Attached files
| file | filename |
|---|---|
| EX-32.2 - CERTIFICATION - GOLDEN GRAIN ENERGY | a322certification4-30x17.htm |
| EX-32.1 - CERTIFICATION - GOLDEN GRAIN ENERGY | a321certification4-30x17.htm |
| EX-31.2 - CERTIFICATION - GOLDEN GRAIN ENERGY | a312certification4-30x17.htm |
| EX-31.1 - CERTIFICATION - GOLDEN GRAIN ENERGY | a311certification4-30x17.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. | |
For the quarterly period ended | April 30, 2017 | |
OR | ||
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. | |
For the transition period from to . | ||
COMMISSION FILE NUMBER 000-51177 | ||
GOLDEN GRAIN ENERGY, LLC
(Exact name of registrant as specified in its charter)
Iowa | 02-0575361 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
1822 43rd Street SW, Mason City, Iowa 50401 | ||||
(Address of principal executive offices) | ||||
(641) 423-8525 | ||||
(Registrant's telephone number, including area code) | ||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer o | Accelerated Filer o |
Non-Accelerated Filer x | Smaller Reporting Company o |
Emerging Growth Company o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of June 14, 2017, there were 18,953,000 Class A membership units outstanding and 920,000 Class B membership units outstanding.
1
INDEX
Page Number | |
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
GOLDEN GRAIN ENERGY, LLC
Balance Sheets
ASSETS | April 30, 2017 | October 31, 2016 | ||||||
(Unaudited) | ||||||||
Current Assets | ||||||||
Cash and equivalents | $ | 14,517,870 | $ | 16,532,190 | ||||
Marketable securities | 20,310,320 | 15,785,542 | ||||||
Accounts receivable | 4,732,298 | 6,202,104 | ||||||
Other receivables | 737,687 | 568,940 | ||||||
Derivative instruments | 977,618 | 514,878 | ||||||
Inventory | 5,964,306 | 6,905,684 | ||||||
Prepaid expenses and other | 2,205,518 | 1,589,075 | ||||||
Total current assets | 49,445,617 | 48,098,413 | ||||||
Property and Equipment | ||||||||
Land and land improvements | 12,962,015 | 12,961,713 | ||||||
Building and grounds | 28,617,796 | 28,305,386 | ||||||
Grain handling equipment | 15,833,823 | 15,833,823 | ||||||
Office equipment | 220,527 | 220,527 | ||||||
Plant and process equipment | 96,340,019 | 95,681,018 | ||||||
Construction in progress | 6,964,568 | 4,580,801 | ||||||
160,938,748 | 157,583,268 | |||||||
Less accumulated depreciation | 95,523,297 | 90,896,301 | ||||||
Net property and equipment | 65,415,451 | 66,686,967 | ||||||
Other Assets | ||||||||
Investments | 24,184,670 | 24,474,860 | ||||||
Other assets | 1,464,303 | 1,503,666 | ||||||
Total other assets | 25,648,973 | 25,978,526 | ||||||
Total Assets | $ | 140,510,041 | $ | 140,763,906 | ||||
Notes to the Financial Statements are an integral part of these Statements.
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GOLDEN GRAIN ENERGY, LLC
Balance Sheets
LIABILITIES AND MEMBERS' EQUITY | April 30, 2017 | October 31, 2016 | ||||||
(Unaudited) | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 6,936,813 | $ | 7,660,157 | ||||
Accrued expenses | 1,118,848 | 1,413,127 | ||||||
Other current liabilities | 125,499 | 163,884 | ||||||
Total current liabilities | 8,181,160 | 9,237,168 | ||||||
Long-term Liabilities | ||||||||
Deferred compensation | 403,821 | 355,623 | ||||||
Deferred revenue, net of current portion | 49,886 | 93,443 | ||||||
Total long-term liabilities | 453,707 | 449,066 | ||||||
Commitments and Contingencies | ||||||||
Members' Equity (19,873,000 units issued and outstanding) | 131,875,174 | 131,077,672 | ||||||
Total Liabilities and Members’ Equity | $ | 140,510,041 | $ | 140,763,906 | ||||
Notes to the Financial Statements are an integral part of these Statements.
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GOLDEN GRAIN ENERGY, LLC
Statements of Operations (Unaudited)
Three Months Ended | Three Months Ended | Six Months Ended | Six Months Ended | |||||||||||||
April 30, 2017 | April 30, 2016 | April 30, 2017 | April 30, 2016 | |||||||||||||
Revenues | $ | 50,960,556 | $ | 51,518,991 | $ | 107,024,105 | $ | 100,292,114 | ||||||||
Cost of Goods Sold | 47,030,410 | 49,897,922 | 94,180,362 | 96,717,286 | ||||||||||||
Gross Profit | 3,930,146 | 1,621,069 | 12,843,743 | 3,574,828 | ||||||||||||
Operating Expenses | 890,429 | 896,759 | 1,842,576 | 1,895,727 | ||||||||||||
Operating Income | 3,039,717 | 724,310 | 11,001,167 | 1,679,101 | ||||||||||||
Other Income (Expense) | ||||||||||||||||
Other income | 310,518 | 190,780 | 106,443 | 289,984 | ||||||||||||
Interest income (expense) | (2,827 | ) | 2,648 | (21 | ) | (1,080 | ) | |||||||||
Equity in net income of investments | 1,395,312 | 1,486,556 | 4,594,663 | 3,853,624 | ||||||||||||
Total Other Income | 1,703,003 | 1,679,984 | 4,701,085 | 4,142,528 | ||||||||||||
Net Income | $ | 4,742,720 | $ | 2,404,294 | $ | 15,702,252 | $ | 5,821,629 | ||||||||
Basic & diluted net income per unit | $ | 0.24 | $ | 0.12 | $ | 0.79 | $ | 0.29 | ||||||||
Weighted average units outstanding for the calculation of basic & diluted net income per unit | 19,873,000 | 19,873,000 | 19,873,000 | 19,873,000 | ||||||||||||
Distributions Per Unit | $ | — | $ | — | $ | 0.75 | $ | 0.70 | ||||||||
Notes to the Financial Statements are an integral part of these Statements.
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GOLDEN GRAIN ENERGY, LLC
Statements of Cash Flows (Unaudited)
Six Months Ended | Six Months Ended | |||||||
April 30, 2017 | April 30, 2016 | |||||||
Cash Flows from Operating Activities | ||||||||
Net income | $ | 15,702,252 | $ | 5,821,629 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 4,666,189 | 4,220,027 | ||||||
Unrealized loss on risk management & marketable securities | (737,518 | ) | (246,478 | ) | ||||
Amortization of deferred revenue | (81,942 | ) | (55,196 | ) | ||||
Change in accretion of interest on grant & note receivable | (30,498 | ) | (34,000 | ) | ||||
Distributions in excess of earnings from investments | 290,190 | 2,173,947 | ||||||
Gain on insurance proceeds from involuntary conversion | (489,852 | ) | — | |||||
Deferred compensation expense | 48,198 | 15,809 | ||||||
Change in assets and liabilities | ||||||||
Accounts receivable | 1,469,806 | (3,894,301 | ) | |||||
Inventory | 941,378 | 1,457,326 | ||||||
Prepaid expenses and other | (785,190 | ) | (360,331 | ) | ||||
Accounts payable | (407,396 | ) | (191,340 | ) | ||||
Accrued expenses | (294,279 | ) | (495,792 | ) | ||||
Net cash provided by operating activities | 20,291,338 | 8,411,300 | ||||||
Cash Flows from Investing Activities | ||||||||
Capital expenditures | (3,830,328 | ) | (6,536,196 | ) | ||||
Insurance proceeds from involuntary conversion | 648,752 | — | ||||||
Purchase of marketable securities | (6,750,000 | ) | (9,250,000 | ) | ||||
Proceeds from sale of marketable securities | 2,500,000 | 10,000,000 | ||||||
Net cash (used in) investing activities | (7,431,576 | ) | (5,786,196 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Refund on utility right costs | 30,668 | — | ||||||
Distributions to members | (14,904,750 | ) | (13,911,100 | ) | ||||
Net cash (used in) financing activities | (14,874,082 | ) | (13,911,100 | ) | ||||
Net (Decrease) in Cash and Equivalents | (2,014,320 | ) | (11,285,996 | ) | ||||
Cash and Equivalents – Beginning of Period | 16,532,190 | 21,084,029 | ||||||
Cash and Equivalents – End of Period | $ | 14,517,870 | $ | 9,798,033 | ||||
Supplemental Cash Flow Information | ||||||||
Cash paid for interest | $ | 10,484 | $ | 29,245 | ||||
Supplemental Disclosure of Noncash Operating, Investing & Financing Activities | ||||||||
Accounts payable related to construction in progress | $ | 236,743 | $ | 939,139 | ||||
Notes to the Financial Statements are an integral part of these Statements.
6
GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
April 30, 2017
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and notes disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements for the year ended October 31, 2016, contained in the Company's annual report on Form 10-K for 2016.
In the opinion of management, the interim condensed financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments.
Nature of Business
Golden Grain Energy, LLC ("Golden Grain Energy" and "the Company") is an approximately 115 million gallon annual production ethanol plant near Mason City, Iowa. The Company sells its production of ethanol, distiller grains with solubles and corn oil primarily in the continental United States. The Company also holds several investments in various companies that focus on ethanol production, marketing and/or logistics.
Organization
Golden Grain Energy is organized as an Iowa limited liability company. The members' liability is limited as specified in Golden Grain Energy's operating agreement and pursuant to the Iowa Revised Uniform Limited Liability Company Act.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.
Cash and Equivalents
The Company's cash balances are maintained in bank depositories and regularly exceed federally insured limits. The Company has not experienced any losses in connection with these balances. Also included in cash and equivalents are highly liquid investments, that are readily convertible into known amounts of cash, which are subject to an insignificant risk of change in value due to interest rate, quoted price or penalty on withdrawal and have a maturity of three months or less.
Marketable Securities
The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are recorded as either short term or long term on the Balance Sheet, based on contractual maturity date and are stated at amortized cost. Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings.
Marketable securities consist of certificates of deposits with original maturities of greater than three months and mutual funds. Certificates of deposit are considered held to maturity securities, which are measured at cost. Mutual funds are considered trading securities which are measured at fair value using prices obtained from pricing services. Any unrealized or realized gains and losses on the trading securities are recorded as part of other income.
Marketable securities consisted of mutual funds invested in intermediate-term municipal and government bonds and certificates of deposit all with maturities of less than one year. For the periods ended April 30, 2017 and 2016, there was no other-than-temporary impairment recognized. The Company recorded interest, dividends and net realized and unrealized gains (losses) from these investments as part of other income as follows:
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
April 30, 2017
Three Months Ended April 30, | Six Months Ended April 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net earnings on marketable securities | $ | 310,000 | $ | 103,000 | $ | 106,000 | $ | 202,000 | ||||||||
Marketable Securities | ||||||||||||||||
As of | Cost | Fair Market Value | Certificates of Deposit | |||||||||||||
April 30, 2017 | $ | 18,474,000 | $ | 18,310,000 | $ | 2,000,000 | ||||||||||
October 31, 2016 | $ | 12,967,000 | $ | 13,036,000 | $ | 2,750,000 | ||||||||||
Accounts Receivable
Credit sales are made primarily to one customer and no collateral is required. The Company carries these accounts receivable at original invoice amount with no allowance for doubtful accounts due to the historical collection rates on these accounts.
Investments
The Company has less than a 20% investment interest in five companies in related industries. These investments are being accounted for by the equity method of accounting under which the Company's share of net income is recognized as income in the Company's statement of operations and added to the investment account. Distributions or dividends received from the investments are treated as a reduction of the investment account. Distributions or dividends received in excess of the carrying value are recognized as income in the statement of operations. The investments are evaluated for indications of impairment on a regular basis. A loss would be recognized when the fair value is determined to be less than the carrying value.
The fiscal years of Renewable Products Marketing Group, LLC (RPMG) and Guardian Energy Janesville, LLC end on September 30 and the fiscal years of Absolute Energy, LLC, Homeland Energy Solutions, LLC and Lawrenceville Tank, LLC, end on December 31. The Company consistently follows the practice of recognizing the net income based on the most recent reliable data. Therefore, the net income which is reported in the Company's statement of operations for the period ended April 30, 2017, for all companies, is based on the investee's results for the three and six months ended March 31, 2017.
Note Receivable
The Company has a note receivable from an unrelated party. The Company carries the note at original face value plus accrued interest which is equal to 6% as of April 30, 2017 and is compounded monthly. The note commenced in December 2014 with a face value of $510,000 and has a maturity of 5 years. Annual payments are to begin in September 2018. Balance of the note receivable, including accrued interest, as of April 30, 2017 and October 31, 2016 was approximately $584,000 and $566,000, respectively.
Revenue and Cost Recognition
Revenue from the sale of the Company's products is recognized at the time title to the goods and all risks of ownership transfer to the customers. This generally occurs upon shipment, loading of the goods or when the customer picks up the goods. Collectability of revenue is reasonably assured based on historical evidence of collectability between the Company and its customers. Interest income is recognized as earned.
Shipping costs incurred by the Company in the sale of ethanol, distiller grains and corn oil are not specifically identifiable and as a result, revenue from the sale of ethanol, distiller grains and corn oil are recorded based on the net selling price reported to the Company from its marketer. Railcar lease costs incurred by the Company in the sale and shipment of distiller grain products are included in cost of goods sold.
Inventory
Inventories are generally valued at the lower of weighted average cost or net realizable value. In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonable predictable costs of completion, disposal and transportation.
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
April 30, 2017
Property & Equipment
Property and equipment are stated at historical cost. Significant additions and betterments are capitalized, while expenditures for maintenance and repairs are charged to operations when incurred. The Company uses the straight-line method of computing depreciation over the estimated useful lives between 3 and 40 years.
The Company reviews its property and equipment for impairment whenever events indicate that the carrying amount of the asset group may not be recoverable. If circumstances require a long-lived asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset group to the carrying value of the asset group. If the carrying value of the asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
Investment in commodities contracts, derivative instruments and hedging activities
The Company evaluates its contracts to determine whether the contracts are derivative instruments. Certain contracts that meet the definition of a derivative may be exempted from derivative accounting and treated as normal purchases or normal sales if documented as such. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.
The Company enters into short-term cash, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. The Company occasionally also enters into derivative contracts to hedge its exposure to price risk as it relates to ethanol sales. As part of its risk management process, the Company uses futures and option contracts through regulated commodity exchanges or through the over-the-counter market to manage its risk related to pricing of inventories. All of the Company's derivatives, other than those excluded under the normal purchases and sales exclusion, are designated as non-hedge derivatives, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated or accounted for as hedging instruments.
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenues in the accompanying financial statements. The fair values of contracts are presented on the accompanying balance sheet as derivative instruments net of cash due from/to broker.
Net income per unit
Basic and diluted earnings per unit are computed using the weighted-average number of Class A and B units outstanding during the period.
Fair Value
Financial instruments include cash and equivalents, marketable securities, receivables, accounts payable, accrued expenses and derivative instruments. The fair value of marketable securities and derivative financial instruments is based on quoted market prices, as disclosed in Note 7. The fair value, determined using level 3 inputs, of all other current financial instruments is estimated to approximate carrying value due to the short-term nature of these instruments.
Risks and Uncertainties
The Company has certain risks and uncertainties that it will experience during volatile market conditions, which can have a severe impact on operations. The Company's revenues are derived from the sale and distribution of ethanol and distiller grains to customers primarily located in the United States. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. For the three and six months ended April 30, 2017, ethanol sales accounted for approximately 84% of total revenue, distiller grains sales accounted for approximately 12% of total revenue and corn oil sales accounted for approximately 4% of total revenue while corn costs averaged approximately 76% of cost of goods sold.
The Company's operating and financial performance is largely driven by the prices at which ethanol is sold and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets with ethanol selling, in general, for less than gasoline at the wholesale level. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company's largest cost of production
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
April 30, 2017
is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, and government policies and programs. The Company's risk management program is used to protect against the price volatility of these commodities.
2. INVENTORY
Inventory consisted of the following as of April 30, 2017 and October 31, 2016:
April 30, 2017 | October 31, 2016 | |||||||
Raw Materials | $ | 2,600,431 | $ | 3,808,935 | ||||
Work in Process | 1,200,247 | 1,170,767 | ||||||
Finished Goods | 2,163,628 | 1,925,982 | ||||||
Totals | $ | 5,964,306 | $ | 6,905,684 | ||||
3. BANK FINANCING
The Company has entered into a master loan agreement with Farm Credit Services of America (FLCA) which includes revolving loans with original maximum borrowings of $35 million, which currently has availability of $10 million and matures on February 1, 2020. Interest on the term loan is payable monthly at 3.15% above the one-month LIBOR (4.18% as of April 30, 2017). The borrowings are secured by substantially all the assets of the Company. The credit agreements are subject to covenants, requiring the Company to maintain various financial ratios, as well as certain distribution limitations. As of April 30, 2017, the Company was in compliance with all of the loan covenants. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of any outstanding principal balances on the loans and/or imposition of fees and penalties. As of April 30, 2017 and October 31, 2016, the Company had no borrowings outstanding.
4. RELATED PARTY TRANSACTIONS
The Company purchased corn and materials from members of its Board of Directors or Risk Management Committee that own or manage elevators. The Company also purchased ingredients from RPMG. Purchases from the related parties during the three and six months ended April 30, 2017 totaled approximately $9,001,000 and $19,380,000, respectively. Purchases during the three and six months ended April 30, 2016 totaled approximately $23,543,000 and $47,803,000, respectively. As of April 30, 2017 and October 31, 2016, the amount owed to related parties was approximately $377,000 and $518,000, respectively (See Note 5).
5. COMMITMENTS, CONTINGENCIES, AGREEMENTS AND RELATED PARTY
Ethanol, Distiller Grains and Corn Oil marketing agreements and major customers
The Company has entered into marketing agreements with a marketing company, in which the Company has an investment, for the exclusive rights to market, sell and distribute the entire ethanol, distiller grains and corn oil inventory produced by the Company. The marketing fees are presented net in revenues.
Approximate sales and marketing fees related to the agreements in place are as follows:
Three Months Ended April 30, | Six Months Ended April 30 | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Sales ethanol, distiller grains & corn oil | $ | 51,143,000 | $ | 51,638,000 | $ | 107,240,000 | $ | 100,511,000 | ||||||||
Marketing fees | 137,000 | 119,000 | 247,000 | 219,000 | ||||||||||||
As of | April 30, 2017 | October 31, 2016 | ||||||||||||||
Amount due from RPMG | $ | 4,732,000 | $ | 6,202,000 | ||||||||||||
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
April 30, 2017
6. RISK MANAGEMENT
The Company's activities expose it to a variety of market risks, including the effects of changes in commodity prices. These financial exposures are monitored and managed by the Company as an integral part of its overall risk-management program. The Company's risk management program focuses on the unpredictability of financial and commodities markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.
To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange traded futures contracts to reduce its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts and uses exchange traded futures contracts to reduce price risk. Exchange-traded futures contracts are valued at market price. Changes in market price of contracts related to corn and natural gas are recorded in cost of goods sold and changes in market prices of contracts related to sale of ethanol are recorded in revenues.
The following table represents the approximate amount of realized and unrealized gains (losses) and changes in fair value recognized in earnings on commodity contracts for periods ended April 30, 2017 and 2016 and the fair value of derivatives as of April 30, 2017 and October 31, 2016:
Income Statement Classification | Realized Gain (Loss) | Change in Unrealized Gain (Loss) | Total Gain (Loss) | |||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||
Commodity Contracts for the | Revenue | $ | (10,000 | ) | $ | (30,000 | ) | $ | (40,000 | ) | ||||
three months ended April 30, 2017 | Cost of Goods Sold | 50,000 | 300,000 | 350,000 | ||||||||||
Total | $ | 40,000 | $ | 270,000 | $ | 310,000 | ||||||||
Commodity Contracts for the | Revenue | $ | — | $ | — | $ | — | |||||||
three months ended April 30, 2016 | Cost of Goods Sold | 443,000 | (386,000 | ) | 57,000 | |||||||||
Total | $ | 443,000 | $ | (386,000 | ) | $ | 57,000 | |||||||
Commodity Contracts for the | Revenue | $ | (1,000 | ) | $ | 32,000 | $ | 31,000 | ||||||
six months ended April 30, 2017 | Cost of Goods Sold | 204,000 | 199,000 | 403,000 | ||||||||||
Total | $ | 203,000 | $ | 231,000 | $ | 434,000 | ||||||||
Commodity Contracts for the | Revenue | $ | — | $ | — | $ | — | |||||||
six months ended April 30, 2016 | Cost of Goods Sold | 825,000 | (170,000 | ) | 655,000 | |||||||||
Total | $ | 825,000 | $ | (170,000 | ) | $ | 655,000 | |||||||
Balance Sheet Classification | April 30, 2017 | October 31, 2016 | ||||||||
Futures and option contracts through July 2018 | ||||||||||
In gain position | $ | 200,000 | $ | 157,000 | ||||||
In loss position | (35,000 | ) | (222,000 | ) | ||||||
Cash held by broker | 813,000 | 580,000 | ||||||||
Current Asset | $ | 978,000 | $ | 515,000 | ||||||
11
GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
April 30, 2017
As of April 30, 2017, the Company had the following approximate outstanding purchase and sale commitments, of which approximately $4,458,000 of the purchase commitments were with related parties.
Commitments Through | Amount | |||||
Sale commitments | ||||||
Corn Oil - fixed price | June 2017 | $ | 1,014,000 | |||
Distiller Grains - fixed price | June 2017 | 1,654,000 | ||||
Purchase commitments | ||||||
Corn - fixed price | March 2018 | $ | 10,134,000 | |||
Corn - basis contract | July 2018 | 37,926,000 | ||||
As of April 30, 2017, the Company has fixed price futures and forward contracts in place for approximately 20% of our anticipated corn needs, 4% of our natural gas needs and 0% of our ethanol sales for the next 12 months with limited open positions beyond that period.
7. FAIR VALUE MEASUREMENTS
Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1: Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3: Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Marketable Securities: The Company's investments in short-term liquid investments (e.g. mutual funds), are classified within Level 1, carried at fair value based on the quoted market prices.
Derivative financial instruments: Commodity futures and exchange-traded commodity options contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from markets such as the CME and NYMEX. Crush swaps are bundled contracts or combined contracts that include a portion of corn, ethanol and natural gas rolled into a single trading instrument. These contracts are reported at fair value utilizing Level 2 inputs and are based on the various trading activity of the components of each segment of the bundled contract.
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
April 30, 2017
The following table summarizes financial assets and financial liabilities measured at the approximate fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Marketable securities: | ||||||||||||||||
Assets, April 30, 2017 | $ | 18,310,000 | $ | 18,310,000 | $ | — | $ | — | ||||||||
Assets, October 31, 2016 | 13,036,000 | 13,036,000 | — | — | ||||||||||||
Derivative financial instruments: | ||||||||||||||||
April 30, 2017 | ||||||||||||||||
Assets | $ | 200,000 | $ | 200,000 | $ | — | $ | — | ||||||||
Liabilities | (35,000 | ) | (20,000 | ) | (15,000 | ) | — | |||||||||
October 31, 2016 | ||||||||||||||||
Assets | $ | 157,000 | $ | 61,000 | $ | 96,000 | $ | — | ||||||||
Liabilities | (222,000 | ) | (163,000 | ) | (59,000 | ) | — | |||||||||
8. INVESTMENTS
Condensed, combined unaudited financial information of the Company’s investments in Absolute Energy, Homeland Energy Solutions, Guardian Energy, Lawrenceville Tank and RPMG is as follows (in 000’s):
Balance Sheet | March 31, 2017 | September 30, 2016 | ||||||||||||||
Current Assets | $ | 270,983 | $ | 313,541 | ||||||||||||
Other Assets | 247,205 | 246,702 | ||||||||||||||
Current Liabilities | 155,942 | 175,588 | ||||||||||||||
Long-term Debt | 68,343 | 55,726 | ||||||||||||||
Members’ Equity | 293,902 | 328,928 | ||||||||||||||
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
Income Statement | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenue | $ | 181,795 | $ | 177,704 | $ | 378,724 | $ | 361,752 | ||||||||
Gross Profit | 13,049 | 14,293 | 55,382 | 36,088 | ||||||||||||
Net Income | 12,960 | 10,532 | 50,974 | 28,052 | ||||||||||||
The Company recorded equity in net income of approximately (in 000's):
Three Months Ended April 30, | Six Months Ended April 30, | |||||||||||||||
Equity in Net Income | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Absolute Energy | $ | 385 | $ | 273 | $ | 1,292 | $ | 823 | ||||||||
Guardian Energy | 586 | 853 | 1,652 | 2,221 | ||||||||||||
Homeland Energy Solutions | 342 | 212 | 1,493 | 617 | ||||||||||||
Other | 82 | 149 | 158 | 193 | ||||||||||||
Total | $ | 1,395 | $ | 1,487 | $ | 4,595 | $ | 3,854 | ||||||||
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GOLDEN GRAIN ENERGY, LLC
Notes to Unaudited Condensed Financial Statements
April 30, 2017
9. SUBSEQUENT EVENTS
On May 15, 2017, the board of directors declared a cash distribution of $0.50 per membership unit to the holders of Class A and Class B units of record at the close of business on May 15, 2017 for a total distribution of $9,936,500. The distribution will be recorded in the Company's 2017 third quarter financial statements and was paid in June 2017.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as "may," "will," "should," "anticipate," "believe," "expect," "plan," "future," "intend," "could," "estimate," "predict," "hope," "potential," "continue," or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties, including, but not limited to those listed below and those business risks and factors described elsewhere in this report and our other Securities and Exchange Commission filings.
• | The impact of the Chinese distiller grains and ethanol tariffs have on ethanol and distiller grains prices in the United States; |
• | The impact lower gasoline prices have on the market price of ethanol and our ability to profitably operate the ethanol plant; |
• | Changes in the availability and price of corn and natural gas; |
• | Any elimination or reduction of the renewable fuels use requirements under the RFS; |
• | Our ability to transport our finished goods in order to continue to operate our ethanol plant at capacity; |
• | Our ability to profitably operate the ethanol plant, including the sale of distiller grains and corn oil, and maintain a positive spread between the selling price of our products and our raw material costs; |
• | The ability of the ethanol industry to generate additional demand through higher level blends of ethanol, including E15 and E85; |
• | The effect our hedging activities have on our financial performance and cash flows; |
• | Ethanol, distiller grains and corn oil supply exceeding demand and corresponding price reductions; |
• | Our ability to generate free cash flow to invest in our business, service our debt and satisfy the financial covenants contained in our credit agreement with our lender; |
• | Changes in our business strategy, capital improvements or development plans; |
• | Changes in plant production capacity or technical difficulties in operating the plant; |
• | Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries; |
• | Changes and advances in ethanol production technology; |
• | Changes in interest rates or the lack of credit availability; and |
• | Our ability to retain key employees and maintain labor relations. |
Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in this report. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements with these cautionary statements. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended in October and the associated quarters of those fiscal years.
Overview
Golden Grain Energy, LLC was formed as an Iowa limited liability company on March 18, 2002, for the purpose of constructing, owning and operating a fuel-grade ethanol plant near Mason City in north central Iowa. Since December 2004, we have been engaged in the production of ethanol and distiller grains at the plant and have produced corn oil since February 2009. References to "we," "us," "our" and the "Company" refer to Golden Grain Energy, LLC. We have capacity to produce approximately 115 million gallons of ethanol per year.
Our revenue is derived primarily from the sale and distribution of our ethanol, distiller grains and corn oil. We market our products through Renewable Products Marketing Group, Inc. ("RPMG"), a professional third party marketer. We are an equity owner of RPMG, LLC, the parent company of RPMG, which allows us to realize favorable marketing fees in the sale of our ethanol, distiller grains and corn oil.
On November 21, 2016, our board of directors declared a distribution of $0.75 per membership unit for members of record as of November 21, 2016. The total amount of the distribution was $14,904,750 which was paid in December 2016. On
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May 15, 2017, our board of directors declared a distribution of $0.50 per membership unit to the holders units of record at the close of business on May 15, 2017 for a total distribution of $9,936,500. The distribution was paid in June 2017.
In recent years, the ethanol industry in the United States has increased exports of ethanol and distiller grains. In January 2017, the Chinese issued final tariffs on U.S. distiller grains. The Chinese distiller grains anti-dumping tariffs range from 42.2% to 53.7% and the anti-subsidy tariffs range from 11.2% to 12%. In addition, the Chinese government increased its ethanol import tariff from 5% to 30% as of January 1, 2017. These tariffs have had a negative impact on market ethanol and distiller grains prices in the United States.
In Brazil, UNICA, the Brazilian sugarcane industry, is lobbying the Brazilian government to institute a 16% tariff on imported ethanol. Ethanol producers in Brazil are seeking a 20% tariff. To date, this tariff has not been implemented. However, Brazil is a major source of ethanol demand, and a tariff could negatively impact market ethanol prices in the United States.
Results of Operations
Comparison of the Three Months Ended April 30, 2017 and 2016
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the three months ended April 30, 2017 and 2016:
2017 | 2016 | ||||||||||
Income Statement Data | Amount | % | Amount | % | |||||||
Revenues | $ | 50,960,556 | 100.0 | $ | 51,518,991 | 100.0 | |||||
Cost of Goods Sold | 47,030,410 | 92.3 | 49,897,922 | 96.9 | |||||||
Gross Profit | 3,930,146 | 7.7 | 1,621,069 | 3.1 | |||||||
Operating Expenses | 890,429 | 1.7 | 896,759 | 1.7 | |||||||
Operating Income | 3,039,717 | 6.0 | 724,310 | 1.4 | |||||||
Other Income | 1,703,003 | 3.3 | 1,679,984 | 3.3 | |||||||
Net Income | $ | 4,742,720 | 9.3 | $ | 2,404,294 | 4.7 | |||||
Revenues. Our total revenue was lower for our second quarter of 2017 compared to the same period of 2016 due to the lower quantities of ethanol sold and lower distiller grain prices offset by both higher average prices we received for our ethanol and corn oil. For our second quarter of 2017, ethanol sales accounted for approximately 84% of our total revenue, distiller grains sales accounted for approximately 12% of our total revenue, and corn oil sales accounted for approximately 4% of our total revenue. For our second quarter of 2016, ethanol sales accounted for approximately 80% of our total revenue, distiller grains sales accounted for approximately 16% of our total revenue, and corn oil sales accounted for approximately 4% of our total revenue.
The average price per gallon we received for our ethanol was approximately 10% higher for our second quarter of 2017 compared to the same period of 2016. Management attributes this increase in the average price we received for our ethanol to higher gasoline and higher export demand which typically impacts ethanol prices. Management anticipates that ethanol prices will likely soften during the remaining quarters of our 2017 fiscal year due to higher ethanol supply and production than demand rates. Prices may firm due to the fact that the RFS ethanol use requirement was set at 15 million gallons for corn-based ethanol for 2017 along with increased export demand for ethanol. However, export demand for ethanol is less consistent compared to domestic demand, so if ethanol exports are lower during 2017 compared to 2016, it could further result in lower ethanol prices and could negatively impact our profitability. Further, other ethanol producers are expanding their production capacities. If ethanol supply increases at a greater pace compared to ethanol demand, it could negatively impact ethanol prices and could negatively impact our profitability.
We sold approximately 6% less gallons of ethanol during our second quarter of 2017 compared to the same period of 2016. Management attributes this decrease in ethanol sales with timing of ethanol shipments. Our total ethanol production was 1% less during our second quarter of 2017 as compared to the same period of 2016. Management anticipates that our ethanol sales and production will be slightly greater during the remaining quarters of our 2017 fiscal year compared to our 2016 fiscal year due to plant efficiency improvements implemented during our 2016 and 2017 fiscal years.
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During our second quarter of 2017, we experienced combined realized and unrealized losses on our ethanol derivative instruments of approximately $40,000, which increased our revenue. By comparison, we experienced no gain or loss on our ethanol derivative instruments during our second quarter of 2016.
The average price per ton we received for our dried distillers grains was approximately 18% less for our second quarter of 2017 compared to the same period of 2016. In addition, the average price per ton we received for our modified/wet distillers grains was approximately 50% less for our second quarter of 2017 compared to the same period of 2016. Management attributes these price decreases with lower market corn prices and higher corn supplies after the 2016 harvest. In addition, China started refusing distiller grains from the United States in January 2017 which resulted in lower distiller grains prices and will result in uncertainty regarding future distiller grains demand. This uncertainty may continue to negatively impact market distiller grains prices. Management anticipates that distiller grains will begin to consistently trade at a relative value of less than 100% of corn for the foreseeable future primarily due to China imposing antidumping and countervailing duties against the United States distiller grain markets.
Our dried distiller grains production decreased by approximately 12% during our second quarter of 2017 compared to the same period of 2016. Management attributes this decrease partially to increased modified/wet distiller grain production, in addition to increased corn oil extraction during the period. Management anticipates distiller grains production to be slightly lower for the remaining quarters of our 2017 fiscal year compared to our 2016 fiscal year due to the increase in corn oil extraction and a shift in sales to modified/wet distiller grains.
We sold approximately 7% more pounds of corn oil during our second quarter of 2017 compared to the same period of 2016. This increase in corn oil sales resulted from increased corn oil extraction methods which also led to decreased dried distiller grain production. The average price per pound we received for our corn oil was approximately 7% greater for our second quarter of 2017 compared to the same period of 2016. This increase in corn oil prices occurred despite an increase in corn oil supply. Management believes that an increase in total corn oil demand from increased biodiesel production offset the increase in the market corn oil supply. Biodiesel production was spurred by the renewal of the biodiesel blenders' tax credit which management believes positively impacts corn oil demand. Management anticipates relatively stable corn oil prices going forward, despite anticipated increases in corn oil supplies, unless corn oil demand increases significantly for biodiesel production.
Cost of Goods Sold. Our cost of goods sold was lower for our second quarter of 2017 compared to the same period of 2016 due primarily to a decrease in the gallons of ethanol sold as well as a slight decrease in corn costs. Our average cost per bushel of corn, before our derivative instrument gain, was approximately 1% lower during our second quarter of 2017 compared to the same period of 2016. Management anticipates corn prices to remain low due to an improved balance between corn supply and demand as a result of the larger corn crops harvested in recent years along with relatively stable corn demand, however, we may still experience some short term corn price volatility.
We consumed fewer bushels of corn during our second quarter of 2017 compared to the same period of 2016 due to lower ethanol production. Management anticipates consistent corn consumption during the rest of our 2017 fiscal year, provided we continue to experience profitable operating margins which allow us to operate the ethanol plant at capacity.
Our natural gas costs increased by approximately 31% during our second quarter of 2017 compared to the same period of 2016. Our usage was 5% lower, but the average price we paid per MMBtu of natural gas was approximately 37% higher during our second quarter of 2017 compared to the same period of 2016. Management attributes this increase in natural gas prices with higher commodity and energy prices during the 2017 period as well as growing demand for natural gas. Management anticipates that natural gas prices will remain relatively stable for the remaining quarters of our 2017 fiscal year. Our natural gas consumption during our second quarter of 2017 was lower compared to the same period of 2016 due to increased efficiencies in the production process.
We experienced combined realized and unrealized gains of approximately $350,000 for our second quarter of 2017 related to our corn and natural gas derivative instruments which decreased our cost of goods sold. By comparison, we experienced approximately $57,000 of combined realized and unrealized gains for the same period of 2016 related to our corn and natural gas derivative instruments which decreased our cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn and natural gas in cost of goods sold as the changes occur. As corn and natural gas prices fluctuate, the value of our derivative instruments is impacted, which affects our financial performance.
Operating Expenses. Our operating expenses were similar during our second quarter of 2017 compared to the same period of 2016. Management anticipates that our operating expenses will also be comparable during the remaining quarters of our 2017 fiscal year compared to our 2016 fiscal year, possibly offset by potential differences in employee bonus accruals that are tied to net income.
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Other Income (Expense). Other income was higher for our second quarter of 2017 compared to the same period of 2016, due to an increase in income from marketable securities and investments not recorded on the equity method of accounting offset by a slight decrease in equity income from investments. Our investments are in other companies involved in the ethanol industry which in general experienced favorable operating margins during our second quarter of 2017. However, one of our investments made distributions in excess of the equity balance recorded by the Company totaling approximately $586,000 and $853,000 for our second quarters of 2017 and 2016, respectively, and therefore that entire amount is recorded as income for the quarter. We had less interest income during our second quarter of 2017 compared to the same period of 2016 due to less interest recognized on fewer maturing certificate of deposit with financial institutions.
Comparison of the Six Months Ended April 30, 2017 and 2016
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the six months ended April 30, 2017 and 2016:
2017 | 2016 | ||||||||||
Income Statement Data | Amount | % | Amount | % | |||||||
Revenues | $ | 107,024,105 | 100.0 | $ | 100,292,114 | 100.0 | |||||
Cost of Goods Sold | 94,180,362 | 88.0 | 96,717,286 | 96.4 | |||||||
Gross Profit | 12,843,743 | 12.0 | 3,574,828 | 3.6 | |||||||
Operating Expenses | 1,842,576 | 1.7 | 1,895,727 | 1.9 | |||||||
Operating Income | 11,001,167 | 10.3 | 1,679,101 | 1.7 | |||||||
Other Income | 4,701,085 | 4.4 | 4,142,528 | 4.1 | |||||||
Net Income | $ | 15,702,252 | 14.7 | $ | 5,821,629 | 5.8 | |||||
Revenues. Our total revenue was higher for our six months ended April 30, 2017 compared to the same period of 2016 due to the higher average prices we received for our ethanol and corn oil. For our six months ended April 30, 2017, ethanol sales accounted for approximately 84% of our total revenue, distiller grains sales accounted for approximately 12% of our total revenue, and corn oil sales accounted for approximately 4% of our total revenue. For our six months ended April 30, 2016, ethanol sales accounted for approximately 80% of our total revenue, distiller grains sales accounted for approximately 16% of our total revenue, and corn oil sales accounted for approximately 4% of our total revenue.
The average price per gallon we received for our ethanol was approximately 12% higher for our six months ended April 30, 2017 compared to the same period of 2016. Management attributes this increase in the average price we received for our ethanol to higher gasoline and higher export demand which typically impacts ethanol prices.
We sold approximately 1% less gallons of ethanol during our six months ended April 30, 2017 compared to the same period of 2016. Management attributes this decrease in ethanol sales with timing of ethanol shipments. Our total ethanol production was similar during our six months ended April 30, 2017 as compared to the same period of 2016.
During our six months ended April 30, 2017, we experienced combined realized and unrealized gains on our ethanol derivative instruments of approximately $31,000, which increased our revenue. By comparison, we experienced no gain or loss on our ethanol derivative instruments during our six months ended April 30, 2016.
The average price per ton we received for our dried distillers grains was approximately 13% less for our six months ended April 30, 2017 compared to the same period of 2016. In addition, the average price per ton we received for our modified/wet distillers grains was approximately 46% less for our six months ended April 30, 2017 compared to the same period of 2016. Management attributes these price decreases with slightly lower market corn prices and higher corn supplies after the 2016 harvest. In addition, China started refusing distiller grains from the United States in January 2017 which resulted in lower distiller grains prices and will result in uncertainty regarding future distiller grains demand. In January 2017, China started imposing antidumping and countervailing duties against the United States distiller grain markets. These events have negatively impacted market distiller grains prices. Management anticipates that distiller grains will consistently trade at a relative value of less than 100% of corn for the foreseeable future primarily due to China's market positions.
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Our dried distiller grains production decreased by approximately 13% during our six months ended April 30, 2017 compared to the same period of 2016. Management attributes this decrease partially to increased modified/wet distiller grain production, in addition to increased corn oil extraction during the period.
We sold approximately 9% more pounds of corn oil during our six months ended April 30, 2017 compared to the same period of 2016. This increase in corn oil sales resulted from increased corn oil extraction methods and resulted in decreased dried distiller grain production. The average price per pound we received for our corn oil was approximately 15% greater for our six months ended April 30, 2017 compared to the same period of 2016. This increase in corn oil prices occurred despite an increase in corn oil supply. Management believes that an increase in total corn oil demand from increased biodiesel production offset the increase in the market corn oil supply.
Cost of Goods Sold. Our cost of goods sold was lower for our six months ended April 30, 2017 compared to the same period of 2016 due primarily to decreased corn costs offset by increased natural gas costs. Our average cost per bushel of corn, before our derivative instrument gain, was approximately 3% lower during the first half of our 2017 fiscal year compared to the same period of 2016.
We consumed slightly less corn during our six months ended April 30, 2017 compared to the same period of 2016 due to increased conversion of corn into ethanol on similar gallons of ethanol production. During our six months ended April 30, 2017 we experienced a 1% increase in efficiency of converting corn into ethanol as compared to the same period of 2016.
Our natural gas costs increased by approximately 30% during our six months ended April 30, 2017 compared to the same period of 2016. Our usage was slightly less, but the average price we paid per MMBtu of natural gas was approximately 33% higher during our six months ended April 30, 2017 compared to the same period of 2016. Management attributes this increase in natural gas prices with higher commodity and energy prices during the 2017 period as well as growing demand for natural gas. Our natural gas consumption during our six months ended April 30, 2017 was slightly less compared to the same period of 2016 due to a 2% increase in efficiency of natural gas usage per gallon of ethanol production.
We experienced combined realized and unrealized gains of approximately $403,000 for our six months ended April 30, 2017 related to our corn and natural gas derivative instruments which decreased our cost of goods sold. By comparison, we experienced approximately $655,000 of combined realized and unrealized gains for the same period of 2016 related to our corn and natural gas derivative instruments which decreased our cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn and natural gas in cost of goods sold as the changes occur. As corn and natural gas prices fluctuate, the value of our derivative instruments is impacted, which affects our financial performance.
Operating Expenses. Our operating expenses were lower during our six months ended April 30, 2017 compared to the same period of 2016 primary due to less dues and subscription and legal expense for 2017 due to timing of when we make payments to trade organizations. In addition, legal expenses were lower during our six months ended April 30, 2017 compared to the same period of 2016. This was due to the anti-dumping and countervailing duties claims that we were defending during our 2016 period. These decreases in operating expenses were partially offset by an increase in personnel expense during our six months ended April 30, 2017 compared to the same period of 2016 due to an increase in the accrual for employee bonuses. Management anticipates that our operating expenses will be comparable during the remaining quarters of our 2017 fiscal year compared to our 2016 fiscal year as we balance out payments for the dues and subscriptions that we pay to trade organizations offset by potential changes in employee bonus accruals that are tied to net income.
Other Income (Expense). Other income was higher for our six months ended April 30, 2017 compared to the same period of 2016, due primarily to equity income from investments. Our investments are in other companies involved in the ethanol industry which in general experienced favorable operating margins during our six months ended April 30, 2017. However, one of our investments made distributions in excess of the equity balance recorded by the Company totaling approximately $1,652,000 and therefore that entire amount is recorded as income for our six months ended April 30, 2017. We had more interest income and less interest expense during our six months ended April 30, 2017 compared to the same period of 2016 due to less available borrowing on our revolving loan, for which we pay an unused balance fee. We also had less other income during our six months ended April 30, 2017 compared to the same period of 2016 due to a decrease in income from marketable securities and investments not recorded on the equity method of accounting.
Changes in Financial Condition for the Six Months Ended April 30, 2017
Current Assets. We had less cash and equivalents at April 30, 2017 compared to October 31, 2016. This decrease in our cash position is due primarily to nearly $15 million in distributions we paid to our members during December 2016 and cash that was invested into marketable securities, offset by cash generated from operations. The value of our accounts receivable and
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inventory were lower at April 30, 2017 compared to October 31, 2016 due to the timing of payments we receive from our vendor and timing of shipment of our products. We had less ethanol gallons and bushels of corn on hand at April 30, 2017 compared to October 31, 2016 which made the value of our inventory lower.
Property and Equipment. The net value of our property and equipment was lower at April 30, 2017 compared to October 31, 2016 due to depreciation, offset by ongoing capital projects. We had approximately $7.0 million in construction in progress at April 30, 2017 related to various capital projects we were conducting during our 2016 and 2017 fiscal years, the largest of which is improvements to our plant associated with a cooling tower construction and a co-generation integration.
Other Assets. Our other assets were lower at April 30, 2017 compared to October 31, 2016 due to a decrease in the value of our various investments caused by distributions declared in excess of earnings recorded for the six months ended April 30, 2017.
Current Liabilities. Our accounts payable at April 30, 2017 were lower compared to October 31, 2016 due to fewer payables to our vendors for corn deliveries. Our accrued expenses were lower at April 30, 2017 compared to October 31, 2016 due to payment of employee bonus accruals during our 2017 fiscal year.
Long-term Liabilities. Our long-term liabilities were similar at April 30, 2017 and October 31, 2016.
Liquidity and Capital Resources
Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash generated from our operations to continue to operate the ethanol plant at capacity for the next 12 months and beyond. As of April 30, 2017, we had $10 million available pursuant to our revolving term loan and approximately $35 million in cash and equivalents and marketable securities.
We do not currently anticipate any significant purchases of property and equipment that would require us to secure additional capital in the next 12 months. We expect to fund our current capital projects using cash we have on hand as well as our revolving line of credit. However, management continues to evaluate conditions in the ethanol industry and explore opportunities to improve the efficiency and profitability of our operations which may require capital expenditures.
We have a program of investing our excess cash in short-term liquid investments which allows us to access the cash when we need it and preserve our capital while limiting our loss exposure. Only a portion of our cash balances are federally insured when they are deposited with our bank. As a result, our plan is intended to decrease the risk we face when we were concentrating our cash balances with one financial institution.
The following table shows our cash flows for the six months ended April 30, 2017 and 2016:
Six Months Ended April 30, | |||||||
2017 | 2016 | ||||||
Net cash provided by operating activities | $ | 20,291,338 | $ | 8,411,300 | |||
Net cash (used in) investing activities | (7,431,576 | ) | (5,786,196 | ) | |||
Net cash (used in) financing activities | (14,874,082 | ) | (13,911,100 | ) | |||
Cash Flow From Operations
Our cash flows from operations for the six months ended April 30, 2017 were higher compared to the same period of 2016 due primarily to increased net income and working capital associated with accounts receivable. These increases were offset by a decrease in working capital associated with distributions received in excess of earnings.
Cash Flow From Investing Activities
We used more cash for investing activities during our six months ended April 30, 2017 compared to the same period of 2016. During the 2017 period, we invested more cash into marketable securities offset by fewer capital expenditures compared to the 2016 period due to fewer plant improvement projects. In addition, during our six months ended April 30, 2017 we received insurance proceeds from an involuntary asset conversion compared to the same period of 2016.
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Cash Flow From Financing Activities.
During our six months ended April 30, 2017, we used more cash for financing activities related to higher distributions paid to members as compared to the same period of 2016.
Short-Term and Long-Term Debt Sources
In exchange for our credit facility Farm Credit, we executed a mortgage in favor of Farm Credit covering all of our real property and granted Farm Credit a security interest in all of our equipment and other assets. In the event we default on our loans with Farm Credit, Farm Credit may foreclose on our assets, including both our real property and our machinery and equipment.
Variable Line of Credit
We have a long-term line of credit. Interest on this loan accrues at 3.15% above the One-Month London Interbank Offered Rate (LIBOR). The interest rate is subject to weekly adjustment. We may elect to enter into a fixed interest rate on this loan at various times throughout the term of the loan as provided in the loan agreements. During the first fiscal quarter of 2016, we executed an amendment to our credit agreements with Farm Credit which adjusted our loan covenants related to issuing distributions to our members and changed the terms of our revolving line of credit. We have $10 million available pursuant to this long-term revolving line of credit until it matures on February 1, 2020. We agreed to pay an annual fee of 0.5% of the unused portion of this loan. As of April 30, 2017, we had $0 outstanding on this loan with an accrued interest rate of 4.18% per year. As of April 30, 2017, we had $10 million available to be drawn on this loan.
Administrative Agency Agreement
As part of the Farm Credit loan closing, we entered into an Administrative Agency Agreement with CoBank, ACP ("CoBank"). CoBank purchased a participation interest in the Farm Credit loans and was appointed the administrative agent for the purpose of servicing the loans. As a result, CoBank will act as the agent for Farm Credit with respect to our loans. We agreed to pay CoBank an annual fee of $5,000 as the agent for Farm Credit.
Covenants
Our credit agreements with Farm Credit are subject to numerous covenants requiring us to maintain various financial ratios. As of April 30, 2017, we were in compliance with all of our loan covenants with Farm Credit. Based on current management projections, we anticipate that we will be in compliance with our loan covenants for the next 12 months and beyond.
Grants and Government Programs
In December 2006, we received the first payment from our semi-annual economic development grants equal to the amount of the tax assessments imposed on our ethanol plant by Cerro Gordo County, the county in which our ethanol plant is located. Based on our 2009 assessment, the total amount of these grants is expected to be approximately $9 million, which will be paid semi-annually over a 10-year period with the final payment being made in 2019.
Critical Accounting Policies
Management uses estimates and assumptions in preparing our financial statements in accordance with U.S. generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Of the significant accounting policies described in the notes to our financial statements, we believe that the following are the most critical:
Revenue Recognition
Revenue from the sale of our products is recognized at the time title to the goods and all risks of ownership transfer to the customers. The time of transfer is defined in the specific sales agreement; however, it generally occurs upon shipment, loading of the goods or when the customer picks up the goods. Collectability of revenue is reasonably assured based on historical evidence of collectability between us and our customers. Interest income is recognized as earned.
Shipping costs incurred by us in the sale of ethanol and corn oil are not specifically identifiable and as a result, revenue from the sale of ethanol and corn oil are recorded based on the net selling price reported to us from our marketer. Shipping costs incurred by us in the sale of distiller grain products are included in cost of goods sold.
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Investment in Commodities Contracts, Derivative Instruments and Hedging Activities
We evaluate contracts to determine whether the contracts are derivative instruments. Certain contracts that meet the definition of a derivative may be exempted from derivative accounting and treated as normal purchases or normal sales if documented as such. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.
We enter into short-term cash, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. We occasionally also enter into derivative contracts to hedge our exposure to price risk as it relates to ethanol sales. As part of our risk management process, we use futures and option contracts through regulated commodity exchanges or through the over-the-counter market to manage our risk related to pricing of inventories. All of our derivatives, other than those excluded under the normal purchases and sales exclusion, are designated as non-hedge derivatives, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated or accounted for as hedging instruments.
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenues in the accompanying financial statements. The fair values of contracts are presented on the accompanying balance sheet as derivative instruments.
Investments
The Company has less than a 20% investment interest in five companies in related industries. These investments are being accounted for by the equity method of accounting under which the Company's share of net income is recognized as income in the Company's income statement and added to the investment account. Distributions or dividends received from the investments are treated as a reduction of the investment account. The investments are evaluated for indications of impairment on a regular basis. A loss would be recognized when the fair value is determined to be less than the carrying value.
Off-Balance Sheet Arrangements.
We currently have no off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to the impact of market fluctuations associated with commodity prices as discussed below. We have no exposure to interest rate changes as we did not have any amounts outstanding on our variable interest rate loans as of April 30, 2017. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn, natural gas and ethanol. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes.
Commodity Price Risk
We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distiller grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.
As of April 30, 2017, we had price protection in place for approximately 20% of our anticipated corn needs, 4% of our natural gas needs and 0% of our ethanol sales for the next 12 months.
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A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas prices and average ethanol price as of April 30, 2017, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from April 30, 2017. The results of this analysis, which may differ from actual results, are as follows:
Estimated Volume Requirements for the next 12 months (net of forward and futures contracts) | Unit of Measure | Hypothetical Adverse Change in Price | Approximate Adverse Change to Income | ||||||||
Natural Gas | 2,812,500 | MMBTU | 10% | $ | 841,000 | ||||||
Ethanol | 115,000,000 | Gallons | 10% | 16,146,000 | |||||||
Corn | 30,737,000 | Bushels | 10% | 10,758,000 | |||||||
Liability Risk
We participate, along with other plants in the industry, in a group captive insurance company (Captive). The Captive insures losses related to workman's compensation, commercial property and general liability. The Captive reinsures catastrophic losses for all participants, including the Company, in excess of predetermined amounts. Our premiums are accrued by a charge to income for the period to which the premium relates and is remitted by our insurer to the captive reinsurer. These premiums are structured such that we have made a prepaid collateral deposit estimated for losses related to the above coverage. The Captive insurer has estimated and collected an amount in excess of the estimated losses but less than the catastrophic loss limit insured by the Captive. We cannot be assessed over the amount in the collateral fund.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Executive Vice President and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
Our management, including our Executive Vice President (the principal executive officer), Curtis Strong, along with our Chief Financial Officer (the principal financial officer), Christine Marchand, have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of April 30, 2017. Based on this review and evaluation, these officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission; and to ensure that the information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
For the fiscal quarter ended April 30, 2017, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
The following risk factors are provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K. The risk factors set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section for the fiscal year ended October 31, 2016, included in our annual report on Form 10-K.
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Distiller grains demand and prices may be negatively impacted by the Chinese anti-dumping and anti-subsidy duties. China was historically the world's largest importer of distiller grains produced in the United States. On January 12, 2016, the Chinese government announced that it would commence an anti-dumping and countervailing duty investigation related to distiller grains imported from the United States. In January 2017, the Chinese finalized the anti-dumping and anti-subsidy duties. The anti-dumping duties range from 42.2% to 53.7%. The final anti-subsidy tariffs range from 11.2% to 12%. Both during the investigation and after the announcement of the duties, distiller grains demand and prices have been negatively impacted. While we expect China to continue to import some distiller grains, we do not anticipate that the imports will be at the same level as previous years which could continue to negatively impact market distiller grains demand and prices. This potential reduction in demand along with lower domestic corn prices could negatively impact our ability to profitably operate the ethanol plant.
If Brazil implements a tariff on U.S. produced ethanol, it could negatively impact market ethanol prices. Brazil is currently the largest importer of ethanol produced in the United States. However, recently the Brazilian government has discussed implementing a tariff on ethanol produced in the United States and exported to Brazil. Due to current ethanol production levels in the United States, the market price of ethanol has been supported by exports of ethanol. Further, additional ethanol capacity is being constructed which may further increase the domestic supply of ethanol. If Brazil implements a tariff on U.S. ethanol, it could lead to an oversupply of ethanol in the United States which could negatively impact domestic ethanol prices. Ethanol prices may decrease to a level which does not allow us to operate the ethanol plant profitably.
Many ethanol producers are expanding their production capacity which could lead to an oversupply of ethanol in the United States. Recently, many ethanol producers have commenced projects to expand their ethanol production capacities. These expansions could result in a significant increase in the supply of ethanol in the United States. Currently, ethanol prices are supported by ethanol exports which may not continue at their current levels. While many in the ethanol industry are working to increase the amount of ethanol that is used domestically, specifically in the form of E15, which contains 15% ethanol as compared to the 10% ethanol which is used in most current blends, adoption of E15 has not been as rapid as most ethanol producers would like. Also, the additional ethanol capacity which is being constructed may exceed current domestic and export demand. If an oversupply of ethanol were to occur, it could negatively impact domestic ethanol prices which could negatively impact our ability to profitably operate the ethanol plant.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information
None.
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Item 6. Exhibits.
(a) | The following exhibits are filed as part of this report. |
Exhibit No. | Exhibit | ||
101 | The following financial information from Golden Grain Energy, LLC's Quarterly Report on Form 10-Q for the quarter ended April 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of April 30, 2017 and October 31, 2016, (ii) Statements of Operations for the three and six months ended April 30, 2017 and 2016, (iii) Statements of Cash Flows for the six months ended April 390, 2017 and 2016, and (iv) the Notes to Condensed Financial Statements.** | ||
* Filed herewith.
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GOLDEN GRAIN ENERGY, LLC | |||
Date: | June 14, 2017 | /s/ Curtis Strong | |
Curtis Strong | |||
Executive Vice-President | |||
(Principal Executive Officer) | |||
Date: | June 14, 2017 | /s/ Christine Marchand | |
Christine Marchand | |||
Chief Financial Officer | |||
(Principal Financial and Accounting Officer) | |||
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