SOUTHWEST IOWA RENEWABLE ENERGY, LLC - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 SIRE 2017.12.31 - SOUTHWEST IOWA RENEWABLE ENERGY, LLC	sire-20171231x10qex322.htm
EX-32.1 - EXHIBIT 32.1 SIRE 2017.12.31 - SOUTHWEST IOWA RENEWABLE ENERGY, LLC	sire-20171231x10qex321.htm
EX-31.2 - EXHIBIT 31.2 SIRE 2017.12.31 - SOUTHWEST IOWA RENEWABLE ENERGY, LLC	sire-20171231x10qex312.htm
EX-31.1 - EXHIBIT 31.1 SIRE 2017.12.31 - SOUTHWEST IOWA RENEWABLE ENERGY, LLC	sire-20171231x10qex311.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 December 31, 2017

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 (do not check if a smaller reporting company) o Non-accelerated filer o Smaller reporting company x

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

As of December 31, 2017, 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	2
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	14
Item 3.	QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISKS	22
Item 4.	CONTROLS AND PROCEDURES	22
	PART II – OTHER INFORMATION	23
Item 1.	LEGAL PROCEEDINGS	23
Item 1A.	RISK FACTORS	23
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	23
Item 3.	DEFAULTS UPON SENIOR SECURITIES	23
Item 4.	MINE SAFETY DISCLOSURES	23
Item 5.	OTHER INFORMATION	23
Item 6.	Exhibits	23
	SIGNATURES	25
	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	December 31, 2017			September 30, 2017
	(Unaudited)
Current Assets
Cash and cash equivalents	$	2,489		$	1,487
Accounts receivable	1,141			1,826
Accounts receivable, related party	10,460			11,469
Derivative financial instruments	364			23
Inventory	13,176			13,214
Prepaid expenses and other	840			441
Total current assets	28,470			28,460

Property, Plant and Equipment
Land	2,064			2,064
Plant, building and equipment	225,830			225,651
Office and other equipment	1,560			1,511
	229,454			229,226
Accumulated depreciation	(114,217		)	(111,000		)
Net property, plant and equipment	115,237			118,226

Other assets	2,101			2,143
Total Assets	$	145,808		$	148,829

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	December 31, 2017		September 30, 2017
	(Unaudited)
Current Liabilities
Accounts payable	$	7,483	$	3,387
Accounts payable, related party	3		165
Dividend declared but unpaid	6,664		—
Derivative financial instruments	497		911
Accrued expenses	5,723		6,943
Accrued expenses, related parties	880		168
Current maturities of notes payable	5,043		6,538
Total current liabilities	26,293		18,112

Long Term Liabilities
Notes payable, less current maturities	7,307		13,026
Other long-term liabilities	5,700		5,700
Total long term liabilities	13,007		18,726

Members' Equity
Members' capital, 13,327 Units issued and outstanding	87,165		87,165
Accumulated earnings	19,343		24,826
Total members' equity	106,508		111,991

Total Liabilities and Members' Equity	$	145,808	$	148,829

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
	December 31, 2017		December 31, 2016

Revenues	$	50,546	$	52,065
Cost of Goods Sold
Cost of goods sold-non hedging	45,742		44,905
Realized & unrealized hedging (gains) losses	2,096		(23		)
	47,838		44,882

Gross Margin	2,708		7,183

General and administrative expenses	1,378		1,262

Operating Income	1,330		5,921

Interest and other (income) expense, net	149		289

Net Income	$	1,181	$	5,632

Weighted average units outstanding - basic	13,327		13,327
Weighted average units outstanding - diluted	14,386		14,442
Income per unit - basic	$	88.62	$	422.60
Income per unit - diluted	$	82.09	$	389.97

Notes to Financial Statements are an integral part of this statement

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

(Unaudited)
	Three Months Ended			Three Months Ended
	December 31, 2017			December 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,181		$	5,632
Adjustments to reconcile to net cash provided by operating activities:
Depreciation	3,217			3,000
Amortization	18			17
Change in other assets, net	42			5
(Increase) decrease in current assets:
Accounts receivable	1,694			662
Inventories	38			(3,003		)
Prepaid expenses and other	(399		)	(916		)
Derivative financial instruments	(341		)	(287		)
Increase (decrease) in current liabilities:
Accounts payable	3,934			3,238
Derivative financial instruments	(414		)	(791		)
Accrued expenses	(508		)	2,416
(Decrease) in other long-term liabilities	—			(25		)
Net cash provided by operating activities	8,462			9,948

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment	(228		)	(775		)
Net cash (used in) investing activities	(228		)	(775		)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt	—			4,157
Payments on debt	(7,232		)	(15,145		)
Net cash (used in) financing activities	(7,232		)	(10,988		)

Net increase (decrease) in cash and cash equivalents	1,002			(1,815		)

CASH AND CASH EQUIVALENTS
Beginning	1,487			3,139
Ending	$	2,489		$	1,324


SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest	212			272
Distribution declared but unpaid	6,664			—

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 140 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 months ended December 31, 2017 and 2016 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, 2017 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 pursuant to marketing agreements. Revenues are recognized when the marketing company has taken title to the product, prices are fixed or determinable and collectability is reasonably assured.

The Company’s products are generally shipped FOB loading point, and recorded as a sale upon delivery of the applicable bill of lading. The Company’s ethanol sales are handled through an ethanol purchase agreement (the “Ethanol Agreement”) with Bunge North America, Inc. (“Bunge”). Syrup and distillers grains (co-products) are sold through a distillers grains agreement (the “DG Agreement”) with Bunge, based on market prices. The Company markets and distributes all of the corn oil it produces directly to end users at market prices. Carbon dioxide is sold through a Carbon Dioxide Purchase and Sale Agreement (the “CO2 Agreement”) with Air Products and Chemicals, Inc. Marketing fees, agency fees, and commissions due to the marketer are calculated 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.

Accounts Receivable

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 accounts receivable 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 December 31, 2017 and September 30, 2017, management had determined no allowance was necessary. Accounts 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 significant market risk with respect to 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 its dependence on corn in the ethanol production process. In general, rising corn prices result in lower profit margins and, therefore, represent unfavorable market conditions. This is especially true when market conditions do not allow the Company to pass along increased corn costs to customers. 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. When the Company has sufficient working capital available, it enters 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. Gains and losses on contracts that are designated as normal purchases or normal sales contracts are not recognized until quantities are delivered or utilized in production.

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 December 31, 2017, the Company did not have any open ethanol contracts, but was committed to sell 0.1 million tons of wet and dried distillers grains and 6.3 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 December 31, 2017, the Company was committed to purchasing 2.4 million bushels of corn on a forward contract basis resulting in a total commitment of $8.6 million. In addition, the Company was committed to purchase 0.4 million bushels of corn on basis contracts.

In addition, the Company enters into short-term cash, 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 December 31, 2017 and September 30, 2017 at market value are as follows:



	Balance Sheet Classification	December 31, 2017			September 30, 2017
		in 000's			in 000's
Futures and option contracts
In gain position		$	181		$	190
In loss position		(42		)	(100		)
Cash held by (due to) broker		225			(67		)
	Current asset	364			23

Forward contracts, corn	Current liability	497			911

Net futures, options, and forward contracts (liability)		$	(133	)	$	(888	)

The net realized and unrealized gains and losses on the Company’s derivative contracts for the three months ended December 31, 2017 and 2016 consist of the following:



		Three Months Ended
	Statement of Operations Classification	December 31, 2017			December 31, 2016
		in 000's			in 000's
Net realized and unrealized (gains) losses related to:

Forward purchase corn contracts	Cost of Goods Sold	$	2,362		$	319
Futures and option corn contracts	Cost of Goods Sold	(266		)	(342		)

Inventory

Inventory is stated 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.

Put Option liability

The put option liability consists of an agreement between the Company and ICM, Inc. 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 did not change significantly from September 30, 2017 to December 31, 2017.

Income Per Unit

Basic income per unit is calculated by dividing net income by the weighted average units outstanding for each period. Basic earnings and diluted per unit data were computed as follows (in thousands except per unit data):



	Three Months Ended
	December 31, 2017		December 31, 2016
Numerator:
Net income for basic earnings per unit	$	1,181	$	5,632
Net income for diluted earnings per unit	$	1,181	$	5,632

Denominator:
Weighted average units outstanding - basic	13,327		13,327
Weighted average units outstanding - diluted	14,386		14,442
Income per unit - basic	$	88.62	$	422.60
Income per unit - diluted	$	82.09	$	389.97

Recently Issued Accounting Pronouncements

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The new standard will be effective for us on October 1, 2018. The Company expects to have enhanced disclosures, but does not expect the new standard to have a material impact on the Company's financial statements.

Leases

In February 2016, FASB issued ASU 2016-02 "Leases” ("ASU 2016-02"). ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for all leases greater than one year in duration and classified as operating leases under previous GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and for interim periods within that fiscal year. We will not implement ASU 2016-02 until October 2019, when Fiscal 2020 starts. The Company does not expect the new standard to have a material impact on the Company's financial statements.

Note 3: Inventory

Inventory is comprised of the following:



	December 31, 2017		September 30, 2017
	(000's)		(000's)
Raw Materials - corn	$	1,771	$	4,010
Supplies and Chemicals	4,789		4,149
Work in Process	1,499		1,486
Finished Goods	5,117		3,569
Total	$	13,176	$	13,214

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 several LIBOR based interest rate options with respect to each of the Term Loan and the Revolving Term Loan. In December 2017, we prepaid $1.5 million for the second quarter payment originally due March 20, 2018 to save interest charges.

As of December 31, 2017, there was $36.0 million available under the Revolving Term Loan.

Notes payable

Notes payable consists of the following:



	December 31, 2017		September 30, 2017
	(000's)		(000's)
Term Loan bearing interest at LIBOR plus 3.35% (4.92% at December 31, 2017)	$	9,000	$	12,000
Revolving Term Loan bearing interest at LIBOR plus 3.35% (4.92% at December 31, 2017)	—		4,100
Other debt with interest rates ranging from 3.50% to 4.15% and maturities through 2022	3,534		3,666
	12,534		19,766
Less Current Maturities	5,043		6,538
Less Financing Costs, net of amortization	184		202
Total Long Term Debt	7,307		13,026

The approximate aggregate maturities of notes payable as of December 31, 2017 are as follows:



2018	$	5,043

2019	5,065

2020	581

2021	595

2022	1,250

Total	$	12,534

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.

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 December 31, 2017 and September 30, 2017, categorized by the level of the valuation inputs within the fair value hierarchy (in '000s):



	December 31, 2017
	Level 1		Level 2		Level 3
Assets:
Derivative financial instruments	$	181	$	—	$	—

Liabilities:
Derivative financial instruments	42		497		—
Put option liability	—		—		5,700


	September 30, 2017
	Level 1		Level 2		Level 3
Assets:
Derivative financial instruments	$	190	$	—	$	—

Liabilities:
Derivative financial instruments	100		911		—
Put option liability	—		—		5,700

The following table summarizes the assumptions used in computing the fair value of the put options subject to fair value accounting at December 31, 2017 and September 30, 2017



	December 31, 2017		September 30, 2017
Put option assumptions:
Risk-free interest rate	1.34	%	1.34	%
Expected volatility	26	%	26	%
Expected life (years)	1.25		1.25
Exercise price	$10,897		$10,897
Company unit price	$5,670		$5,670

The following table reflects the activity for liabilities measured at fair value using Level 3 inputs during the three months ended December 31, 2017 and for Fiscal 2017 that ended September 30, 2017:



	December 31, 2017	September 30, 2017
Beginning Balance	$5,700	$	6,100
Change in Value	—	(400		)
Ending Balance	$5,700	$	5,700

Note 6: Related Party Transactions

Bunge

Under the Ethanol Agreement, the Company sells Bunge all of the ethanol produced by the Company, and Bunge purchases the same. The Company pays 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 incurred ethanol marketing expenses of $0.4 million during each of the three months ended December 31, 2017 and 2016 under the Ethanol Agreement.

Under the DG Purchase Agreement, Bunge purchases all distillers grains produced by the Company, and receives 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 incurred distillers grains marketing expenses of $0.3 million and $0.2 million during the three months ended December 31, 2017 and 2016, respectively.

The Company and Bunge entered into an Amended and Restated Grain Feedstock Agency Agreement on December 5, 2014 (the “ Agency Agreement ”). The Agency Agreement provides that Bunge procure corn for the Company and that the Company 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 by Bunge were $0.2 million during each of the three months ended December 31, 2017 and 2016, 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. The Company has contracted for 28,900 acres of Enogen corn for the fiscal year ending September 30, 2018. Concurrent with the Agency Agreement, the Company and Bunge entered into a Services Agreement regarding Enogen Corn purchases (the “ Services Agreement ”). Under this Services Agreement, the Company originates all Enogen Corn contracts for its facility and Bunge assists the Company with certain administrative matters related to Enogen Corn, including facilitating delivery to the facility. The Company pays 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. Expenses under the Services Agreement are included as part of the Amended and Restated Grain Feedstock Agency Agreement discussed above.

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 (in November of 2016, the number of ethanol cars was reduced to 323, which is in addition to the hopper car reductions of one each in November 2013 and January 2015 to 298). 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. On November 1, 2016, the agreement was amended to provide for 96 hopper cars to be side-leased back to Bunge. Expenses under the Railcar Agreement were $1.0 million and $1.6 million for the three months ended December 31, 2017 and December 31, 2016, net of subleases and accretion, respectively. The Company has subleased 92 hopper cars to two unrelated third parties, which sublease expires March 25, 2019. The Company will continue to work with Bunge to determine the need for ethanol and hopper cars in light of current market conditions, and the expected conditions in Fiscal 2018 and future fiscal years.

Note 7: Major Customer

The Company is party to the Ethanol and Distillers Grain Purchase Agreements with Bunge for the exclusive marketing, selling, and distributing of all the ethanol, distillers grains, and syrup produced by the Company. Revenues from Bunge were $47.8 million and $49.6 million for the three months ended December 31, 2017 and 2016, respectively.

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 financial condition and results of operations. This discussion should be read in conjunction with the financial statements included herewith and notes to the financial statements and our Annual Report on Form 10-K for the year ended September 30, 2017 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 reductions in, or other modifications to, 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 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;


•	Disruptions, failures or security breaches relating to our information technology infrastructure;


•	Negative impacts resulting from recent tax reform legislation; and


•	Decrease in export demand due to the imposition of duties and tariffs by foreign governments on ethanol and distiller grains produced in the United States.

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. 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, 2017 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 limited liability company, located in Council Bluffs, Iowa, formed in March, 2005 to construct and operate a 140 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 December 19, 2018, our Board of Directors declared a distribution of $500 per unit to its members of record on December 31, 2017 which we expect to be paid on or about January 16, 2018. Based on the current number of units outstanding, the aggregate payment will be approximately $6.7 million.

Recent Regulatory Developments

Tax Cuts and Jobs Act

On December 22, 2017, the H.R. 1, originally known as the Tax Cuts and Jobs Act (the “2017 Tax Reform Act”), was signed into law. The 2017 Tax Reform Act includes significant changes to the taxation of business entities, including a permanent reduction in the federal corporate income tax rate from 35% to 21%, effective in 2018 and changes in the deductibility of interest on debt obligations. The Company is currently evaluating the impact of the 2017 Tax Reform Act, as well as potential future regulations implementing the new tax law and interpretations of the new tax law with its professional advisers. The full impact of the Tax Act on the Company in future periods cannot be predicted at this time.

Renewable Fuel Standard

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.

The RFS volume requirements increase incrementally each year through 2022 when the mandate requires that the United States use 36 billion gallons of renewable fuels. Starting in 2009, the RFS required that a portion of the RFS must be met by certain “advanced” renewable fuels. These advanced renewable fuels include ethanol that is not made from corn, such as cellulosic ethanol and biomass based biodiesel. The use of these advanced renewable fuels increases each year as a percentage of the total renewable fuels required to be used in the United States.

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. On July 5, 2017, the EPA released a proposed rule to set the 2018 renewable volume requirements which would set the annual volume requirement for renewable fuel at 19.24 billion gallons of renewable fuels per year (the “Proposed 2018 Rule”). On November 30, 2017, the EPA issued the final rule for 2018 which varied only slightly from the Proposed 2018 Rule with the annual volume requirement for renewable fuel set at 19.29 billion gallons of renewable fuels per year (the "Final 2018 Rule"). Although the volume requirements set forth in the Final 2018 Rule are slightly higher than the 19.28 billion gallons required under the final 2017 renewable fuel volume requirements, the 2018 volume requirements are still significantly below the 26 billion gallons statutory mandate for 2018 with significant reductions in the volume requirements for advanced biofuels. However, the Final 2018 Rule does maintain the number of gallons which may be met by conventional renewable fuels such as corn-based ethanol at 15.0 billion gallons.

Under the RFS, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. Since 2018 is the first year the total proposed volume requirements are more than 20% below statutory levels, the EPA Administrator directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. If 2019 volume requirements are also more than 20% below statutory levels, the reset will be triggered under the RFS and the EPA will be required to modify statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the volume requirements post-2022.

On October 19, 2017, EPA Administrator Pruitt issued a letter to several U.S. Senators representing states in the Midwest reiterating his commitment to the text and spirit of the RFS, among other topics, he stated the EPA is actively exploring its authority to remove arbitrary barriers to the year-rounds use of E15 and other mid-level ethanol blends so that E15 may be sold throughout the year without disruption and that the EPA will be not pursue regulations to allow ethanol exports to generate renewable identification numbers (“RINs”). These statements represents actions that would likely have a positive impact on the ethanol industry either directly or indirectly.

The letter also stated that the EPA would soon finalize a decision to deny the request to change the point of obligation for renewable identification numbers, or RINs, from refiners and importers to blenders. The EPA assigns individual refiners, blenders and importers the volume of renewable fuels they are obligated to use based on their percentage of total fuel sales. Obligated parties use RINs to show compliance with RFS-mandated volumes. RINs are attached to renewable fuels by producers and detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached RINs affects the price of ethanol in certain markets and influences purchasing decisions by obligated parties. Consistent with the position in his letter, on November 22, 2017, the EPA issued a Notice of Denial of Petitions seeking to change the RFS point of obligation in which the EPA confirmed that the point of obligation will not change.

Management anticipates that there will continue to be legal challenges to the RFA, including the EPA's recent reductions in the RFS volume requirements and the Final 2018 Rule. However, if the EPA's decision to reduce the volume requirements under the RFS 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.

Although the release of the Final 2018 Rule and the maintenance of the 15 billion gallon threshold for volume requirements that may be met with corn-based ethanol together with the letter issued by Administrator Pruitt and the resulting actions taken by the EPA consistent with Administrator Pruitt’s letter signals support from the EPA and the Trump administration for domestic ethanol production, the Trump administration could still elect to materially modify, repeal or otherwise invalidate the RFS and it is unclear what regulatory framework and renewable volume requirements, if any, will emerge as a result of any such reforms; however, any such reform could adversely affect the demand and price for ethanol and the Company's profitability.

Industry Factors Affecting our Results of Operations

Ethanol prices decreased 9.0% during the three months ended December 31, 2017 as compared to the same period in the previous fiscal year. Offsetting the price reduction was a 4.7% increase in ethanol shipments during the three months ended December 31, 2017 as compared to the prior year.

Management currently believes that despite ethanol price changes, the ethanol outlook for the second quarter of our fiscal year ending September 30, 2018 ("Fiscal 2018") will be relatively flat due to the following factors :

•

The latest estimates of supply and demand provided by the U.S. Department of Agriculture (the "USDA") estimate the 2017/18 ending corn stocks of 2.49 billion bushels, the highest level in 30 years. The USDA held corn consumption for ethanol and co-products steady at 5.5 billion bushels and increased their forecast for the 2017/2018 corn supply of 14.6 billion bushels, suggesting lower corn prices into the first half of Fiscal 2018.


•	Gasoline demand increased slightly in 2017 over 2016 levels. The U.S. Energy Information Administration (the "EIA") released in its Short Term Energy Outlook report of November 7, 2017 that U.S. gasoline demand maintained last year's record levels of ~9.3 million bpd in 2017.

•

Global ethanol demand as reported by the EIA continues to increase with increased exports to various foreign markets, including Canada and Mexico, in response to higher blending mandates and octane demand within the foreign countries. Net ethanol exports of U.S. ethanol in calendar year 2017 were 33% higher than exports during 2016 and the industry forecasts that U.S. ethanol net exports in 2018 will likely surpass 2017 by another

25%. Despite the imposition of a 20% tariff on U.S. ethanol imports above a specified quota effective September 1, 2017, Brazilian demand from the U.S. remained steady. However, given the ethanol supply struggles Brazil is currently facing, the government of Brazil is currently contemplating reversing the tariff. As a result, management currently anticipates, at least in the short term, exports to Brazil will remain steady despite the tariff as a result of the high gasoline prices and low ethanol supplies within Brazil. In September 2017, China’s National Development and Reform Commission, the National Energy Board and 15 other state departments issued a joint plan to expand the use and production of biofuels containing up to 10% ethanol by 2020. China, the number three importer of U.S. ethanol in 2016, imported negligible volumes during calendar year 2017 due to a 30% tariff imposed on imports of U.S. and Brazil fuel ethanol, which took effect in January 2017. There is no assurance that the recently issued joint plan will lead to increased imports of U.S. ethanol by China but any increase in exports to China could have a positive impact on the ethanol market.

However, despite certain favorable market conditions and the flat outlook for ethanol, we believe that our margins will remain tight. Escalation in the price for crude oil and unleaded gasoline could have a negative impact on the demand for gasoline and impact the market price of ethanol, which could adversely impact our profitability during Fiscal 2018. 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 have experienced significant decline due to decreased exports to China as a result of the substantial tariffs and duties imposed on imports into China of distillers grains produced in the U.S. as a result of the antidumping and countervailing investigations. However, in November 2017, the Chinese foreign ministry announced that it would be removing the 11% value-added tax on U.S. produced dried distiller grains initiated in January 2017 although no time line for such removal has been established. China has historically been one of the largest importers of domestically produced distillers grains. Continued reduced demand from China does not escalate in the short term, combined with lower corn and soybean prices, it 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. Although management anticipates our Fiscal 2018 corn oil production levels to be comparable to production in the fiscal year ended September 30, 2017 (“Fiscal 2017”); corn oil prices will continue to be impacted by corn and soybean prices, soybean supply and market demand for corn oil which could decrease as a result of the expiration of the biodiesel blenders’ tax credit. However, legislation has been introduced in Congress to extend the biodiesel blenders tax credit to 2021, and may be retroactively implemented for 2017 Despite the potential renewal of the biodiesel blenders' tax credit, the EPA announced in November 2017 that the biodiesel and advanced biofuel mandates would remain unchanged for biodiesel production.. The unchanged mandates combined with any extension of the biodiesel blenders tax credit could increase demand for corn oil and soybean oil and positively impact the price of corn oil. However, 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 will likely continue to impact corn oil prices.

Results of Operations

The following table shows our results of operations, stated as a percentage of revenue for the three months ended December 31, 2017 and 2016.



	Three Months Ended December 31, 2017				Three Months Ended December 31, 2016
	Amounts		% of Revenues		Amounts		% of Revenues
	in 000's				in 000's
Income Statement Data
Revenues	$	50,546	100.0	%	$	52,065	100.0	%
Cost of Goods Sold
Material Costs	32,879		65.0	%	30,885		59.3	%
Variable Production Expense	7,870		15.6	%	7,229		13.9	%
Fixed Production Expense	7,089		14.0	%	6,768		13.0	%
Gross Margin	2,708		5.4	%	7,183		13.8	%
General and Administrative Expenses	1,378		2.7	%	1,262		2.4	%
Interest Expense and Other Income, net	149		0.3	%	289		0.6	%
Net Income	$	1,181	2.3	%	$	5,632	10.8	%

Revenues

Our revenue from operations is derived from three primary sources: sales of ethanol, distillers grains, and corn oil. The chart below 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. During the three months ended December 31, 2017, the average price per gallon of ethanol decreased by 9.0% as compared to the same period in 2016, while this decrease was partially offset by a 4.7% increase in gallons of ethanol sold resulting from our increased production during the three months ended December 31, 2017. The net effect was a 4.5% reduction in ethanol revenue for the three months ended December 31, 2017. The decrease in ethanol prices resulted principally from high inventories in the domestic market combined with ongoing record production in the market.

A decrease in the average price per ton of distillers grains of approximately 14.7%, was offset with a 18.5% increase in volume sold that resulted in a modest increase in revenue for this category in the three months ended December 31, 2017. Distillers grain revenue declined as prices dropped due to lower corn prices and decreased domestic and export market demand principally relating to the decreased demand from China resulting from the antidumping and countervailing investigations and the implementation of significant duties on distillers grains produced the United States.

Corn oil revenue increased 12.3% in the three months ended December 31, 2017 compared to the three months ended December 31, 2016 with higher volume of 19.5% partially offset by a decrease in corn oil prices of 4.9% per pound. The corn oil yield increased 17.8% in the three months ended December 31, 2017 as compared to the three months ended December 31, 2016 due to operating efficiencies. Our market is primarily local middlemen that compete for our available supply.



	Three Months Ended December 31, 2017				Three Months Ended December 31, 2016
	Amounts in 000's		% of Revenues		Amounts in 000's		% of Revenues
Product Revenue Information
Denatured and Undenatured Ethanol	$	39,720	78.6	%	$	41,611	79.9	%
Distillers Grains	8,030		15.9	%	7,939		15.2	%
Corn Oil	2,559		5.1	%	2,279		4.4	%
Other	237		0.4	%	236		0.5	%

Cost of Goods Sold

Our cost of goods sold as a percentage of our revenues was 94.6% and 86.2% for the three months ended December 31, 2017 and 2016, 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 decreased 0.9% in the three months ended December 31, 2017 compared to the three months ended December 31, 2016. The amount of bushels of corn used in ethanol sold increased by 0.9% in the three months ended December 31, 2017 from 2016 due to increased production of 6.1%.

Realized and unrealized gains (losses) related to our derivatives and hedging related to corn resulted in a $2.1 million increase to our cost of goods sold for the three months ended December 31, 2017, compared to no impact for the three months ended December 31, 2016. 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 an increase of 8.9% when comparing the three months ended December 31, 2017 to the three months ended December 31, 2016 due to higher chemical costs and higher energy costs. Our average steam and natural gas energy cost increased 4.4% comparing the three months ended December 31, 2017 to the three months ended December 31, 2016 principally due to higher energy prices.

Fixed production expenses increased 4.7% for the three months ended December 31, 2017 compared to the three months ended December 31, 2016. Increased repairs and maintenance charges, depreciation and salaries and wages were basically offset by lower lease costs.

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 December 31, 2017 increased 9.2% compared to the three months ended December 31, 2016, primarily for consulting and legal services.

Other Expense

Our other expenses were approximately $0.1 million and $0.3 million, respectively, for the three months ended December 31, 2017 and 2016, and represent approximately 0.3% of our revenue. Increased cash flow resulted with lower interest expenses coupled with interest income in 2017 was the primary reason for the improvement as compared to 2016.

Change in fair value of put option liability

There was no change in the fair value of the put option liability with ICM during the three months ended December 31, 2017 or 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). 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
	December 31, 2017			December 31, 2016

EBITDA
Net Income	$	1,181		$	5,632
Interest Expense	230			289
Depreciation	3,217			3,000
EBITDA	4,628			8,921

Unrealized Hedging (Gain)	(463		)	(724		)

Modified EBITDA	$	4,165		$	8,197

Liquidity and Capital Resources

The Company has certain loan agreements with FCSA and CoBank (the "FCSA Credit Facility").. The FCSA Credit Facility provides 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%.

As of December 31, 2017, we had a cash balance of $2.5 million, $36.0 million available under the Revolving Term Loan and working capital of $2.2 million.

During the second quarter of Fiscal 2018, we estimate that we will require cash of approximately $38.1 million for our primary input of corn and $3.9 million for our energy sources of electricity, steam, and natural gas. We will also require $6.7 million for the distribution declared by the Board of Directors on December 19, 2017.

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 (the "crush margin"). 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 $48 million, or $0.34 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 $70 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, 2017 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, 2017 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.

Tax reform may affect the Company and its members.

On December 22, 2017, President Trump signed into law H.R.1, originally known as the Tax Cuts and Jobs Act (the “2017 Tax Reform Act”), that reforms the Internal Revenue Code of 1986, as amended (the “Code”) making significant changes to the taxation of business entities. The 2017 Tax Reform Act, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and allows for the expensing of capital expenditures. We continue to assess the impact of the 2017 Tax Reform Act, as well as any future regulations implementing the new tax law and any interpretations of the new tax law may have on our business. The impact of this tax reform on the Company and its members is uncertain but the effect of the 2017 Tax Reform Act and any implementing regulations and interpretations could adversely affect our business and financial condition.

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:	February 8, 2018	/s/ Brian T. Cahill
		Brian T. Cahill, President and Chief Executive Officer

Date:	February 8, 2018	/s/ Brett L. Frevert
		Brett L. Frevert, CFO and Principal Financial Officer

Attached files

SOUTHWEST IOWA RENEWABLE ENERGY, LLC Reports

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