	(3,072		)
Derivative financial instruments	(715		)	146
Increase (decrease) in current liabilities:
Accounts payable	(2,449		)	(813		)
Derivative financial instruments	2,380			(2,436		)
Accrued expenses	(62		)	3,143
(Decrease) in other long-term liabilities	(75		)	(75		)
Net cash (used in) provided by operating activities	(2,551		)	21,466

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment	(3,554		)	(2,828		)
Purchases of other assets	—			(500		)
Decrease in restricted cash	305			—
Net cash (used in) investing activities	(3,249		)	(3,328		)

CASH FLOWS FROM FINANCING ACTIVITIES
Distributions paid to members	—			(13,327		)
Proceeds from debt	126,224			105,924
Payments on debt	(120,438		)	(116,964		)
Net cash provided by (used in) financing activities	5,786			(24,367		)

Net (decrease) in cash and cash equivalents	(14		)	(6,229		)

CASH AND CASH EQUIVALENTS
Beginning	3,030			9,267
Ending	$	3,016		$	3,038


SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest	$	1,005		$	1,443


Notes to Financial Statements are an integral part of this statement

SOUTHWEST IOWA RENEWABLE ENERGY, LLC

Notes to Financial Statements

Note 1: Nature of Business

Southwest Iowa Renewable Energy, LLC (the “Company”), located in Council Bluffs, Iowa, was formed in March, 2005 and began producing ethanol in February, 2009. The Company is permitted to produce up to 125 million gallons of ethanol per year. The Company sells its ethanol, distillers grains, corn syrup, and corn oil in the continental United States, Mexico, and the Pacific Rim.

Note 2: Summary of Significant Accounting Policies

Basis of Presentation and Other Information

The accompanying financial statements as of and for the three and nine months ended June 30, 2016 and 2015 are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto, for the fiscal year ended September 30, 2015 contained in the Company’s Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.

Use of Estimates

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

Revenue Recognition

The Company sells ethanol and related products (other than corn oil) pursuant to marketing agreements. Revenues are recognized when the marketing company (the “customer”) has taken title to the product, prices are fixed or determinable and collectability is reasonably assured.

The Company’s ethanol sales are handled through an ethanol purchase agreement (the “Ethanol Agreement”) with Bunge North America, Inc. (“Bunge”). Syrup and distillers grain (co-products) are sold through a distillers grains agreement (the “DG Agreement”) with Bunge, based on market prices. Marketing fees, agency fees, and commissions due to the marketer are paid separately from the settlement for the sale of the ethanol products and co-products and are included as a component of cost of goods sold. Shipping and handling costs incurred by the Company for the sale of ethanol and co-products are included in cost of goods sold. Corn oil is sold directly by the Company to various customers, and revenue is recognized when such customer takes title to the corn oil, prices are fixed or determinable and collectability is reasonably assured.

Accounts Receivable

Trade accounts receivable are recorded at original invoice amounts less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Most of the trade accounts are with Bunge. Management determines the allowance for doubtful accounts by regularly evaluating customer receivables and considering the customer’s financial condition, credit history and current economic conditions. As of June 30, 2016 and September 30, 2015, management had determined no allowance was necessary. Receivables are written off when deemed uncollectable and recoveries of receivables written off are recorded when received.

Investment in Commodities Contracts, Derivative Instruments and Hedging Activities

The Company’s operations and cash flows are subject to fluctuations due to changes in commodity prices. The Company is subject to market risk with respect to the price of ethanol and ethanol byproducts and the price and availability of corn, the principal raw material used to produce ethanol and ethanol by-products. Exposure to commodity price risk results from the Company’s dependence on corn in the ethanol production process. In general, rising corn prices might result in lower profit margins and, therefore, represent unfavorable market conditions. The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade, and global demand and supply.

To minimize the risk and the volatility of commodity prices, primarily related to corn and ethanol, the Company uses various derivative instruments, including forward corn, ethanol, and distillers grains purchase and sales contracts, over-the-counter and exchange-traded futures and option contracts. From time to time, when market conditions are appropriate, the Company will enter into derivative contracts to hedge its exposure to price risk related to forecasted corn needs and forward corn purchase contracts.

Management has evaluated the Company’s contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting 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.

The Company applies the normal sale exemption to forward contracts relating to ethanol, distillers grains, and corn oil and therefore these forward contracts are not marked to market. As of June 30, 2016, the Company was committed to sell 10.9 million gallons of ethanol, 0.1 million tons of distillers grains and 2.4 million pounds of corn oil.

Corn purchase contracts are treated as derivative financial instruments. Changes in market value of forward corn contracts, which are marked to market each period, are included in costs of goods sold. As of June 30, 2016, the Company was committed to purchasing 6.0 million bushels of corn on a forward contract basis resulting in a total commitment of $23.3 million. In addition, the Company was committed to purchase 0.8 million bushels of corn on basis contracts.

The Company also enters into short-term options and futures contracts as a means of managing exposure to changes in commodity prices. The Company enters into derivative contracts to hedge the exposure to volatile commodity price fluctuations. The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market volatility. The Company’s specific goal is to protect itself from large moves in commodity costs. All derivatives are designated as non-hedge derivatives and the contracts will be accounted for at fair value. Although the contracts will be effective economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.

Derivatives not designated as hedging instruments along with cash held by brokers at June 30, 2016 and September 30, 2015 at market value are as follows:



	Balance Sheet Classification	June 30, 2016			September 30, 2015
		in 000's			in 000's
Futures and option contracts
In gain position		$	1,815		$	572
In loss position		(329		)	(81		)
Cash held by broker		48			328
	Current asset	1,534			819

Forward contracts, corn	Current liability	3,039			659

Net futures, options, and forward contracts		$	(1,505	)	$	160

The net realized and unrealized gains and losses on the Company’s derivative contracts for the three and nine months ended June 30, 2016 and 2015 consist of the following:



		Three Months Ended						Nine Months Ended
	Statement of Operations Classification	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
		in 000's			in 000's			in 000's			in 000's
Net realized and unrealized (gains) losses related to:

Forward purchase corn contracts	Cost of Goods Sold	$	3,150		$	(1,703	)	$	4,554		$	(3,875	)
Futures and option corn contracts	Cost of Goods Sold	(2,536		)	951			(4,169		)	1,314
Futures and option ethanol contracts	Revenue	429			—			429			—

Inventory

Inventory is stated at the lower of cost or market value using the average cost method.

Fair value of financial instruments

The carrying amounts of cash and cash equivalents, derivative financial instruments, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short term nature of these instruments.

The put option liability consists of an agreement between the Company and ICM that contains a conditional obligation to repurchase feature. In accordance with accounting for put options as a liability, the Company calculated the fair value of the put option under Level 3, using a valuation model called the Monte Carlo Simulation. Using this model, the estimated value increased from September 30, 2015 to June 30, 2016 by $0.4 million.

The carrying account of the note payable approximates fair value, as the interest rate is a floating rate. The terms are consistent with those available in the market as of June 30, 2016 and September 30, 2015.

Income Per Unit

Basic income per unit is calculated by dividing net income by the weighted average units outstanding for each period. Diluted income per unit is adjusted for convertible debt, using the treasury stock method and the put option using the reverse treasury stock method. The put option adjustment is excluded from the three months and nine months ended June 30, 2016 because it would be anti-dilutive. Units from the convertible term notes (paid in full in December 2014) are considered unit equivalents and are considered in the diluted income per unit comparison. Basic earnings and diluted per unit data were computed as follows (in thousands except per unit data):



	Three Months Ended					Nine Months Ended
	June 30, 2016			June 30, 2015		June 30, 2016			June 30, 2015
Numerator:
Net income (loss) for basic earnings per unit	$	(273	)	$	6,091	$	(1,395	)	$	13,009
Interest expense on convertible term note	—			—		—			399
Change in fair value of put option liability	—			—		—			600
Net income (loss) for diluted earnings per unit	$	(273	)	$	6,091	$	(1,395	)	$	14,008

Denominator:
Weighted average units outstanding - basic	13,327			13,327		13,327			13,327
Weighted average units outstanding - diluted	13,327			14,039		13,327			16,522
Income (loss) per unit - basic	$	(20.48	)	$	457.04	$	(104.67	)	$	976.14
Income (loss) per unit - diluted	$	(20.48	)	$	433.86	$	(104.67	)	$	847.84

Note 3: Inventory

Inventory is comprised of the following:



	June 30, 2016		September 30, 2015
	(000's)		(000's)
Raw Materials - corn	$	5,384	$	3,390
Supplies and Chemicals	3,296		3,098
Work in Process	1,517		1,496
Finished Goods	3,234		6,314
Total	$	13,431	$	14,298

Note 4: Revolving Loan/Credit Agreements

FCSA/CoBank

The Company has a credit agreement with Farm Credit Services of America, FLCA (“FCSA”) and CoBank, ACB, as cash management provider and agent (“CoBank”) which provides the Company with a term loan in the original amount of $30.0 million (the “Term Loan”) and a revolving term loan in the original amount of up to $36.0 million (the “Revolving Term Loan”, together with the Term Loan, the “ FCSA Credit Facility ”). The FCSA Credit Facility is secured by a security interest on all of the Company’s assets.

The Term Loan provides for quarterly payments by the Company to FCSA of $1.5 million, with a maturity date of September 20, 2019. The Revolving Term Loan has a maturity date of June 1, 2023 and requires reductions in principal availability in increments of $6.0 million each June 1 commencing on June 1, 2020. Under the FCSA Credit Facility, the Company has the right to select from the several LIBOR based interest rate options with respect to each of the Term Loan and the Revolving Term Loan.

As of June 30, 2016, there was $18.3 million available under the Revolving Term Loan.

Notes payable

Notes payable consists of the following:



	June 30, 2016		September 30, 2015
	(000's)		(000's)
Term Loan bearing interest at LIBOR plus 3.35% (3.81% at June 30, 2016)	$	19,500	$	24,000
Revolving Term Loan bearing interest at LIBOR plus 3.35% (3.81% at June 30, 2016)	17,710		6,894
Other debt with interest rates ranging from 3.50% to 4.15% and maturities through 2022	4,309		4,839
	41,519		35,733
Less Current Maturities	6,511		6,506
Total Long Term Debt	$	35,008	$	29,227

The approximate aggregate maturities of notes payable as of June 30, are as follows:



2017	$	6,511

2018	6,532

2019	6,554

2020	2,077

2021	585

2022 and Thereafter	19,260

Total	$	41,519

Note 5: Fair Value Measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company used various methods including market, income and cost approaches. Based on these approaches, the Company often utilized certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observable inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy.

The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:


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


Level 2 -	Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.


Level 3 -	Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, including the general classifications of such instruments pursuant to the valuation hierarchy, is set below.

Put Option liability. The put option liability consists of an agreement between the Company and ICM that contains a conditional obligation to repurchase feature. In accordance with accounting for put options as a liability, the Company calculated the fair value of the put option under Level 3, using a Monte Carlo Simulation model. Unrealized gains and losses related to the change in fair value of the put option liability are included in other expense on the Statement of Operations.

Derivative financial instruments. Commodity futures and exchange traded options are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Mercantile Exchange (“CME”) market. Ethanol contracts are reported at fair value utilizing Level 2 inputs from third-party pricing services. Forward purchase contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from local grain terminal values. The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based on the CME market.

The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and September 30, 2015, categorized by the level of the valuation inputs within the fair value hierarchy (in '000s):



	June 30, 2016
	Level 1		Level 2		Level 3
Assets:
Derivative financial instruments	$	1,815	$	—	$	—

Liabilities:
Derivative financial instruments	329		3,039		—
Put option liability	—		—		6,000


	September 30, 2015
	Level 1		Level 2		Level 3
Assets:
Derivative financial instruments	$	572	$	—	$	—

Liabilities:
Derivative financial instruments	81		659		—
Put option liability	—		—		5,640

The following table summarizes the assumptions used in computing the fair value of the put options subject to fair value accounting at June 30, 2016 and September 30, 2015



	June 30, 2016		September 30, 2015
Put option assumptions:
Expected dividend yield	—		—
Risk-free interest rate	0.41	%	0.41	%
Expected volatility	36	%	36	%
Expected life (years)	0.75		1.25
Exercise price	$10,897		$10,897
Company unit price	$5,400		$6,300

The following table reflects the activity for liabilities measured at fair value using Level 3 inputs during the three and six months ended June 30, 2016 and June 30, 2015:



	Three Months Ended			Nine months ended
	June 30, 2016	June 30, 2015		June 30, 2016		June 30, 2015
Beginning Balance	$6,000	$	5,300	$	5,640	$	—
Put Option Issued	—	—		—		4,700
Change in Value	—	—		360		600
Ending Balance	$6,000	$	5,300	$	6,000	$	5,300

Note 6: Related Party Transactions

Bunge

On December 5, 2014, the Company entered into an Amended and Restated Ethanol Purchase Agreement (the “Ethanol Agreement”) with Bunge. Under the Ethanol Agreement, the Company has agreed to sell Bunge all of the ethanol produced by the Company, and Bunge has agreed to purchase the same. The Company will pay Bunge a percentage fee for ethanol sold by Bunge, subject to a minimum and maximum annual fee. The initial term of the Ethanol Agreement expires on December 31, 2019, however it will automatically renew for one five-year term unless Bunge provides the Company with notice of election not to renew no later than 180 days prior to the expiration of the initial term. The Company has incurred ethanol marketing expenses of $0.4 million and $0.2 million during the three months ended June 30, 2016 and 2015, respectively and $1.2 million and $0.8 million during the nine months ended June 30, 2016 and 2015, respectively.

The Company and Bunge also entered into an Amended and Restated Grain Feedstock Agency Agreement on December 5, 2014 (the “ Agency Agreement ”). The Agency Agreement provides that Bunge will procure corn for the Company, and that the Company will pay Bunge a per bushel fee, subject to a minimum and maximum annual fee. The initial term of the Agency Agreement expires on December 31, 2019 and will automatically renew for one additional five year term unless Bunge provides the Company with notice of election not to renew no later than 180 days prior to the expiration of the initial term. Expenses for corn procurement were $0.2 million and $0.2 million for the three months ended June 30, 2016 and 2015, respectively and $0.5 million and $0.8 million during the nine months ended June 30, 2016 and 2015, respectively.

Starting with the 2015 crop year, the Company began using corn containing Syngenta Seeds, Inc.’s proprietary Enogen® technology (“ Enogen Corn ”) for a portion of its ethanol production needs. The Company contracts directly with growers to produce Enogen Corn for sale to the Company. Consistent with the Agency Agreement, the Company and Bunge entered into a Services Agreement regarding Enogen Corn purchases (the “ Services Agreement ”). Under this agreement, the Company will originate all Enogen Corn contracts for its facility and Bunge will assist the Company with certain administrative matters related to Enogen Corn, including facilitating delivery to the facility. The Company will pay Bunge a per bushel service fee. The initial term of the Services Agreement expires on December 31, 2019 and will automatically renew for one additional five year term unless Bunge provides the Company with notice of election not to renew no later than 180 days prior to the expiration of the initial term.

On December 5, 2014, the Company and Bunge entered into an Amended and Restated Distillers Grain Purchase Agreement (the “ DG Purchase Agreement ”). Under the DG Purchase Agreement, Bunge will purchase all distillers grains produced by the Company, and will receive a fee based on the net sale price of distillers grains, subject to a minimum and maximum annual fee. The initial term of the DG Purchase Agreement expires on December 31, 2019 and will automatically renew for one additional five year term unless Bunge provides the Company with notice of election not to renew no later than 180 days prior to the expiration of the initial term. The Company has incurred distillers grains marketing expenses of $0.3 million and $0.4 million during the three months ended June 30, 2016 and 2015, respectively and expenses of $0.9 million and $1.0 million during the nine months ended June 30, 2016 and 2015, respectively.

The Company and Bunge executed a letter agreement (the “ Letter Agreement ”) on December 5, 2015, terminating the Corn Oil Agency Agreement dated as of November 12, 2010 (the "Corn Oil Agency Agreement") by and between the Company and Bunge and the Risk Management Services Agreement by and between the Company and Bunge dated as of December 15, 2008. Expenses under the terminated Corn Oil Agency Agreement were $0.1 million for the nine months ended June 30, 2015, and $0 for all other time periods

On June 26, 2009, the Company executed a Railcar Agreement with Bunge for the lease of 325 ethanol cars and 300 hopper cars which are used for the delivery and marketing of ethanol and distillers grains. Under the Railcar Agreement, the Company leases railcars for terms lasting 120 months and continuing on a month to month basis thereafter. The Railcar Agreement will terminate upon the expiration of all railcar leases. The Company has subleased 92 hopper cars to two unrelated third parties, which sublease expires March 25, 2019. Expenses under the Railcar Agreement were $1.2 million and $0.8 million for the three months ended June 30, 2016 and June 30, 2015, net of subleases and accretion, respectively, and expenses were $3.1 million and $2.4 million for the nine months ended June 30, 2016 and 2015, net of subleases and accretion, respectively. The Company continues to work with Bunge to determine the need for ethanol and hopper cars in light of current market conditions, and the expected conditions in 2016 and beyond.

Note 7: Major Customer

The Company is party to the Ethanol and DG Purchase Agreements with Bunge for the exclusive marketing, selling, and distributing of all the ethanol, distillers grains, and syrup produced by the Company. Until December 5, 2014, the Company was

also a party to the Corn Oil Agency Agreement with Bunge providing for the purchase by Bunge of all corn oil produced by the Company. Revenues from Bunge were $56.1 million and $55.8 million for the three months ended June 30, 2016 and 2015, respectively, and $159.1 million and $178.6 million for the nine months ended June 30, 2016 and 2015 respectively.

Note 8: Subsequent Event

On July 15, 2016, the SIRE Board of Directors declared a distribution of $250per unit to its members. The distributions are expected to be paid on or around August 15, 2016 to members of record on July 15, 2016. Based on the current number of units outstanding, the aggregate payment will be approximately $3.3 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

General

The following management discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements included herewith and notes to the consolidated financial statements and our Annual Report on Form 10-K for the year ended September 30, 2015 including the consolidated financial statements, accompanying notes and the risk factors contained herein.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q of Southwest Iowa Renewable Energy, LLC (the "Company," "SIRE," "we," or "us")contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terminology such as “may,” “will”, “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, without limitation:


•	Changes in the availability and price of corn, natural gas, and steam;


•	Negative impacts resulting from the reduction in the renewable fuel volume requirements under the Renewable Fuel Standard issued by the Environmental Protection Agency


•	Our inability to comply with our credit agreements required to continue our operations;


•	Negative impacts that our hedging activities may have on our operations;


•	Decreases in the market prices of ethanol and distillers grains;


•	Ethanol supply exceeding demand; and corresponding ethanol price reductions;


•	Changes in the environmental regulations that apply to our plant operations;


•	Changes in plant production capacity or technical difficulties in operating the plant;


•	Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;


•	Changes in federal mandates relating to the blending of ethanol with gasoline;


•	Changes in other federal or state laws and regulations relating to the production and use of ethanol;


•	Changes and advances in ethanol production technology;


•	Competition from larger producers as well as competition from alternative fuel additives;


•	Changes in interest rates and lending conditions of our loan covenants;


•	Volatile commodity and financial markets; and


•	Negative impacts on distillers grain prices and demand resulting from the Chinese antidumping and countervailing duty investigation.

These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include various assumptions that underlie such statements. Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in these reports. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the management discussion and analysis, in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 under the section entitled “Risk Factors” and in our other prior Securities and Exchange Commission filings. These and many other factors could affect our future financial condition and operating results and could cause actual results to differ materially from expectations set forth in the forward-looking statements made in this document or elsewhere by Company or on its behalf. We undertake no obligation to revise or update any forward-looking statements. The forward-looking statements

contained in this quarterly report on Form 10-Q are included in the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Overview

The Company is an Iowa LLC, located in Council Bluffs, Iowa, formed in March, 2005 to construct and operate a 125 million gallon capacity ethanol plant (the "Facility"). We began producing ethanol in February, 2009 and sell our ethanol, distillers grains, corn oil and corn syrup in the continental United States, Mexico, and the Pacific Rim.

Recent Events

On July 15, 2016, our Board of Directors declared a distribution of $250 per unit to its members. The distributions are expected to be paid on or around August 15, 2016 to members of record on July 15, 2016. Based on the current number of units outstanding, the aggregate payment will be approximately $3.3 million.

Recent Regulatory Developments

The ethanol industry is dependent on several economic incentives to produce ethanol, including ethanol use mandates. One significant federal ethanol support is the Federal Renewable Fuels Standard (the “RFS”) which has been and will continue to be a driving factor in the growth of ethanol usage. The RFS requires that in each year a certain amount of renewable fuels must be used in the United States. The RFS is a national program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective. The U.S. Environmental Protection Agency (the “EPA”) is responsible for revising and implementing regulations to ensure that transportation fuel sold in the United States contains a minimum volume of renewable fuel.

On February 3, 2010, the EPA implemented new regulations governing the RFS which are referred to as “RFS2.” The RFS2 requirements increase incrementally each year through 2022 when the mandate requires that the United States use 36 billion gallons of renewable fuels. Annually, the EPA is supposed to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligations. However, the EPA decided to delay finalizing the rule on the 2014 and 2015 RFS2 standards until after the end of 2014. On May 29, 2015, the EPA released proposed rules for the 2014, 2015 and 2016 renewable volume obligations (“EPA Proposed Rule”) which proposed significant reductions in the total renewable fuel volume requirements from the statutory mandates initially set by Congress. The public comment period on the proposed rules was open through July 27, 2015.

On November 30, 2015, the EPA issued its final rules in response to the public comments received relating to the reductions in its proposed rules (the “EPA Final Rule”). The following chart sets forth the statutory volumes, the EPA Proposed Rule volumes for 2014, 2015 and 2016 (in billion gallons) and the EPA Final Rule volumes for 2014, 2015 and 2016 (in billion gallons) are as follows:



		Total Renewable Fuel Volume Requirement	Portion of Volume Requirement That Can Be Met By Corn-based Ethanol
2014	Statutory	18.15	14.10
	EPA Proposed Rule	15.93	13.25
	EPA Final Rule	16.28	13.61
2015	Statutory	20.50	15.00
	EPA Proposed Rule	16.30	13.40
	EPA Final Rule	16.93	14.05
2016	Statutory	22.25	15.00
	EPA Proposed Rule	17.40	14.00
	EPA Final Rule	18.11	14.50

Although the EPA Final Rule increased the volume requirements over the requirements proposed in the EPA Proposed Rule, the final volume requirements are still below the volume requirements statutorily mandated by Congress. These reduced volume requirements, combined with the potential elimination of such requirements by the exercise of the EPA waiver authority or by Congress, could decrease the market price and demand for ethanol which will negatively impact the Company’s financial performance.

Beginning in January 2016, various ethanol and agricultural industry groups petitioned a federal appeals court to hear a legal challenge to the EPA Final Rule. In addition, various representatives of the oil industry have also filed challenges to the EPA Final Rule.

On May 18, 2016, the EPA released a proposed rule to set 2017 renewable volume requirements under RFS2 (the “Proposed 2017 Rule”). The Proposed 2017 Rule sets the annual volume requirement for renewable fuel at 18.8 billion gallons per year, of which 14.8 billion gallons may be met with corn-based ethanol, which is below the statutory mandate for 2017 of 24 billion gallons per year, of which 15 billion gallons may be met with corn-based ethanol. The public comment period for the Proposed 2017 Rule was open until July 11, 2016. The EPA is expected to finalize the Proposed 2017 Rule in response to public comments by November 30, 2016. Various ethanol and other industry groups submitted public comments to the EPA urging the EPA to adjust the volume requirements set forth in the EPA Final Rules and the Proposed 2017 Rule to conform to the statutory requirements.

If the EPA’s decision to reduce the volume requirements under the RFS2 is allowed to stand, or if the volume requirements are further reduced, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

Industry Factors Affecting our Results of Operations

•

Ethanol prices increased 2.1% during the three months ended June 30, 2016, from the same period in the previous fiscal year. This was due to a slight increase in prices for crude oil and gasoline prices due to anticipated summer driving volumes, and ethanol’s correlation to the oil and gasoline markets. However, despite this modest increase in ethanol prices, the following factors continue to adversely impact the price of ethanol:


•	Industry-wide production outpaced domestic consumption and net exports during the three months ended June 30, 2016, further increasing the domestic supply of ethanol.


•	The reduction of the volume requirements in the EPA Final Rule and the Proposed 2017 Rule discussed above continues to be a factor impacting ethanol prices.

Although ethanol prices remain low as compared to historical average prices, management currently believes that the ethanol outlook for the fourth quarter of our fiscal year ending September 30, 2016 ("Fiscal 2016") will be relatively flat and not experience further decline due to the following factors:


•	The latest estimates of supply and demand provided by the U.S. Department of Agriculture (the "USDA") estimate the 2015/16 ending corn stocks was lowered to 1.7 billion bushels, and forecast a 2015/16 corn supply of 13.6 billion bushels, and lowered corn prices through Fiscal 2016.


•	Gasoline demand continues to increase over 2015 levels as a result of low gasoline prices which may lead to increased demand for ethanol which could positively impact the market price for ethanol, especially during the summer driving season when gasoline demand tends to increase


•	Global demand as reported by the U.S. Department of Energy, International Energy Statistics, continues to increase at approximately 2% to 3% per year as countries, such as Argentina, increase ethanol blending mandates which provides U.S. producers an opportunity to participate in such growth through exports.


•	Ethanol has resumed trading at a discount to gasoline, after trading at a premium since September 2015, which should improve the economics of using ethanol as an oxygenate and octane enhancer when blended with gasoline.

However, despite certain favorable market conditions and the flat outlook for ethanol, we believe that our margins will remain tight. Continued low prices for crude oil and unleaded gasoline or further decreases in the price of such commodities could have a significant negative impact on the market price of ethanol, which could adversely

impact our profitability during the upcoming fourth quarter of Fiscal 2016. This negative impact could worsen in the event that domestic ethanol inventories remain high, or if U.S. exports of ethanol decline. Unless additional demand can be found in foreign or domestic markets, a continued level of current ethanol stocks or any increase in domestic ethanol supply could further adversely impact the price of ethanol.

Our margins have been, and could continue to be, negatively impacted due to the lower prices received for our distillers grains as a result of increased corn and soybean supplies. The increased supplies of corn and soybeans results in lower corn and soybean prices, adversely impacting the price and demand for distillers grains which are an animal feed substitute for corn and soybeans. Demand and prices for distillers grains may experience further declines in the near term due to potentially decreased exports to China as a result of the Chinese antidumping and countervailing duty investigation into distillers grains produced in the U.S., which China initiated in January 2016. Exports to China could further decrease if the investigation results in the imposition of antidumping tariffs on U.S. distillers grains. China has historically been one of the largest importers of domestically produced distillers grains. Reduced demand from China combined with lower corn and soybean prices could lead to an oversupply of distillers grains in the domestic market which could adversely impact our margins and our financial performance.

Corn oil prices have also been adversely impacted by the oversupply of soybeans and the resulting lower price of soybean oil which competes with corn oil, primarily for biodiesel production. However, management currently believes that the renewal of the biodiesel blenders’ tax credit for 2016 may lead to increased biodiesel production which could result in increased demand for corn oil. This may offset or decrease the impact of lower soybean oil prices and the current oversupply of corn oil due to the substantial increase in corn oil production during the last few years.

Results of Operations

The following table shows our results of operations, stated as a percentage of revenue for the three months ended June 30, 2016 and 2015.



	Three Months Ended June 30, 2016					Three Months Ended June 30, 2015
	Amounts			% of Revenues		Amounts		% of Revenues
	in 000's					in 000's
Income Statement Data
Revenues	$	58,128		100.0	%	$	58,235	100.0	%
Cost of Goods Sold
Material Costs	41,785			71.9	%	36,455		62.6	%
Variable Production Expense	7,093			12.2	%	7,668		13.2	%
Fixed Production Expense	8,023			13.8	%	6,363		10.9	%
Gross Margin	1,227			2.1	%	7,749		13.3	%
General and Administrative Expenses	1,104			1.9	%	1,256		2.2	%
Interest Expense and Other Income, net	396			0.7	%	402		0.7	%
Change in fair value of put option liability	—			—	%	—		—	%
Net Income (Loss)	$	(273	)	(0.5	)%	$	6,091	10.5	%

The following table shows our results of operations, stated as a percentage of revenue for the nine months ended June 30, 2016 and 2015.



	Nine Months Ended June 30, 2016					Nine Months Ended June 30, 2015
	Amounts			% of Revenues		Amounts		% of Revenues
	in 000's					in 000's
Income Statement Data
Revenues	$	165,449		100.0	%	$	186,243	100.0	%
Cost of Goods Sold
Material Costs	118,963			71.9	%	115,651		62.1	%
Variable Production Expense	22,105			13.4	%	26,302		14.1	%
Fixed Production Expense	21,446			13.0	%	20,822		11.2	%
Gross Margin	2,935			1.8	%	23,468		12.6	%
General and Administrative Expenses	3,273			2.0	%	3,771		2.0	%
Interest Expense and Other Income, net	697			0.4	%	1,388		0.7	%
Loss from debt extinguishment	—			—		4,700		2.5	%
Change in fair value of put option liability	360			0.2	%	600		0.3	%
Net Income (Loss)	$	(1,395	)	(0.8	)%	$	13,009	7.0	%

Revenues

Our revenue from operations is derived from three primary sources: sales of ethanol, distillers grains, and corn oil. The chart above displays statistical information regarding our revenues.The decrease in revenue was attributable to the overall decrease in commodity prices for ethanol and distillers grains, with ethanol prices remaining low and a substantial decrease in the average price per ton received for our distiller grains. The increase in revenue from the three months ended June 30, 2016 compared to the same period in 2015 was due to a 2.1% price increase during the three month period and a 4.7% increase in gallons of ethanol sold. This was somewhat offset by a decrease in the average price per ton of distillers grains of approximately 30.7%, even on a 11.1% increase in volume. Corn oil revenue increased 3.3% in the three months ended June 30, 2016 compared to the three months ended June 30, 2015 due to higher corn oil prices we believe is due to increased demand resulting from the surge in biodiesel production in response to the renewal of the biodiesel blender's tax credit for 2016 and its retroactive application to 2015.

The decrease in revenue from the nine months ended June 30, 2016 compared to 2015 was due to the average price per gallon of ethanol decreasing by approximately 9.0% and a decrease in the average price per ton of distillers grains of approximately 14.8%. There was also a 1.5% decrease in gallons of ethanol sold during the nine months ended June 30, 2016 compared to the nine months ended June 30, 2015. Corn oil revenue decreased by 7.2% in the nine months ended June 30, 2016 compared to the nine months ended June 30, 2015.



	Three Months Ended June 30, 2016				Three Months Ended June 30, 2015
	Amounts in 000's		% of Revenues		Amounts in 000's		% of Revenues
Product Revenue Information
Denatured and undenatured Ethanol	$	45,198	77.8	%	$	42,341	72.7	%
Distillers Grains	10,200		17.5	%	13,229		22.7	%
Corn Oil	2,401		4.1	%	2,324		4.0	%
Other	329		0.6	%	341		0.6	%



	Nine Months Ended June 30, 2016				Nine Months Ended June 30, 2015
	Amounts in 000's		% of Revenues		Amounts in 000's		% of Revenues
Product Revenue Information
Denatured and undenatured Ethanol	$	128,822	77.8	%	$	144,000	77.3	%
Distillers Grains	29,243		17.7	%	34,479		18.5	%
Corn Oil	6,387		3.9	%	6,885		3.7	%
Other	997		0.6	%	879		0.5	%

Cost of Goods Sold

Our cost of goods sold as a percentage of our revenues was 97.9% and 86.7% for the three months ended June 30, 2016 and 2015, respectively and 98.2% and 87.4% for the nine months ended June 30, 2016 and 2015, respectively. Our two primary costs of producing ethanol and distillers grains are corn and energy, with steam and natural gas as our primary energy sources. Cost of goods sold also includes net (gains) or losses from derivatives and hedging relating to corn. The average price of corn used in ethanol production per bushel increased 4.4% in the three months ended June 30, 2016 compared to the three months ended June 30, 2015 and increased 1.9% for the nine months ended June 30, 2016 from 2015, respectively. The amount of bushels of corn used in ethanol sold decreased by 1.3% in the three months ended June 30, 2016 from 2015 and decreased 1.3% in the nine months ended June 30, 2016 and 2015, respectively.

Realized and unrealized gains (losses) related to our derivatives and hedging related to corn resulted in an increase of $0.6 million in our cost of goods sold for the three months ended June 30, 2016, compared to a decrease of $0.8 million in our cost of goods sold for the three months ended June 30, 2015. In the nine months ended June 30, 2016, the realized and unrealized gains (losses) related to our derivatives and hedging related to corn resulted in a increase of $0.4 million in our cost of goods sold ,compared to a increase of $2.6 million in our cost of goods sold for the nine months ended June 30, 2015. We recognize the gains or losses that result from the changes in the value of our derivative instruments related to 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.

Variable production expenses showed a decrease when comparing the three months ended June 30, 2016 to the three months ended June 30, 2015 and for the nine months ended June 30, 2016 to the nine months ended June 30, 2015 due to significantly lower chemical costs and energy costs and as a result of a lower natural gas prices during the three months and nine months ended June 30, 2016. Our average steam and natural gas energy cost decreased 17.2% comparing the three months ended June 30, 2016 to the three months ended June 30, 2015 and decreased 30.5% comparing the nine months ended June 30, 2016 to the nine months ended June 30, 2015.

Fixed production expenses showed an increase when comparing the three months ended June 30, 2016 to the three months ended June 30, 2015 due to the timing of the spring shutdown. In 2016, the shutdown was tthe first week of April, but in 2015, occurred in the last week of March. Fixed production expenses increased for the nine months ended June 30, 2016 to the nine months ended June 30, 2015 due to the expiration of the railcar sublease for 147 hopper cars with Bunge that expired in Sepember 2015.

General & Administrative Expense

General and administrative expenses include salaries and benefits of administrative employees, professional fees and other general administrative costs. Our general and administrative expenses for the three months ended June 30, 2016 decreased 12.1% compared to the three months ended June 30, 2015, and decreased 13.2% compared to the nine months ended June 30, 2015 as management continues to analyze and manage discretionary expenses to keep costs down.

Other Expense

Our other expenses were approximately $0.4 million for the three months ended June 30, 2016 and 2015, and were approximately 0.7% of our revenues for the three months ended June 30, 2016 and 2015, . For the nine months ended June 30,

2016, our other expenses were $0.7 million and $1.4 million, which is approximately 0.4% and 0.7% of our revenues. The reduction in other expenses is largely due to the reduced interest expense resulting from the December 2014 repayment of subdebt.

Loss from debt extinguishment and change in fair value of put option liability

There was a $0 and $0.4 million, respectively, increase in the fair value of the put option liability with ICM, entered into during December, 2014, during the three months and nine months ended June 30, 2016. This is a non-cash charge, and is re-evaluated quarterly for significant changes in value.

Selected Financial Data

Modified EBITDA is defined as net income plus interest expense net of interest income, plus depreciation and amortization, or EBITDA, as adjusted for unrealized hedging losses (gains) and the loss from debt extinguishment. Modified EBITDA is not required by or presented in accordance with generally accepted accounting principles in the United States of America ("GAAP"), and should not be considered as an alternative to net income, operating income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity.

We present modified EBITDA because we consider it to be an important supplemental measure of our operating performance and it is considered by our management and Board of Directors as an important operating metric in their assessment of our performance.

We believe modified EBITDA allows us to better compare our current operating results with corresponding historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by variations in capital structures (affecting relative interest expense, including the impact of write-offs of deferred financing costs when companies refinance their indebtedness), the amortization of intangibles (affecting relative amortization expense), unrealized hedging losses (gains) and other items that are unrelated to underlying operating performance. We also present modified EBITDA because we believe it is frequently used by securities analysts and investors as a measure of performance. There are a number of material limitations to the use of modified EBITDA as an analytical tool, including the following:


•	Modified EBITDA does not reflect our interest expense or the cash requirements to pay our principal and interest. Because we have borrowed money to finance our operations, interest expense is a necessary element of our costs and our ability to generate profits and cash flows. Therefore, any measure that excludes interest expense may have limitations.

•

Although depreciation and amortization are non-cash expenses in the period recorded, the assets being depreciated and amortized may have to be replaced in the future, and modified EBITDA does not reflect the cash requirements for such replacement. Because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate profits. Therefore, any measure that excludes depreciation and amortization expense may have limitations.

We compensate for these limitations by relying heavily on our GAAP financial measures and by using modified EBITDA as supplemental information. We believe that consideration of modified EBITDA, together with a careful review of our GAAP financial measures, is the most informed method of analyzing our operations. Because modified EBITDA is not a measurement determined in accordance with GAAP and is susceptible to varying calculations, modified EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. The following table provides a reconciliation of modified EBITDA to net income (in thousands except per unit data):



	Three months ended			Three months ended		Nine months ended			Nine months ended
	June 30, 2016			June 30, 2015		June 30, 2016			June 30, 2015

EBITDA
Net Income (Loss)	$	(273	)	$	6,091	$	(1,395	)	$	13,009
Interest Expense	372			407		1,072			1,525
Depreciation	2,942			2,851		8,820			8,624
EBITDA	3,041			9,349		8,497			23,158

Unrealized Hedging (Gain) Loss	1,320			39		1,385			(1,373		)
Loss from debt extinguishment	—			—		—			4,700
Change in fair value of put option liability	—			—		360			600

Modified EBITDA	$	4,361		$	9,388	$	10,242		$	27,085

Liquidity and Capital Resources

In June 2014, the Company announced the completion of a $66.0 million FCSA Credit Facility with FCSA and CoBank. The proceeds were used to refinance senior bank debt previously outstanding and scheduled to mature in August 2014. The FCSA Credit Facility provided the Company with a term loan of $30 million, due in 2019, and a revolving term loan of $36 million, due in 2023. The interest rate on the FCSA Credit Facility is LIBOR plus 3.35%, which is a significantly lower interest rate than under the prior credit facility.

As of June 30, 2016, we had a cash balance of $3.0 million, $18.3 million available under the Revolving Term Loan and working capital of $14.5 million.

During the fourth quarter of Fiscal 2016, we estimate that we will require approximately $36.5 million for our primary input of corn and $3.9 million for our energy sources of electricity, steam, and natural gas.

Management expects to have sufficient cash available to fund operations for the next twelve months generated by cash from our continuing operations and available cash under our Revolving Term Loan. We cannot estimate the availability of funds for hedging in the future.

Commodity Price Risk

Our operations are highly dependent on commodity prices, especially prices for corn, ethanol and distillers grains and the spread between them. As a result of price volatility for these commodities, our operating results may fluctuate substantially. The price and availability of corn are subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, weather, governmental programs and foreign purchases. We may experience increasing costs for corn and natural gas and decreasing prices for ethanol and distillers grains which could significantly impact our operating results. Because the market price of ethanol is not directly related to corn prices, ethanol producers are generally not able to compensate for increases in the cost of corn through adjustments in prices for ethanol. We continue to monitor corn and ethanol prices and manage the "crush margin" to affect our longer-term profitability.

We enter into various derivative contracts with the primary objective of managing our exposure to adverse price movements in the commodities used for, and produced in, our business operations and, to the extent we have working capital available and available market conditions are appropriate, we engage in hedging transactions which involve risks that could harm our business. We measure and review our net commodity positions on a daily basis. Our daily net agricultural commodity position consists of inventory, forward purchase and sale contracts, over-the-counter and exchange traded derivative

instruments. The effectiveness of our hedging strategies is dependent upon the cost of commodities and our ability to sell sufficient products to use all of the commodities for which we have futures contracts. Although we actively manage our risk and adjust hedging strategies as appropriate, there is no assurance that our hedging activities will successfully reduce the risk caused by market volatility which may leave us vulnerable to high commodity prices. Alternatively, we may choose not to engage in hedging transactions in the future. As a result, our future results of operations and financial conditions may also be adversely affected during periods in which price changes in corn, ethanol and distillers grain to not work in our favor.

In addition, as described above, hedging transactions expose us to the risk of counterparty non-performance where the counterparty to the hedging contract defaults on its contract or, in the case of over-the-counter or exchange-traded contracts, where there is a change in the expected differential between the price of the commodity underlying the hedging agreement and the actual prices paid or received by us for the physical commodity bought or sold. We have, from time to time, experienced instances of counterparty non-performance but losses incurred in these situations were not significant.

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 any 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 the current period (commonly referred to as the “mark to market” method). 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 corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, our hedging strategies may cause immediate adverse effects, but are expected to produce long-term positive impact.

In the event we do not have sufficient working capital to enter into hedging strategies to manage our commodities price risk, we may be forced to purchase our corn and market our ethanol at spot prices and as a result, we could be further exposed to market volatility and risk. However, during the past year, the spot market has been advantageous.

Credit and Counterparty Risks

Through our normal business activities, we are subject to significant credit and counterparty risks that arise through normal commercial sales and purchases, including forward commitments to buy and sell, and through various other over-the-counter (OTC) derivative instruments that we utilize to manage risks inherent in our business activities. We define credit and counterparty risk as a potential financial loss due to the failure of a counterparty to honor its obligations. The exposure is measured based upon several factors, including unpaid accounts receivable from counterparties and unrealized gains (losses) from OTC derivative instruments (including forward purchase and sale contracts). We actively monitor credit and counterparty risk through credit analysis (by our marketing agent).

Impact of Hedging Transactions on Liquidity

Our operations and cash flows are highly impacted by commodity prices, including prices for corn, ethanol, distillers grains and natural gas. We attempt to reduce the market risk associated with fluctuations in commodity prices through the use of derivative instruments, including forward corn contracts and over-the-counter exchange-traded futures and option contracts. Our liquidity position may be positively or negatively affected by changes in the underlying value of our derivative instruments. When the value of our open derivative positions decrease, we may be required to post margin deposits with our brokers to cover a portion of the decrease or we may require significant liquidity with little advanced notice to meet margin calls. Conversely, when the value of our open derivative positions increase, our brokers may be required to deliver margin deposits to us for a portion of the increase. We continuously monitor and manage our derivative instruments portfolio and our exposure to margin calls and while we believe we will continue to maintain adequate liquidity to cover such margin calls from operating results and borrowings, we cannot estimate the actual availability of funds from operations or borrowings for hedging transactions in the future.

The effects, positive or negative, on liquidity resulting from our hedging activities tend to be mitigated by offsetting changes in cash prices in our business. For example, in a period of rising corn prices, gains resulting from long grain derivative positions would generally be offset by higher cash prices paid to farmers and other suppliers in local corn markets. These offsetting changes do not always occur, however, in the same amounts or in the same period.

We expect that a $1.00 per bushel fluctuation in market prices for corn would impact our cost of goods sold by approximately $45 million, or $0.36 per gallon, assuming our plant operates at 100% of our capacity. We expect the annual impact to our results of operations due to a $0.50 decrease in ethanol prices will result in approximately a $62 million decrease in revenue.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

No Changes in Internal Control Over Financial Reporting

No change in SIRE's internal control over financial reporting occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, SIRE's internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time the Company is involved in various litigation matters arising in the ordinary course of its business. None of these matters, either individually or in the aggregate, currently is material to the Company except as reported in the Company’s annual report on Form 10-K for the year ended September 30, 2015 or in the Company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2016 and there were no material developments to such matters.

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in Item IA of our Form 10-K for the fiscal year ended September 30, 2015 other than as provided below. Additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.

The Chinese antidumping and countervailing duty investigation may negatively impact distillers grains demand and prices. China is the world's largest importer of distillers grains produced in the United States. On January 12, 2016, the Chinese government announced its decision to initiate an antidumping and countervailing duty investigation related to distillers grains imported from the United States. While the investigation is pending, it is likely that distillers grains exports to China will be reduced. Further, if China introduces a tariff on distillers grains produced in the United States and exported to China, demand from the largest source of exports of U.S. produced distillers grains would likely be materially reduced. This antidumping and countervailing duty investigation could significantly decrease demand and prices for distillers grains produced in the United States. The potential reduction in demand from China combined with lower domestic corn prices could negatively impact the price and demand for our distillers grains and our financial performance.

The introduction of Iranian oil into the market could negatively impact gasoline and ethanol prices. The United States recently lifted sanctions on Iran which had historically prevented the import of Iranian oil into the United States. Many other nations which had similar bans on Iranian oil, preventing Iran from exporting a significant amount of oil into the world market, have also eliminated such bans. As a result of the lifting of these sanctions, additional Iranian oil may be introduced into

the world market which could result in lower oil prices. The introduction of Iranian oil exports would further reduce oil prices and increase the world supply of oil when oil prices are already seeing historic low and world supplies of oil are already high. Lower oil prices have resulted in lower priced gasoline which has had an adverse impact on ethanol prices and demand. The continuation of these lower gasoline prices or any further decreases in gasoline prices will continued to adversely impact the price of ethanol which could negatively impact our financial performance.

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

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None

Item 6. Exhibits



31.1	Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) executed by the Principal Executive Officer.

31.2	Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) executed by the Principal Financial Officer.

32.1***	Rule 15d-14(b) Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) executed by the Principal Executive Officer.

32.2***	Rule 15d-14(b) Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) executed by the Principal Financial Officer.

101.XML^	XBRL Instance Document

101.XSD^	XBRL Taxonomy Schema

101.CAL^	XBRL Taxonomy Calculation Database

101.LAB^	XBRL Taxonomy Label Linkbase

101.PRE^	XBRL Taxonomy Presentation Linkbase

***	This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.
^	Furnished, not filed.

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		SOUTHWEST IOWA RENEWABLE ENERGY, LLC

Date:	August 3, 2016	/s/ Brian T. Cahill
		Brian T. Cahill, President and Chief Executive Officer

Date:	August 3, 2016	/s/ Brett L. Frevert
		Brett L. Frevert, CFO and Principal Financial Officer

SOUTHWEST IOWA RENEWABLE ENERGY, LLC - FORM 10-Q - August 3, 2016

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SOUTHWEST IOWA RENEWABLE ENERGY, LLC Reports