UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Exact name of registrant as specified in its charter)

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This annual report 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 upon 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:

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, 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 by these cautionary statements.

AVAILABLE INFORMATION

Information about us is also available at our website at www.cardinalethanol.com, under "Financials and SEC Filing Information" which includes links to the reports we have filed with the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this Annual Report on Form 10-K.

PART I

Cardinal Ethanol, LLC is an Indiana limited liability company formed on February 7, 2005 with the name of Indiana Ethanol, LLC. On September 27, 2005, we changed our name to Cardinal Ethanol, LLC. References to “we,” “us,” “our,” “Cardinal” and the “Company” refer to Cardinal Ethanol, LLC. We were formed for the purpose of raising capital to develop, construct, own and operate a 100 million gallon per year ethanol plant in east central Indiana near Union City, Indiana. We began producing ethanol, distillers grains and corn oil at the plant in November 2008. 2008 (the "Ethanol Division"). In addition, we in 2017 added a facility to allow us to procure, transport and sell grain commodities through our new grain operations (the "Trading Division").

In August 2010, we obtained a new Title V air permit allowing us to increase our annual ethanol production to 140 million gallons compared to 110 million gallons under our previous permit. Our annual ethanol production for the fiscal year ended September 30, 20172018 increased to approximately 125131 million gallons. We expect ethanol production for the fiscal year ended September 30, 2018 to increase furthergallons due to the completion of certain projects which added storage capacity, improved process efficiencies, and added an additional cooling tower cell and a beer-degasser.

Our revenues are primarily derived from the sale of our ethanol, distillers grains and corn oil. We have completed a construction project to add grain receiving and train loading facilities and additional rail spurs, track and grain storage to allow us to procure, transportmarket and sell grain commodities through our new grain operations (the "Trading Division"). We expect that we will buy primarily soybeansethanol and its co-products (distillers grains and corn from producers relying principally on forward purchase contracts to ensure an adequate supply of grain. However, we may also purchase grain the day of delivery. Grain prices will typically be comprised of futures prices on the Chicago Mercantile Exchange ("CME") and local basis adjustments. We intend to manage the futures price risk of changing commodity prices by entering into exchange traded futures contracts with the CME. Grain shipments will be made by rail and truck. We anticipate that sales will be made to grain processors and export marketsoil) primarily in the southeasterncontinental United States using third party marketers. Murex, LLC markets all of our ethanol. Our distillers grains are marketed by CHS, Inc. We market and will generally be made by contract for delivery in a future period. Income is expected to be earned on grain bought and sold, the appreciation or depreciation in the basis valuedistribute all of the grain heldcorn oil we produce directly to end users and the appreciation or depreciation between the futures contract months. The Trading Division began operations at the end of our fourth fiscal quarter of 2017. Although we bought soybeans and entered into forward purchase contracts for soybean purchases and sales, we have determined that the Trading Division was not material to our business at September 30, 2017 and therefore, is not a reportable, separate business segment. We intend to continue to monitor the Trading Division to assess its materiality to our business for future periods.

    

The principal products we are producing at the plantin our Ethanol Division are fuel-grade ethanol and distillers grains. In addition, we are extracting corn oil and capturing a portion of the raw carbon dioxide we produce for sale. The table below shows the approximate percentage of our total ethanol division revenue which is attributed to each of our products for each of our last three fiscal years.

Our primary product is ethanol. Ethanol is ethyl alcohol, a fuel component made primarily from corn and various other grains. The ethanol we produce is manufactured from corn. Although the ethanol industry continues to explore production technologies employing various feedstocks, such as biomass, corn-based production technologies remain the most practical and provide the lowest operating risks. Corn produces large quantities of carbohydrates, which convert into glucose more easily than most other kinds of biomass. The Renewable Fuels Association estimates current domestic ethanol production capacity of approximately 1616.4 billion gallons with approximately 2.5%3% of that capacity idled as of September 25, 2017.20, 2018.

An ethanol plant is essentially a fermentation plant. Ground corn and water are mixed with enzymes and yeast to produce a substance called “beer,” which contains about 10% alcohol and 90% water. The “beer” is boiled to separate the water, resulting

Ethanol can be used as: (i) an octane enhancer in fuels; (ii) an oxygenated fuel additive for the purpose of reducing ozone and carbon monoxide emissions; and (iii) a non-petroleum-based gasoline substitute. Approximately 95% of all ethanol is used in its primary form for blending with unleaded gasoline and other fuel products. Used as a fuel oxygenate, ethanol provides a means to control carbon monoxide emissions in large metropolitan areas. The principal purchasers of ethanol are generally the wholesale gasoline marketer or blender. The principal markets for our ethanol are petroleum terminals in the northeastern United States.

The principal co-product of the ethanol production process is distillers grains, a high protein, high-energy animal feed supplement primarily marketed to the dairy, beef, poultry and swine industries. Dry mill ethanol processing creates three forms of distillers grains: Distillers Wet Grains with Solubles ("DWS"), Distillers Modified Wet Grains with Solubles ("DMWS") and Distillers Dried Grains with Solubles ("DDGS"). DWS is processed corn mash that contains approximately 70% moisture. DWS has a shelf life of approximately three days and can be sold only to farms within the immediate vicinity of an ethanol plant. DMWS is DWS that has been dried to approximately 50% moisture. DMWS have a slightly longer shelf life of approximately ten days and are often sold to nearby markets. DDGS is DWS that has been dried to 10% to 12% moisture. DDGS has an almost indefinite shelf life and may be sold and shipped to any market regardless of its vicinity to an ethanol plant.

Since November 2008, we have been separating some of the corn oil contained in our distillers grains for sale. We have worked hard to improve corn oil production levels and continue to fine tune the operation of our equipment to further increase production rates. The corn oil that we produce is not food grade corn oil and therefore cannot be used for human consumption. However, corn oil can be used as the feedstock to produce biodiesel, as a feed ingredient and has other industrial uses.

Since March 2010, we have been selling some of the carbon dioxide gas produced at the plant.

Over ourthe past fiscal year, exports of ethanol have increased with Brazil receiving the largest percentage of ethanol produced in the United States and Canada in second place. China, India, the Philippines and South Korea have also been top destinations. However, in August 2017,tariffs implemented by Brazil implemented a tariffand China on ethanol imported from the United States that will be imposed afterand the potential for the imposition of tariffs by other countries due to trade disputes with the United States, may reduce overall ethanol export demand, which could have a 600 million liter quota is met. This tariff has resulted in a decline innegative effect on domestic ethanol demand from Brazil and is expected to continue to negatively impact demand in the future.prices. In addition, ethanol export demand is typically more unpredictable than domestic demand and tends to fluctuate over time as it is subject to monetary and political forces in other nations. For example, a strong U.S. Dollar is a force that may negatively impact ethanol exports from the United States.

Historically, the United States ethanol industry has exported a significant amount of distillers grains to ChinaChina. The imposition of anti-dumping and Mexico with Vietnam receiving notable amounts. However, the distillers grains market has faced many challengesanti-subsidy duties by China over the past year. On January 10, 2017, China announced a final ruling related to its anti-dumping and countervailing duty investigation imposing anti-dumping duties from a range of 42.2% to 53.7% and anti-subsidy duties from 11.2% to 12.0%. The imposition of these dutiestwo years has resulted in a significant decline in demand from this top importerChina requiring United States producers to seek out alternative markets. Vietnam suspended United States exports in December 2016 due to its decision to ban certain fumigants used inOver the shipping of distillers grains. However, on September 6, 2017,past year, export markets have become increasingly diversified with Turkey, Mexico and South Korea received the Vietnam government resumed importslargest percentage of distillers grains fromproduced in the United States which is anticipatedand Thailand, Vietnam, Indonesia and Canada also receiving notable amounts. However, recent trade disputes with other countries have created additional uncertainty as to increase imports of distillers grains to that market.future export demand.

Our ethanol plant is located near Union City, Indiana in Randolph County. We selected the site because of its location to existing ethanol consumption and accessibility to road and rail transportation. Our site is in close proximity to rail and major highways that connect to major population centers such as Indianapolis, Cincinnati, Columbus, Cleveland, Toledo, Detroit, New York and Chicago.

The ethanol industry is dependent on several economic incentives to produce ethanol. One significant federal ethanol support is the Federal Renewable Fuels Standard (the “RFS”). 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 RFS statutory volume requirement increases incrementally each year until the United States is required to use 36 billion gallons of renewable fuels by 2022. Starting in 2009, the RFS required that a portion of the RFS must be met by certain “advanced” renewable

    

The United States Environmental Protection Agency ("EPA") has the authority to waive the RFS statutory volume requirement, in whole or in part, provided one of the following two conditions have been met: (1) there is inadequate domestic renewable fuel supply; or (2) implementation of the requirement would severely harm the economy or environment of a state, region or the United States. Annually, the EPA is required by statute 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 obligation. The statutory volumes and the EPA's volumes for 2014, 2015, 2016, 2017 and 20172018 (in billion gallons) are as follows:

On May 18, 2017,June 26, 2018, the EPA released a proposed rule to set the renewable volume obligation for 2018.2019. The EPA proposes to set the total volume obligation at 19.2419.88 billion gallons of which 15.0 billion gallon could be met by corn-based ethanol. A public hearing on the proposed rule was held in JuneJuly and the public comment period expired on August 31, 2017.17, 2018. The final rule is expected to be issued in November 2017.2018. If the volume requirements of the RFS were to be reduced in the future, it could have an adverse effect on market prices and demand for ethanol. In addition, the EPA has recently expanded its use of waivers to small refineries. The effect of these waivers is that the refinery is no longer required to earn or purchase blending credits known as RINs. If the increase in discretionary waivers by the ERPA were to continue, it could negatively affect ethanol prices.

In February 2010, the EPA issued new regulations governing the RFS. These new regulations have been called RFS2. The most controversial part of RFS2 involves what is commonly referred to as the lifecycle analysis of green house gas emissions. Specifically, the EPA adopted rules to determine which renewable fuels provided sufficient reductions in green house gases, compared to conventional gasoline, to qualify under the RFS program. RFS2 establishes a tiered approach, where regular renewable fuels are required to accomplish a 20% green house gas reduction compared to gasoline, advanced biofuels and biomass-based biodiesel must accomplish a 50% reduction in green house gases, and cellulosic biofuels must accomplish a 60% reduction in green house gases. Any fuels that fail to meet this standard cannot be used by fuel blenders to satisfy their obligations under the RFS program. The scientific method of calculating these green house gas reductions has been a contentious issue. Many in the ethanol industry were concerned that corn based ethanol would not meet the 20% green house gas reduction requirement based on certain parts of the environmental impact model that many in the ethanol industry believed was scientifically suspect. However, RFS2 as adopted by the EPA provides that corn-based ethanol from modern ethanol production processes does meet the definition of a renewable fuel under the RFS program. Our ethanol plant was grandfathered into the RFS up to 115,000,000 gallons annually due to the fact that it was constructed prior to the effective date of the lifecycle green house gas requirement and isrequirement. Therefore, we are not required to prove compliance with the lifecycle green house gas reductions.reductions for a significant amount of our production. Certain provisions of RFS2 as adopted may disproportionately benefit ethanol produced from sugarcane. This could make sugarcane

Most ethanol that is used in the United States is sold in a blend called E10. E10 is a blend of 10% ethanol and 90% gasoline. E10 is approved for use in all standard vehicles. In 2016, gasoline demand in the United States was approximately 143 billion gallons. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 14.3 billion gallons per year. This is commonly referred to as the “blending wall,” which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. This is a theoretical limit because it is believed that it would not be possible to blend ethanol into every gallon of gasoline that is being used in the United States and it discounts the possibility of additional ethanol used in higher percentage blends.

In June 2012, the EPA gave final approval for the sale of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, for use in vehicles manufactured in the model year 2001 and later. Although there have been significant steps towards introduction of E15 in the marketplace, there are still obstacles to meaningful market penetration by E15. Many states still have regulatory issues that hamper or prevent the sale of E15. In addition, sales of E15 may be limited because E15 is not approved for use in all vehicles, the EPA requires a label that may discourage consumers from using E15, and retailers may choose not to sell E15 due to concerns regarding liability. In addition, different gasoline blendstocks may beare currently required at certain times of

    

A blender pump is a gasoline pump that can dispense a variety of different ethanol/gasoline blends. Blender pumps typically can dispense E10, E20, E30, E40, E50 and E85. These blender pumps accomplish these different ethanol/gasoline blends by internally mixing ethanol and gasoline which are held in separate tanks at the retail gas stations. Many in the ethanol industry believe that increased use of blender pumps will increase demand for ethanol by allowing gasoline retailers to provide various mid-level ethanol blends in a cost effective manner and allowing consumers with flex-fuel vehicles to purchase more ethanol through these mid-level blends. However, the expense of blender pumps has delayed their availability in the retail gasoline market.

The government's regulation of the environment changes constantly. We are subject to extensive air, water and other environmental regulations and we have been required to obtain a number of environmental permits to construct and operate the plant. It is possible that more stringent federal or state environmental rules or regulations could be adopted, which could increase our operating costs and expenses. It also is possible that federal or state environmental rules or regulations could be adopted that could have an adverse effect on the use of ethanol. For example, changes in the environmental regulations regarding the required oxygen content of automobile emissions could have an adverse effect on the ethanol industry. Plant operations are governed by the Occupational Safety and Health Administration (“OSHA”). OSHA regulations may change such that the costs of operating the plant may increase. Any of these regulatory factors may result in higher costs or other adverse conditions affecting our operations, cash flows and financial performance.

In late 2009, California passed a Low Carbon Fuels Standard ("LCFS"). The California LCFS requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which is measured using a lifecycle analysis, similar to the RFS. On December 29, 2011, a federal district court in California ruled that the California LCFS was unconstitutional which halted implementation of the California LCFS. However, the California Air Resources Board ("CARB") appealed this court ruling and on September 18, 2013, the federal appellate court reversed the federal district court finding the LCFS constitutional and remanding the case back to federal district court to determine whether the LCFS imposes a burden on interstate commerce that is excessive in light of the local benefits. On June 30, 2014, the United States Supreme Court declined to hear the appeal of the federal appellate court ruling and CARB recently re-adopted the LCFS with some slight modifications. The LCFS could have a negative impact on demand for corn-based ethanol and result in decreased ethanol prices affecting our ability to operate profitably.    

We have obtained all of the necessary permits to operate the plant. In the fiscal year ended September 30, 2017,2018, we incurred costs and expenses of approximately $260,000$166,000 complying with environmental laws. Although we have been successful in obtaining all of the permits currently required, any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources in complying with such regulations.

We are in direct competition with numerous ethanol producers, many of whom have greater resources than we do. Following the significant growth during 2005 and 2006, the ethanol industry has grown at a much slower pace. As of September 25, 2017,20, 2018, the Renewable Fuels Association estimates that there are 214approximately 210 ethanol production facilities in the United States with capacity to produce approximately 1616.4 billion gallons of ethanol and fiveseven additional plants under expansion or construction with capacity to produce an additional 273362 million gallons. However, the Renewable Fuels Association estimates that approximately 2.5%3% of the ethanol production capacity in the United States is idled.

Since ethanol is a commodity product, competition in the industry is predominantly based on price. We have also experienced increased competition from oil companies who have purchased ethanol production facilities. These oil companies are required to blend a certain amount of ethanol each year. Therefore, the oil companies may be able to operate their ethanol production facilities at times when it is unprofitable for us to operate. Larger ethanol producers may be able to realize economies of scale that we are unable to realize. This could put us at a competitive disadvantage to other ethanol producers. The ethanol industry is continuing to consolidate where a few larger ethanol producers are increasing their production capacities and are controlling a larger portion of the United States ethanol production. Further, some ethanol producers own multiple ethanol plants which may allow them to compete more effectively by providing them flexibility to run certain production facilities while they have other facilities shut down. This added flexibility may allow these ethanol producers to compete more effectively, especially during periods when operation margins are unfavorable in the ethanol industry.

The following table identifies the majority of the largest ethanol producers in the United States along with their production capacities.

U.S. FUEL ETHANOL PRODUCTION CAPACITY

BY TOP PRODUCERS

Producers of Approximately 750

million gallons per year (mmgy) or more

The ethanol industry in the United States experienced increased competition from ethanol produced outside of the United States during 2012 which was likely the result of the expiration of the tariff on imported ethanol which expired on December 31, 2011. Although ethanol imports have since decreased, if competition from ethanol imports were to increase again that could negatively impact demand for ethanol produced in the United States which could result in lower operating margins.

We also anticipate increased competition from renewable fuels that do not use corn as the feedstock. Many of the current ethanol production incentives are designed to encourage the production of renewable fuels using raw materials other than corn. One type of ethanol production feedstock is cellulose. Cellulose is the main component of plant cell walls and is the most common organic compound on earth. Cellulose is found in wood chips, corn stalks, rice, straw, amongst other common plants. Cellulosic ethanol is ethanol produced from cellulose. Several companies and researchers have commenced pilot projects to study the feasibility of commercially producing cellulosic ethanol and are producing cellulosic ethanol on a small scale and a few companies in the United States have begun producing on a commercial scale. Additional commercial scale cellulosic ethanol plants could be completed in the near future. If this technology can be profitably employed on a commercial scale, it could potentially lead to ethanol that is less expensive to produce than corn based ethanol. Cellulosic ethanol may also capture more government subsidies and assistance than corn based ethanol. This could decrease demand for our product or result in competitive disadvantages for our ethanol production process.

Our ethanol plant also competes with producers of other gasoline additives having similar octane and oxygenate values as ethanol. Alternative fuels, gasoline oxygenates and alternative ethanol production methods are also continually under development. The major oil companies have significantly greater resources than we have to market other additives, to develop alternative products, and to influence legislation and public perception of ethanol. These companies also have sufficient resources to begin production of ethanol should they choose to do so.

Ethanol plants in the Midwest produce the majority of distillers grains and primarily compete with other ethanol producers in the production and sales of distillers grains. Ethanol plants produced approximately 4244 million metric tons of distillers grains in 2016.

The major raw material required for our ethanol plant to produce ethanol, distillers grain and corn oil is corn. To produce 135 million gallons of ethanol per year, our ethanol plant needs approximately 47 million bushels of corn per year, or approximately 129,000 bushels per day, as the feedstock for its dry milling process. Traditionally, corn grown in the area of the plant site has been fed locally to livestock or exported for feeding or processing and/or overseas export sales.

In an attempt to minimize the effects of the volatility of corn costs on operating profits, we take hedging positions in corn futures markets. Hedging means protecting the price at which we buy corn and the price at which we will sell our products in the future. It is a way to attempt to reduce the risk caused by price fluctuation. The effectiveness of hedging activities is dependent upon, among other things, the cost of corn and our ability to sell sufficient amounts of ethanol and distillers grains to utilize all of the corn subject to the futures contracts. Hedging activities can result in costs to us because price movements in grain contracts are highly volatile and are influenced by many factors beyond our control. These costs may be significant.

High corn prices have a negative effect on our operating margins unless the price of ethanol and distillers grains out paces rising corn prices. Corn prices were lower during the fiscal year ended September 30, 2017,2018, compared to the same period in 20162017 due to increased supply resulting from a plentiful 20162017 harvest in our corn supply region. On OctoberSeptember 12, 2017,2018, the United States Department of Agriculture ("USDA") released a report estimating the 20172018 corn crop in the United States at approximately 14.314.8 billion bushels, down 6%up 2% from last year's production, with yields averaging 171.8181.3 bushels per acre. The USDA forecasted area harvested for grain at 83.181.8 million acres, down 4%1% from 2016. If realized, this would be the second highest national yield and production on record.2017. The Indiana corn crop is estimated to be approximately 903945 million bushels, down 5%up 1% from 2016.2017. Yields in Indiana are expected to be approximately 173192 bushels per acre, similar to 2016.up 7% from 2017. Management will continue to monitor the availability of corn in our area.

Natural gas is also an important input commodity to our manufacturing process. Our natural gas usage for our fiscal year ended September 30, 20172018 was approximately 3.08%3.3% more MMBTUs than for last fiscal year, constituting approximately 4.82%4.4% of our total costs of goods sold. We are using natural gas to produce process steam and to dry our distillers grain products to a moisture content at which they can be stored for long periods of time, and can be transported greater distances, so that we can market the product to broader livestock markets, including poultry and swine markets in the continental United States.

On March 20, 2007, we entered into a Long-Term Transportation Service Contract for Redelivery of Natural Gas with Ohio Valley Gas Corporation ("Ohio Valley"). Under the contract, Ohio Valley receives, transports and redelivers natural gas to us for all of our natural gas requirements up to a maximum of 100,000 therms per purchase gas day and our estimated annual natural gas requirements of 34,000,000 therms. For all gas received for and redelivered to us by Ohio Valley, we pay a throughput rate in the amount of $0.0138 per therm for the first five years of the contract term, and $0.0138 increased by the compounded inflation rate as established and determined by the U.S. Consumer Price Index - All Urban Consumers for Transportation for the following five years. In addition, we pay a service charge for all gas received for and redelivered to us by Ohio Valley in the amount of $750 per delivery meter per billing cycle per month for the first five years of the contract term and $750 increased by the compounded inflation rate over the initial rate as established and determined by the U.S. Consumer Price Index - All Urban Consumers for Transportation for the following five years. The initial term of the contract is ten years. Provided neither party terminates the contract, the contract will automatically renew for a series of not more than three consecutive one year periods.

We require a significant amount of electrical power to operate the plant. On May 2, 2007, we entered into an agreement with Indiana Michigan Power Company to furnish our electric energy. The initial term of the contract was 30 months from the time service is commenced and continues thereafter unless terminated by either party with 12 months written notice. We pay Indiana Michigan Power Company monthly pursuant to their standard rates.

We require a significant supply of water. Engineering specifications show our plant's water requirements to be approximately 774 gallons per minute, 1.1 million gallons per day, depending on the quality of water. We have assessed our water needs and available supply and have determined that we have an adequate supply. Union City Water Works is supplying the water necessary to operate our plant.

We do not currently hold any patents, trademarks, franchises or concessions. We were granted a license by ICM, Inc. to use certain ethanol production technology necessary to operate our ethanol plant. The cost of the license granted by ICM, Inc. was included in the amount we paid to Fagen, Inc. to design and build our ethanol plant. In addition, we were granted a license by ICM, Inc. to use certain corn oil technologies necessary to extract corn oil during our plant operations.

We experience some seasonality of demand for ethanol. Since ethanol is predominantly blended with conventional gasoline for use in automobiles, ethanol demand tends to shift in relation to gasoline demand. As a result, we experience some seasonality of demand for ethanol in the summer months related to increased driving. In addition, we experience some increased ethanol demand during holiday seasons related to increased gasoline demand.

As discussed above, we have entered into a marketing agreement with Murex for the purpose of marketing and distributing our ethanol and have engaged CHS, Inc. for the purpose of marketing and distributing our distillers grains. We rely on Murex for the sale and distribution of our ethanol and CHS, Inc. for the sale and distribution of our distillers grains. Therefore, although there are other marketers in the industry, we are highly dependent on Murex and CHS, Inc. for the successful marketing of our products. Any loss of Murex or CHS, Inc. as our marketing agent for our ethanol and distillers grains respectively could have a significant negative impact on our revenues.

Grain shipments are made by rail and truck. Our sales are made to grain processors and export markets in the southeastern United States. AllOur grain sales are generally made by contract for delivery in a future period. Income is expected to be earned on grain bought and sold, the appreciation or depreciation in the basis value of the products sold to our customers for fiscal years 2017, 2016grain held and 2015 were produced in the United States and all of our long-lived assets are domiciled inappreciation or depreciation between the United States.futures contract months.

We have engaged third-party professional marketers who decide where our ethanol and distillers grains are marketed and we have no control over the marketing decisions made by our third-party professional marketers. These third-party marketers may decide to sell our products in countries other than the United States. Over the past fiscal year, exports of ethanol and distillers grains producedprimarily compete in the United States have increased. However,purchase of grain on a local or regional basis although there isare some potential to sell our products on thelarger national and international markets, we anticipatecompanies that our products will still primarily be marketedmaintain regional grain purchase and soldstorage facilities. We compete in the United States.sale of grain with other public and private grain brokers, elevator operators and farmer owned cooperatives. Competition is based primarily on price, service and reliability.

We sellmanage the futures price risk of changing commodity prices by entering into exchange-traded futures contracts on the CME. The CME is a regulated commodity futures exchange that maintains futures markets for the grain we trade. Futures prices are determined by worldwide supply and demand.

Increases in the price of corn or natural gas would reduce our profitability.  Our primary source of revenue is from the sale of ethanol, distillers grains and corn oil. Our results of operations and financial condition are significantly affected by the cost

Ethanol production requires substantial amounts of corn. Generally, higher corn prices will produce lower profit margins and, therefore, negatively affect our financial performance. If a period of high corn prices were to be sustained for some time, such pricing may reduce our ability to operate profitably because of the higher cost of operating our plant. We may not be able to offset any increase in the price of corn by increasing the price of our products. If we cannot offset increases in the price of corn, our financial performance may be negatively affected.

 

Price movements in corn, natural gas and ethanol contracts are highly volatile and are influenced by many factors that are beyond our control.  There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of corn or natural gas.  However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.  We may incur such costs and they may be significant which could impact our ability to profitably operate the plant and may reduce the value of our units.

 

Changes and advances in ethanol production technology could require us to incur costs to update our plant or could otherwise hinder our ability to compete in the ethanol industry or operate profitably.  Advances and changes in the technology of ethanol production are expected to occur.  Such advances and changes may make the ethanol production technology installed in our plant less desirable or obsolete.  These advances could also allow our competitors to produce ethanol at a lower cost than we are able.  If we are unable to adopt or incorporate technological advances, our ethanol production methods and processes could be less efficient than our competitors, which could cause our plant to become uncompetitive or completely obsolete.  If our competitors develop, obtain or license technology that is superior to ours or that makes our technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that our ethanol production remains competitive.  Alternatively, we may be required to seek third-party licenses, which could also result in significant expenditures.  These third-party licenses may not be available or, once obtained, they may not continue to be available on commercially reasonable terms.  These costs could negatively impact our financial performance by increasing our operating costs and reducing our net income.

 

Competition from the advancement of alternative fuels may lessen the demand for ethanol.  Alternative fuels, gasoline oxygenates and ethanol production methods are continually under development. Like ethanol, these emerging technologies offer an option to address worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. If these alternative technologies continue to expand and gain broad acceptance and become readily available to consumers for motor vehicle use, we may not be able to compete effectively. This additional competition could reduce the demand for ethanol, resulting in lower ethanol prices that might adversely affect our results of operations and financial condition.

 

    

Government incentives for ethanol production may be eliminated in the future, which could hinder our ability to operate at a profit. The ethanol industry is assisted by various federal ethanol production and tax incentives, including the RFS set forth in the Energy Policy Act of 2005. The RFS helps support a market for ethanol that might disappear without this incentive.

Changes in environmental regulations or violations of these regulations could be expensive and reduce our profitability.  We are subject to extensive air, water and other environmental laws and regulations.  In addition, some of these laws require our plant to operate under a number of environmental permits. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment.  A violation of these laws and regulations or permit conditions can result in substantial fines, damages, criminal sanctions, permit revocations and/or plant shutdowns.  In the future, we may be subject to legal actions brought by environmental advocacy groups and other parties for actual or alleged violations of environmental laws or our permits.  Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to spend considerable resources in order to comply with future environmental regulations. The expense of compliance could be significant enough to reduce our profitability and negatively affect our financial condition.

    

Our plant site is made up of two adjacent parcels which together total approximately 295 acres in east central Indiana near Union City, Indiana. The address of our plant is 1554 N. County Road 600 E., Union City, Indiana 47390. On October 31, 2016, we purchased approximately 64 acres of land adjacent to our property for a total purchase price of approximately $646,000.

In November 2008, the plant was substantially completed and plant operations commenced. The plant consists of the following buildings:

Our plant is in excellent condition and is capable of functioning at over 100% of its 100 million gallons per year nameplate production capacity.

On June 27, 2008, we entered into a Tricanter Purchase and Installation Agreement with ICM, Inc. for the construction and installation of a Tricanter Oil Separation System. On February 12, 2010, GS CleanTech Corporation ("GS CleanTech") filed a lawsuit in the United States District Court for the Southern District of Indiana, claiming that the Company's operation of the oil recovery system manufactured and installed by ICM, Inc. infringes a patent claimed by GS CleanTech. GS CleanTech sought royalties and damages associated with the alleged infringement, as well as attorney's fees from the Company. GS CleanTech subsequently filed actions against at least fourteen other ethanol producing companies for infringement of its patent rights, adding several additional patents. GS CleanTech successfully petitioned for the cases to be joined in a multi-district litigation ("MDL") which was assigned to the United States District Court for the Southern District of Indiana (Case No. 1:10-ml-02181). We subsequently answered and counterclaimed that the patent claims at issue are invalid and that the Company is not infringing.

Motions for summary judgment were filed by the defendants, including the Company, and GS CleanTech. Meanwhile, GS CleantechCleanTech filed suit against another group of defendants which were joined with the MDL. On October 23, 2014, the United States District Court granted summary judgment finding that all of the patents claimed by GS CleanTech were invalid and that the Company had not infringed. In addition, on September 15, 2016, the United States District Court granted summary judgment finding that the patents were invalid due to inequitable conduct before the US Patent and Trademark Office by the inventors and their attorneys. GS Cleantech has asked the United States District Court to reconsider its decision regarding inequitable conduct. In addition, GS CleantechCleanTech and its attorneys filed a Notice of Appeal appealing the rulings on summary judgment. The defendants have since settled with the attorneys for GS CleanTech.

On February 16, 2010, ICM, Inc. agreed to indemnify the Company from and against all claims, demands, liabilities, actions, litigations, losses, damages, costs and expenses, including reasonable attorney's fees arising out of any claim of infringement of patents, copyrights or other intellectual property rights by reason of our purchase and use of the oil recovery system and agrees to defend the Company. Several of the other defendants also use equipment and processes provided by ICM, Inc. ICM, Inc. has, and we expect it will continue, to vigorously defend itself and the Company in this lawsuit and in anythe appeal filed by GS CleanTech. If GS CleanTech were to be successful in anythe appeal filed and allowed to continue to pursue its claims, we estimate that damages, if awarded, would be based on a reasonable royalty to, or lost profits of, GS CleanTech. Because of its rulings, it seems unlikely

None.

PART II

    

 

There are detailed timelines that must be followed under the Unit Trading Bulletin Board Rules and Procedures with respect to offers and sales of membership units.  All transactions must comply with the Unit Trading Bulletin Board Rules, our operating agreement, and are subject to approval by our board of directors.

As a limited liability company, we are required to restrict the transfers of our membership units in order to preserve our partnership tax status. Our membership units may not be traded on any established securities market or readily traded on a secondary market (or the substantial equivalent thereof). All transfers are subject to a determination that the transfer will not cause the Company to be deemed a publicly traded partnership.

The following table contains historical information by fiscal quarter for the past two fiscal years regarding the actual unit transactions that were completed by our unit-holders during the periods specified. We believe this most accurately represents the current trading value of the Company's units. The information was compiled by reviewing the completed unit transfers that occurred on our qualified matching service bulletin board during the quarters indicated.

The following table contains the bid and asked prices that were posted on the Company's alternative trading service bulletin board and includes some transactions that were not completed. The Company believes the table above more accurately describes the trading value of its units as the bid and asked prices below include some offers that never resulted in completed transactions. The information was compiled by reviewing postings that were made on the Company's alternative trading service bulletin board.

The following graph shows a comparison of cumulative total member return since September 30, 2012,2013, calculated on a dividend reinvested basis, for the Company, the NASDAQ Composite Index (the “NASDAQ”“Composite”) and an index of other companies that have the same SIC code as the CompanyNASDAQ Clean Edge Green Energy Index (the “Industry Index”"CELS"). The graph assumes $100 was invested in each of our units, the NASDAQ,Composite and the Industry IndexCELS on September 30, 2012.2013. Data points on the graph are annual. Note that historic unit price performance is not necessarily indicative of future unit price performance.

Our revenues from operations come from three primary sources: sales of fuel ethanol, distillers grains and corn oil. The following table shows the sources of our ethanol division revenue for the fiscal years ended September 30, 20172018 and 2016:2017:

    

Our revenues from ethanol increaseddecreased for our fiscal year ended September 30, 20172018 as compared to our fiscal year ended September 30, 2016.2017. This increasedecrease in revenues is primarily the result of an increase in thea lower average price per gallon of ethanol sold for the fiscal year ended September 30, 20172018 as compared to the same period in 2016.2017.

    

We experienced an increase in ethanol gallons sold of approximately 4.75%3.6% for the fiscal year ended September 30, 20172018 as compared to the same period in 20162017 resulting primarily from increased ethanol production rates. We are currently operating at approximately 30%35% above our nameplate capacity.capacity due to completion of certain improvements during our 2016 and 2017 fiscal years which increased our annual production rate. Management anticipates that the gallons ofexpects ethanol sold by our plantproduction will further increase for the fiscal year ended September 30, 20182019 due to plans for completion of various projects which are expected to increase our annual ethanol production capacityrate to approximately 135140 million gallons.

Our average price per gallon of ethanol sold for the fiscal year ended September 30, 20172018 was approximately 4.17% higher12.7% lower than our average price per gallon of ethanol sold for the same period in 2016.2017. Ethanol prices were higherlower during the fiscal year ended September 30, 20172018 due to increased export demandindustry-wide production which offset increased industry-wide production.was in excess of demand. In addition, lower corn, crude oilrecent trade disputes with countries such as China, Mexico and gasoline prices during the 2016 fiscal yearEuropean Union and the potential for the imposition of tariffs on products produced in the United States have had a negative affecteffect on ethanol prices. Finally, ethanol prices for that period.may have been negatively impacted by the increase in the number of waivers granted by the EPA exempting certain refiners from compliance with the RFS.

Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. If corn, crude oil and gasoline prices decrease,increase, that could have a significant negative impact on the market price of ethanol and our profitability, particularly should ethanol stocks grow because of expansion of production capacity in the industry. A decline in ethanol exports due to the tarifftrade disputes resulting in tariffs imposed by Brazil on ethanol produced in the United States or other factors would also likely contribute to higher ethanol stocks unless additional demand could be created domestically through the used of higher blends. Finally, an increase in imports by the United States from Brazil would have a negative effect on ethanol prices.

Our revenues from distillers grains decreasedincreased in the fiscal year ended September 30, 20172018 as compared to the same period in 2016.2017. This decreaseincrease in revenues is primarily the result of a decreasean increase in the average market price per ton of distillers grains sold for the period ended September 30, 20172018 compared to the same period in 2016.2017. The average price per ton of distillers grains sold for the fiscal year ended September 30, 2017 was2018 increased by approximately 25.00% lower than42.4% compared to the average price per ton of distillers grains sold for the same period in 2016.2017. This declineincrease in the market price of distillers grains is due to increased industry-wide production along with lower export demand from nations other than China during the fiscal year ended September 30, 20172018 as compared to the same period in 2016 which has resulted in a decline in the price of distillers grains as a percentage of corn values.2017. In addition, poor corn quality from the 2016 corn crop had a negative effect on the price of distillers grains during our 2017 fiscal year.

China has been a significant consumer of exported distillers grains particularly since December of 2014 following the resolution of a dispute related to China's objection to the presence of an unapproved genetically modified organism in some U.S. shipments.grains. However, an anti-dumping investigation beginning in January of 2016 into distillers grains produced in the United States led to the imposition by China of preliminary anti-dumping and anti-subsidy duties on imports of ethanol produced in the United States in the fall of 2016 and a final ruling imposing even higher duties in January 2017. The investigation and imposition of these duties have resulted in a decline in demand from China. Recent trade disputes with countries such as China, Mexico and the European Union have created additional uncertainty as to future export demand. If export demand suffers, this could lead to lower distillers grains prices could remain low unless additional demand can be createdsustained from domestic or other foreign markets such as Vietnam, a nation that recently resumed imports of distillers grains from the United States after a nine-month ban.markets. Domestic demand for distillers grains could also decrease due to expansion of production capacity in the ethanol industry or if lower corn or soybean prices result in end-users switching to lower priced alternatives. In addition, growing conditions in a particular season’s harvest may cause the corn crop to be of poor quality resulting in lower distillers grains prices. 

    

We experienced an increasea decrease of approximately 1.54%3.6% in distillers grains tons sold in the fiscal year ended September 30, 20172018 as compared to the same period in 20162017 due primarily to timinghigher ethanol and corn oil yields which decreased production of shipments.distillers grains. Management anticipates that the gallons of ethanol sold by our plantannual distillers grains production volume will increase for the fiscal year ended September 30, 20182019 due to completion of various projects which are expected to increase our ethanol production capacityrate to approximately 135140 million gallons which would alsogallons. However, this increase our distillers grains production.in production may be offset somewhat by a decrease in DDGS yield per bushel.

The average price per pound of corn oil was approximately 7.69% highersold for the fiscal year ended September 30, 20172018 decreased by approximately 10.7% as compared to the same period in 20162017 due primarily to increased production by the ethanol industry and to uncertainty of biodiesel demand. Management anticipates that higher demand from the biodiesel industry during our first fiscal quarter of 2017production and from the feed industry during our second fiscal quarter of 2017 which positively impacted the market price of corn oil. However, corn oil demand was lower during the last half of our fiscal year.

Our Ethanol Division cost of goods sold as a percentage of its revenues was approximately 91.60%94.1% for the fiscal year ended September 30, 20172018 as compared to approximately 91.53%91.5% for the same period in 2016.2017. This increase in cost of goods sold as a percentage of revenues was the result of increaseddecreased ethanol prices relative to the price of corn for the fiscal year ended September 30, 20172018 as compared to the same period in 2016.2017. Our two largest costs of production are corn and natural gas. Cost of goods sold also includes net gains or losses from derivatives related to commodities purchased.

Weather, world supply and demand, current and anticipated stocks, agricultural policy and other factors can contribute to volatility in corn prices. If corn prices rise, it will have a negative effect on our operating margins unless the price of ethanol and distillers grains out paces rising corn prices. Volatility in the price of corn could significantly impact our cost of goods sold.

Our natural gas cost was higherlower during our fiscal year ended September 30, 20172018 as compared to the fiscal year ended September 30, 2016.2017. This increasedecrease in the cost of natural gas for the fiscal year ended September 30, 20172018 as compared to the same period in 20162017 was primarily the result of an increasea decrease of approximately 16.60%5.4% in the average price per MMBTU of natural gas due to lower production and increased demand which have used upan increase in natural gas stocks built up in 2015.stocks. We also used approximately 3.08%3.3% more natural gas for the fiscal year ended September 30, 20172018 as compared to the same period in 20162017 because of higher ethanol production.

NaturalManagement expects that natural gas prices are expected to increase in the future due to producers shutting down wells resulting in lower natural gas production and to the conversion of power plants across the U.S. from coal to natural gas. Natural gas prices will also be dependent upon the severity of the coming winter weather. If the nation were to experience a catastrophic weather event causing problems related to the supply of natural gas, this could result in higher natural gas prices.

We enter into hedging instruments to minimize price fluctuations in the prices of our finished products and inputs. As the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our revenues and our cost of goods sold. These commodity-based derivatives are not designated as effective hedges for accounting purposes. Please refer to "Item 7A - Quantitative and Qualitative Disclosures About Market Risk-Commodity Price Risk" for information on our derivatives.

Our operating expenses as a percentage of revenues were approximately 2.41% and 2.34% for the fiscal years ended September 30, 2017 and 2016, respectively. Operating expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees, depreciation of trading division fixed assets, property taxes and other general administrative costs. Our efforts to optimize efficiencies and maximize production may result in a decrease in our operating expenses on a per gallon basis. The increase was due primarily to the depreciation of Trading Division assets of approximately $770,000 for the year ended September 30, 2018. However, because these expenses generally do not vary with the level of production at the plant, we expect our operating expenses to remain steadyconsistent with 2018 into and throughout our 20182019 fiscal year.

Our income from operations for the fiscal year ended September 30, 20172018 was approximately 6.00%3.2% of our revenues compared to operating income of approximately 6.20%6.0% of revenues for the same period in 2016.2017. The decrease in operating income for the fiscal year ended September 30, 20172018 was primarily the result of decreased ethanol prices relative to the cost of corn.

We had other expense of approximately 0.14%0.3% of revenues for the fiscal year ended September 30, 20172018 compared to other income of approximately 0.06%0.1% of revenues for the same period in 2016.2017. This increase in other expense for the fiscal year ended September 30, 2017,2018, was primarily due to drawing additional funds on our debt facilities which increased our interest expense for our fiscal year ended September 30, 2017.2018.

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 fiscal years ended September 30, 20162017 and 2015:2016:

    

OurThe Trading Division began operations at the end of our fourth fiscal quarter of 2017. Although we bought soybeans and entered into forward purchase contracts for soybean purchases and sales, we determined that the Trading Division was not material to our business at September 30, 2017 and therefore, was not a reportable, separate business segment at that time and all operations were included in what is now the ethanol production segment. For the fiscal years ended September 30, 2017 and 2016, revenues from operations come from three primary sources: sales of fuel ethanol, distillers grains and corn oil. The following table shows the sources of our revenue for the fiscal years ended September 30, 20162017 and 2015.

    

Our revenues from ethanol decreasedincreased for our fiscal year ended September 30, 20162017 as compared to our fiscal year ended September 30, 2015.2016. This decreaseincrease in revenues was primarily the result of a decreasean increase in the average price per gallon of ethanol sold for the fiscal year ended September 30, 20162017 as compared to the same period in 2015.2016.

We experienced an increase in ethanol gallons sold of approximately 5.13%4.8% for the fiscal year ended September 30, 20162017 as compared to the same period in 20152016 resulting primarily from increased ethanol production rates.

Our average price per gallon of ethanol sold for the fiscal year ended September 30, 20162017 was approximately 8.86% lower4.2% more than our average price per gallon of ethanol sold for the same period in 2015.2016. Ethanol prices were lowerhigher during the fiscal year ended September 30, 20162017 due in part to higher national ethanol stocks resulting from increased ethanol production. High industry production levels outpaced strong domestic consumption and export demand experienced during the last two quarters of our 2016 fiscal year.which offset increased industry-wide production. In addition, because ethanol prices are typically directionally consistent with changes in corn and energy prices, lower corn, crude oil and gasoline prices throughoutduring the 2016 fiscal year had a negative affect on ethanol prices.prices for that period.

Our revenues from distillers grains decreased in the fiscal year ended September 30, 20162017 as compared to the same period in 2015.2016. This decrease in revenues iswas primarily the result of a decrease in the average market price per ton of distillers grains sold for the period ended September 30, 20162017 compared to the same period in 2015.2016. The average price per ton of distillers grains sold for the fiscal year ended September 30, 20162017 was approximately 18.99%25.3% lower than the average price per ton of distillers grains

China was historically a significant consumer of exported distillers grains particularly since December of 2014 following the resolution of a dispute related to China's objection to the presence of an unapproved genetically modified organism in some U.S. shipments. However, an anti-dumping investigation began by the Chinese government onin January 12,of 2016 into distillers grains produced in the U.S. andUnited States led to the imposition by China of preliminary anti-dumping and anti-subsidy duties on U.S. imports hadof ethanol produced in the United States in the fall of 2016 and a negative effect on exportfinal ruling imposing even higher duties in January 2017. The investigation and imposition of these duties resulted in a decline in demand from China resulting in lower distillers grains prices.

    

We experienced a decreasean increase of approximately 0.59%1.5% in distillers grains tons sold in the fiscal year ended September 30, 20162017 as compared to the same period in 20152016 due primarily to timing of shipments.

Our revenues from corn oil sales increaseddecreased by approximately 1.31%2.6% in the fiscal year ended September 30, 20162017 as compared to the same period in 20152016 which was primarily a result of an increase in the poundsa decrease of gallons of corn oil sold in the fiscal year ended September 30, 20162017 as compared to the same period in 2015. 2016. We sold approximately 10.3% less corn oil in the fiscal year ended September 30, 2017 as compared to the same period in 2016 due primarily to decreased oil extraction rates per bushel of corn, which was primarily attributed to the the quality of corn purchased.

The average price per pound of corn oil was approximately 3.70% lower7.7% higher for the fiscal year ended September 30, 20162017 as compared to the same period in 20152016 due primarily to increased local supplies and decreasedhigher demand from the biodiesel industry which is traditionally one of the largest markets for corn oil. Corn oil prices were low during our first fiscal quarter but then gradually increased throughout muchof 2017 and from the feed industry during our second fiscal quarter of 2017 which positively impacted the market price of corn oil. However, corn oil demand was lower during the last half of our fiscal year.

Our cost of goods sold of the Ethanol Division as a percentage of its revenues was approximately 91.5% for the fiscal year ended September 30, 20162017 as compared to approximately 82.0%91.5% for the same period in 2015. This increase in2016. While the cost of goods sold as a percentagewas virtually the same in 2017 and 2016, the total cost of revenues wasgoods sold increased from $204,015,000 in 2016 to $209,138,000 in 2017. This dichotomy arose from the result of decreased ethanol prices relative toincreased production in 2017 over 2016 and because the price of corn fordecreased by 1.6%. Another contributor was the fiscal year ended September 30, 2016 asprice of natural gas, which increased 19.2% in 2017 compared to the same period in 2015. Our two largest costs of production are corn and natural gas. Cost of goods sold also includes net gains or losses from derivatives related to commodities purchased.2016.

Our largest cost associated with the production of ethanol, distillers grains and corn oil is corn cost. During the fiscal year ended September 30, 2016,2017, we used approximately 2.07%3.4% more bushels of corn to produce our ethanol, distillers grain and corn oil as compared to the same period in 2015.2016. More bushels were used in production because we produced more gallons of ethanol during the fiscal year ended September 30, 20162017 compared to the same period in 2015.2016. During the fiscal year ended September 30, 2016,2017, our average price paid per bushel of corn decreasedincreased approximately 9.23%1.6% as compared to the same period in 2015. Corn prices trended lower most of our 2016 fiscal year due primarily to a plentiful 2015 harvest and an increase in national corn stocks. However, corn prices became more volatile and fluctuated throughout our last fiscal quarter as there were somemarket concerns over the 2016 crop due to a lack of rain during the critical pollination stage in the local areas surroundinglate spring and early summer months about wet conditions in our plant.area of the corn belt. Better growing conditions in July and August relieved those concerns but the higher prices earlier caused the average annual price to be higher.

Our natural gas cost was lowerhigher during our fiscal year ended September 30, 20162017 as compared to the fiscal year ended September 30, 2015.2016. This decreaseincrease in the cost of natural gas for the fiscal year ended September 30, 20162017 as compared to the same period in 20152016 was primarily the result of a decreasean increase of approximately 28.18%19.2% in the average price per MMBTU of natural gas due to plentiful supply.lower production and increased demand which used up natural gas stocks built up in 2015. We also used approximately 6.78%

We enter into hedging instruments to minimize price fluctuations in the prices of our finished products and inputs. As the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our revenues and our cost of goods sold. These commodity-based derivatives are not designated as effective hedges for accounting purposes. Please refer to "Item 7A - Quantitative and Qualitative Disclosures About Market Risk-Commodity Price Risk" for information on our derivatives.

Our operating expenses as a percentage of revenues were approximately 2.34%2.4% and 1.96%2.3% for the fiscal years ended September 30, 20162017 and 2015,2016, respectively. Operating expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees and other general administrative costs.

Our income from operations for the fiscal year ended September 30, 20162017 was approximately 6.12%6.0% of our revenues compared to operating income of approximately 16.07%6.2% of revenues for the same period in 2015.2016. The decrease in operating income for the fiscal year ended September 30, 20162017 was primarily the result of decreased ethanol prices relative to the cost of corn.

We had other expense of approximately 0.06%0.1% of revenues for the fiscal year ended September 30, 20162017 compared to other income of approximately 0.02%0.1% of revenues for the same period in 2015.2016. This increase in other expense for the fiscal year ended September 30, 2016,2017, was primarily due to drawing additional funds on our Declining Notedebt facilities which increased our interest expense for our fiscal year ended September 30, 2016.2017.

The following table highlights the changes in our financial condition for the fiscal years ended September 30, 20172018 and 2016:

We experienced an increasea decrease in our current assets at September 30, 20172018 as compared to September 30, 2016.2017. This increasedecrease was primarily driven by an increasea decrease in our grain inventoriestrade accounts receivable at September 30, 20172018 compared to September 30, 20162017 because of the harvest began earlier and because we began operations ofshorter payment terms under the amended marketing agreement with our new Trading Division and were holding soybeans for sale. Our trade accounts receivable increasedethanol marketer.

We experienced a decrease in our current liabilities at September 30, 2018 compared to September 30, 2017. This decrease is primarily due to ethanol revenues and the timinglower current portion of shipments before fiscal year end. We also experiencedlong-term debt at September 30, 2018 as compared to September 30, 2017 which resulted from paying the outstanding balance of the Term Loan in August 2018. This decrease was partially offset by an increase in our commodity derivative instruments and miscellaneous receivablesinstrument liability positions at September 30, 2017 compared to September 30, 2016 due to the volume of corn and soybean purchases that were hedged at September 30, 2017.2018.

We experienced an increase in our total current liabilities at September 30, 2017 compared to September 30, 2016. The increase is primarily due to an increase in our grain accounts payable at September 30, 2017 as compared to September 30, 2016 due to the earlier harvest and building a soybean inventory using producer credit. We also experienced an increase in trade accounts payable due to the timing of capital expenditures and natural gas invoices and an increase in our current maturities of long-term debt at September 30, 2017 as compared to September 30, 2016 because of the additional debt incurred for construction of the grain receiving and loading facility for our Trading Division.

Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash from our operations to continue to operate the ethanol plant for the next 12 months. We do not anticipate seeking additional equity financing during our 20182019 fiscal year. However, should we experience unfavorable operating

    

The following table shows cash flows for the fiscal year ended September 30, 2017 and 2016:

We experienced a decrease in our cash flow from operations for the fiscal year ended September 30, 2017 as compared to the same period in 2016. This decrease was primarily the result of decreased ethanol and distillers grain prices relative to the cost of corn and the impact these prices had on inventory and other working capital components for the fiscal year ended September 30, 2017 as compared with the same period in 2016.

We used more cash in investing activities for the fiscal year ended September 30, 2017 as compared to the same period in 2016. This decreaseincrease was primarily the result of an increase in payments for construction in progress due to construction of the grain receiving and loading facility for our Trading Division.

    

The interest rate on the Term Loan iswas formerly based on the 3-month London Interbank Offered Rate ("LIBOR") plus two hundred ninety basis points. The interest rate at September 30, 2017 was 4.20%. The Term Loan requiresrequired monthly installment payments of approximately $282,700 commencing on September 1, 2016, with a final maturity date of February 28, 2021. ThereThe outstanding balance on the Term Loan was repaid in August 2018 and as such, there was $0 outstanding on September 30, 2018 and approximately $11,856,000 outstanding on the Term Loan at September 30, 2017 and approximately $14,820,000 outstanding on the Term Loan at September 30, 2016.2017.

    

The maximum availability of the Declining Loan is $5,000,000 with such amount to be available for working capital purposes. The interest rate on the Declining Loan is based on the 3-month LIBOR plus two hundred ninety basis points. The interest rate at September 30, 20172018 was 4.20%5.24%. There was no borrowings outstanding on the Declining Loan at September 30, 20172018 or September 30, 2016.

    

The Revolving Credit Loan has a limit of $15,000,000 supported by a borrowing base made up of our corn, ethanol, dried distillers grain and corn oil inventories reduced by accounts payable associated with those inventories having a priority over FNBO. It is also supported by the eligible accounts receivable and commodity trading account excess margin funds. The interest rate on the Revolving Credit Loan is the 1-month LIBOR plus two hundred ninety basis points. The interest rate at September 30, 20172018 was 4.14%5.01%. There were no borrowings outstanding on the Revolving Credit Loan at September 30, 20172018 or September 30, 2016.2017.

The ConstructionGrain Loadout Facility Loan (formerly construction loan) has a limit of $10,000,000. The interest rate on the ConstructionGrain Loadout Facility Loan is based on the 3-month LIBOR plus two hundred ninety basis points and at September 30, 20172018 was 4.22%5.23%. There were borrowings in the amount of approximately $8,743,000 outstanding on the Grain Loadout Facility Loan at September 30, 2018 and $6,476,000 outstanding on the ConstructionGrain Loadout Facility Loan at September 30, 2017 and no borrowings outstanding2017. The principal balance on the Construction Loan at September 30, 2016.of $10,000,000 was converted to term debt effective December 31, 2017. The Grain Loadout Facility Loan

    

During the term of the loans, we will be subject to certain financial covenants. Our minimum working capital is $15,000,000, which is calculated as our current assets plus the amount available for drawing under our long term revolving note, less current liabilities. Our minimum fixed charge coverage ratio is no less than 1.15:1.0 measured on a rolling four quarter average basis. However, for any reporting period, if our working capital is equal to or more than $25,000,000, we will be subject to maintaining a debt service charge coverage ratio of no less than 1.25:1.0 in lieu of the fixed charge coverage ratio.

Our loan agreement also requires us to obtain prior approval from our lender before making, or committing to make, capital expenditures exceeding an aggregate amount of $5,000,000 in any single fiscal year except for the 2017 fiscal year when we were allowed $7,000,000 of expenditures without prior approval excluding the grain loading and receiving project from the calculation.$5,000,000.

In October 2006, the real estate on which our plant was constructed was determined to be an economic revitalization area, which qualified us for tax abatement. The abatement period is for a ten year term, with an effective date beginning calendar year end 2009 for the property taxes payable in calendar year 2010. The program allows for 100% abatement of property taxes beginning in year 1, and then decreases on a ratable scale so that in year 11 the full amount of property taxes are due and payable. We must apply annually and meet specified criteria to qualify for the abatement program.

 

The long-term debt obligations in the table above include both estimated principal and interest payments applicable to the obligations incurred as a result of the borrowings against the Term Loan for our expansion projects (discussed above). The operating lease obligations in the table above include our hopper and tank railcars and forklift lease obligations as of September 30, 2017.2018. Purchase obligations consist of forward contracted corn and soybean deliveries and forward contracted natural gas purchases.