UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
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| For quarterly period ended April 30, 2007 |
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| Transition report pursuant to Section 13 or 15(d) of the Exchange Act of 1934. |
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| For the transition period from to . |
COMMISSION FILE NUMBER 000-51177
GOLDEN GRAIN ENERGY, L.L.C.
(Exact name of registrant as specified in its charter)
Iowa |
| 02-5075361 |
(State or other jurisdiction of |
| (I.R.S. Employer Identification No.) |
1822 43rd Street SW, Mason City, Iowa 50401
(Address of principal executive offices)
(641) 423-8525
(Issuer’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) o Yes x No
Indicate the number of shares outstanding for each of the issuer’s classes of common equity as of the latest practicable date:
As of June 1, 2007, there were 23,540,000 Class A membership units outstanding and 920,000 Class B membership units outstanding.
INDEX
| Page No. |
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PART I. FINANCIAL INFORMATION |
| 3 |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
| 14 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
| 24 |
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Item 4. Controls and Procedures |
| 25 |
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PART II. OTHER INFORMATION |
| 26 |
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Item 1. Legal Proceedings |
| 26 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
| 27 |
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Item 3. Defaults Upon Senior Securities |
| 27 |
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Item 4. Submission of Matters to a Vote of Security Holders |
| 27 |
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Item 5. Other Information |
| 28 |
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Item 6. Exhibits and Reports on Form 8-K |
| 28 |
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SIGNATURES |
| 28 |
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2
PART I. FINANCIAL INFORMATION
GOLDEN GRAIN ENERGY, LLC
Balance Sheets
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| April 30, 2007 |
| October 31, 2006 |
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ASSETS |
| (Unaudited) |
| (Audited) |
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Current Assets |
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Cash and equivalents |
| $ | 973,160 |
| $ | 9,066,754 |
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Accounts receivable |
| 4,661,753 |
| 6,710,083 |
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Other receivables |
| 1,089,142 |
| 262,735 |
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Derivative instruments |
| — |
| 3,277,805 |
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Due from broker |
| 1,975,063 |
| — |
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Inventory |
| 2,094,724 |
| 1,879,566 |
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Prepaid expenses and other |
| 788,373 |
| 562,156 |
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Total current assets |
| 11,582,215 |
| 21,759,099 |
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Property and Equipment |
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Land and land improvements |
| 4,677,595 |
| 3,896,431 |
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Building and grounds |
| 14,688,492 |
| 4,688,492 |
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Grain handling equipment |
| 6,781,593 |
| 6,361,338 |
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Office equipment |
| 263,343 |
| 263,343 |
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Plant and process equipment |
| 27,971,828 |
| 27,686,926 |
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Construction in progress |
| 42,961,964 |
| 21,368,240 |
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| 97,344,815 |
| 74,264,770 |
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Less accumulated depreciation |
| 9,498,893 |
| 7,496,591 |
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Net property and equipment |
| 87,845,922 |
| 66,768,179 |
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Other Assets |
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Restricted cash |
| 4,172,613 |
| 4,086,351 |
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Investments |
| 9,977,178 |
| 4,872,321 |
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Grant receivable, net of current portion |
| 2,342,087 |
| — |
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Debt issuance costs, net of accumulated amortization (2007 $276,311; 2006 $179,981) |
| 572,157 |
| 460,142 |
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Total other assets |
| 17,064,035 |
| 9,418,814 |
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Total Assets |
| $ | 116,492,172 |
| $ | 97,946,092 |
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Notes to Financial Statements are an integral part of this Statement.
3
GOLDEN GRAIN ENERGY, LLC
Balance Sheets
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| April 30, 2007 |
| October 31, 2006 |
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LIABILITIES AND MEMBERS’ EQUITY |
| (Unaudited) |
| (Audited) |
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Current Liabilities |
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Current portion long-term debt |
| 2,760,350 |
| 5,490,584 |
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Accounts payable |
| 7,881,049 |
| 6,666,119 |
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Accrued expenses |
| 679,304 |
| 569,270 |
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Derivative instruments |
| 757,988 |
| — |
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Deferred revenue |
| 357,813 |
| — |
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Total current liabilities |
| 12,436,504 |
| 12,725,973 |
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Long-term Liabilities |
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Deferred compensation |
| 99,470 |
| 51,395 |
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Long-term debt, net of current maturities |
| 35,751,748 |
| 10,353,822 |
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Deferred revenue, net of current portion |
| 2,312,270 |
| — |
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Total long-term liabilities |
| 38,163,488 |
| 10,405,217 |
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Commitments and Contingencies |
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Members’ Equity |
| 65,892,180 |
| 74,814,902 |
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Total Liabilities and Members’ Equity |
| $ | 116,492,172 |
| $ | 97,946,092 |
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Notes to Financial Statements are an integral part of this Statement.
4
GOLDEN GRAIN ENERGY, LLC
Statements of Operations
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| Three Months Ended |
| Three Months Ended |
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| April 30, 2007 |
| April 30, 2006 |
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| (Unaudited) |
| (Unaudited) |
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Revenues |
| $ | 33,721,324 |
| $ | 26,352,327 |
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Cost of Goods Sold |
| 29,546,527 |
| 16,000,525 |
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Gross Profit |
| 4,174,797 |
| 10,351,802 |
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Operating Expenses |
| 756,487 |
| 369,240 |
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Operating Income |
| 3,418,310 |
| 9,982,562 |
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Other Income (Expense) |
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Interest income |
| 54,615 |
| 86,384 |
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Interest expense |
| (8,993 | ) | (465,592 | ) | ||
CCC Bioenergy income |
| — |
| 8,038 |
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Equity in net income of investments |
| 89,857 |
| — |
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Total |
| 135,479 |
| (371,170 | ) | ||
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Net Income |
| $ | 3,553,789 |
| $ | 9,611,392 |
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Net Income Per Unit (24,460,000 and 24,560,000 weighted average units outstanding, respectively) |
| $ | 0.15 |
| $ | 0.39 |
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Distributions Per Unit |
| $ | — |
| $ | — |
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Notes to Financial Statements are an integral part of this Statement.
5
GOLDEN GRAIN ENERGY, LLC
Statements of Operations
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| Six Months Ended |
| Six Months Ended |
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| April 30, 2007 |
| April 30, 2006 |
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| (Unaudited) |
| (Unaudited) |
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Revenues |
| $ | 66,512,351 |
| $ | 43,862,643 |
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Cost of Goods Sold |
| 52,117,737 |
| 32,390,678 |
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Gross Profit |
| 14,394,614 |
| 11,471,965 |
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Operating Expenses |
| 1,474,138 |
| 1,139,278 |
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Operating Income |
| 12,920,476 |
| 10,332,687 |
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Other Income (Expense) |
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Interest income |
| 139,552 |
| 176,726 |
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Interest expense |
| (58,607 | ) | (856,127 | ) | ||
CCC Bioenergy income |
| — |
| 194,193 |
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Grant income |
| — |
| 150,000 |
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Equity in net income of investments |
| 89,857 |
| — |
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Total |
| 170,802 |
| (335,208 | ) | ||
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Net Income |
| $ | 13,091,278 |
| $ | 9,997,479 |
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Basic & diluted net income per unit (24,460,000 and 25,600,000 weighted average units outstanding, respectively) |
| $ | 0.54 |
| $ | 0.39 |
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Distributions Per Unit |
| $ | 0.90 |
| $ | 0.10 |
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Notes to Financial Statements are an integral part of this Statement.
6
GOLDEN GRAIN ENERGY, LLC
Statements of Cash Flows
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| Six Months Ended |
| Six Months Ended |
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| April 30, 2007 |
| April 30, 2006 |
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| (Unaudited) |
| (Unaudited) |
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Cash Flows from Operating Activities |
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Net income |
| $ | 13,091,278 |
| $ | 9,997,479 |
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Adjustments to reconcile net income to net cash from operations: |
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Depreciation and amortization |
| 2,072,086 |
| 2,011,866 |
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Unrealized loss (gain) on risk management activities |
| 4,035,793 |
| 1,673,420 |
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Amortization of deferred revenue |
| (13,315 | ) | — |
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Undistributed (earnings) from investments |
| (89,857 | ) | — |
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Deferred compensation expense |
| 48,075 |
| 6,825 |
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Change in assets and liabilities |
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Accounts receivable |
| 2,048,330 |
| (254,668 | ) | ||
Inventory |
| (215,158 | ) | (185,916 | ) | ||
Due from broker |
| (1,975,063 | ) | — |
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Prepaid expenses and other |
| (711,313 | ) | 2,500,126 |
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Accounts payable |
| 1,214,930 |
| 2,521,256 |
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Accrued expenses |
| 110,034 |
| (70,332 | ) | ||
Net cash provided by operating activities |
| 19,615,820 |
| 18,200,056 |
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Cash Flows from Investing Activities |
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Capital expenditures |
| (22,810,776 | ) | (710,214 | ) | ||
Increase in restricted cash |
| (86,262 | ) | (1,214,642 | ) | ||
Increase in cash for investing activities |
| — |
| (3,400,000 | ) | ||
Purchase of investment |
| (5,015,000 | ) | (830,486 | ) | ||
Net cash (used in) investing activities |
| (27,912,038 | ) | (6,155,342 | ) | ||
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Cash Flows from Financing Activities |
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Capital expenditure grant received |
| — |
| 102,647 |
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Payments for long-term debt |
| (4,375,031 | ) | (6,038,738 | ) | ||
Proceeds from long-term debt |
| 26,800,000 |
| 3,975,000 |
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Redemption of membership units |
| — |
| (7,875,000 | ) | ||
Distribution to members |
| (22,014,000 | ) | (2,759,640 | ) | ||
Payments for construction retainage payable |
| — |
| (250,000 | ) | ||
Payments for debt issuance costs |
| (208,345 | ) | (172,254 | ) | ||
Net cash provided by (used in) in financing activities |
| 202,624 |
| (13,017,985 | ) | ||
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Net (Decrease) in Cash and Equivalents |
| (8,093,594 | ) | (973,271 | ) | ||
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Cash and Equivalents — Beginning of Period |
| 9,066,754 |
| 8,138,121 |
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Cash and Equivalents — End of Period |
| $ | 973,160 |
| $ | 7,164,850 |
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Notes to Financial Statements are an integral part of this Statement.
7
GOLDEN GRAIN ENERGY, LLC
Statements of Cash Flows
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| Six Months Ended |
| Six Months Ended |
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| April 30, 2007 |
| April 30, 2006 |
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| (Unaudited) |
| (Unaudited) |
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Supplemental Cash Flow Information |
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Interest paid (includes $708,615 of capitalized interest for 2007) |
| $ | 820,855 |
| $ | 392,020 |
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Supplemental Disclosure of Noncash Operating, |
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Construction in process in accounts payable |
| $ | 4,404,744 |
| $ | — |
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Land improvement acquired through issuance of note payable |
| $ | 242,723 |
| $ | — |
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Investment acquired through issuance of note payable |
| $ | — |
| $ | 374,514 |
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Deferred revenue received through grant receivable |
| $ | 2,683,398 |
| $ | — |
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Debt issuance costs amortized to construction in process |
| $ | 51,536 |
| $ | — |
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Notes to Financial Statements are an integral part of this Statement.
8
GOLDEN GRAIN ENERGY, LLC
Notes to Financial Statements
(Unaudited)
April 30, 2007
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements for the year ended October 31, 2006, contained in the Company’s annual report on Form 10-KSB for 2006.
In the opinion of management, the interim condensed financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments.
Nature of Business
Golden Grain Energy, LLC, (an Iowa Limited Liability Company) is a 55-60 million gallon annual production ethanol plant near Mason City, Iowa. The Company sells its production of ethanol and distillers grains with solubles primarily in the continental United States. In April 2006, the Company’s began construction to double the production capacity. The expansion will cost approximately $50,700,000, which includes approximately $500,000 of an expected early completion bonus to the contractor.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.
Revenue Recognition
Revenue from the sale of the Company’s products is recognized at the time title to the goods and all risks of ownership transfer to the customers. This generally occurs upon shipment to the customer or when the customer picks up the goods. Collectibility of revenue is reasonably assured based on historical evidence of collectibility between the Company and its customers. Interest income is recognized as earned.
Shipping costs incurred by the Company in the sale of ethanol are not specifically identifiable and as a result, revenue from the sale of ethanol is recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of ethanol related products are included in cost of goods sold.
Grants receivable and deferred revenue
Grants receivables are recorded when the payments to be received can be estimated and when payment is reasonably assured. The Company recorded a grant receivable and corresponding deferred revenue of approximately $2,683,000 for the tax increment financing monies to be received over a 10 year period. These grants were recorded at their net present value using a discount rate of 8%. Related deferred revenue was recorded and is being amortized into income as a reduction of property taxes over the life of the grant. As of April 30, 2007 grant receivable was approximately $2,700,000 and corresponding deferred revenue was approximately $2,670,000.
Investment in commodities contracts, derivative instruments and hedging activities
SFAS No. 133 requires a company to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted from SFAS No. 133 as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements of SFAS No. 133.
9
GOLDEN GRAIN ENERGY, LLC
Notes to Financial Statements
(Unaudited)
April 30, 2007
The Company enters into short-term cash, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. All of the Company’s derivatives are designated as non-hedge derivatives, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.
As part of its trading activity, the Company uses futures and an option contract offered through regulated commodity exchanges to reduce risk and is exposed to risk of loss in the market value of inventories. To reduce that risk, the Company generally takes positions using cash and futures contracts and options.
Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas purchases are included as a component of cost of goods sold and derivative contracts related to ethanol sales are included as a component of revenues in the accompanying financial statements. The fair values of derivative contracts are presented on the accompanying balance sheet as derivative instruments.
Net income per unit
Basic and diluted earnings per unit are computed using the weighted-average number of A and B units outstanding during the period.
Reclassification
Certain items have been reclassified within the 2006 financials statements. The changes do not affect net income or members’ equity but were changed to agree with the classifications used in the April 30, 2007 financial statements.
2. INVENTORY
Inventory consisted of the following:
| April 30, 2007 |
| October 31, 2006 |
| |||
Raw Materials |
| $ | 1,149,111 |
| $ | 1,308,781 |
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Work in Process |
| 523,355 |
| 377,131 |
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Finished Goods |
| 422,258 |
| 193,654 |
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Totals |
| $ | 2,094,724 |
| $ | 1,879,566 |
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3. INVESTMENTS
Investments consisted of the following:
| April 30, 2007 |
| October 31, 2006 |
| |||
RPMG |
| $ | 962,178 |
| $ | 872,321 |
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Absolute Energy, LLC |
| 4,000,000 |
| 4,000,000 |
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Homeland Energy Solutions, LLC |
| 5,000,000 |
| — |
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Ethanol Risk Management SPC, LTD |
| 15,000 |
| — |
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Totals |
| $ | 9,977,178 |
| $ | 4,872,321 |
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4. BANK FINANCING AND SUBSEQUENT EVENT
On November 14, 2006, the Company entered into a Master Amended and Restated Credit Agreement for a $77,000,000 comprehensive credit agreement. Under this agreement the company has a line of credit through October 2007 with available borrowings up to $15,000,000 and then decreases each year until the line of credit’s maturity date of August 1, 2017. Interest on the line of credit is charged at the prime rate plus a rate based on the ratio of the Company’s total indebtedness to its tangible net worth (8.25% at April 30, 2007). As of April 30, 2007 there was $11,800,000 outstanding on the line of credit.
10
GOLDEN GRAIN ENERGY, LLC
Notes to Financial Statements
(Unaudited)
April 30, 2007
In addition to the line of credit, the Company restructured its term loan from the original agreement and entered into a term loan to finance the Company’s expansion project as part of the Master Amended and Restated Credit Agreement. The original loan has a balance outstanding of approximately $11,207,000 at April 30, 2007 and carries a maximum interest rate of 8% prior to April 1, 2008 and a maximum of 10% thereafter. The expansion term loan is for up to $30,000,000 with an interest rate that remains variable until such time as the Company selects to convert it to a fixed rate based on prime minus a rate based on the ratio of the Company’s debt to tangible net worth (8.25% at April 30, 2007). The loan matures August 1, 2017 and has $15,000,000 outstanding as of April 30, 2007.
Borrowings under the Master Amended and Restated Credit Agreement are secured by substantially all of the assets of the Company. The Company has restrictive covenants including, but not limited to, requiring minimum ratios and limitations on distributions. Restrictions limit distributions to 65% of net income, provided certain financial ratios are maintained and require the Company to maintain a restricted cash account until the original amount of the loan issued under the original term loan matures or is paid off.
As of April 30, 2007 the Company was in compliance with all related covenants.
As of April 30, 2007 the Company has other notes payable outstanding of approximately $506,000.
5. MEMBERS’ EQUITY
As specified in the Company’s operating agreement, the Company has two classes of membership units. Class B units were issued upon the initial capitalization of the Company; all other units issued in the registered Offering were Class A units. The Company is authorized to issue up to 100,000,000 membership units, without respect to class. No additional units may be issued for less than $.50 per unit without the consent of the majority membership units then outstanding. Class A and B units have equal rights except for certain priority allocations to Class B members in the event of dissolution. As of April 30, 2007 and October 31, 2006 the Company had 23,540,000 Class A membership units issued and outstanding and 920,000 Class B membership units issued and outstanding.
6. RELATED PARTY TRANSACTIONS
There are two members of the Company’s Board of Directors that own or manage elevators from which corn and miscellaneous materials are purchased. Purchases during the three and six months ended April 30, 2007 from these companies totaled approximately $9,014,000 and $14,766,000 respectively. For the three and six months ended April 30, 2006 purchases from these companies totaled approximately $5,634,000 and $8,840,000, respectively.
As of April 30, 2007, the Company has approximately $3,764,000 in payables to its contractor, who is also a member, for the construction of the plant expansion. There was no payable as of April 30, 2006.
7. EMPLOYEE BENEFIT PLANS
During 2006, the Company adopted a deferred compensation plan for certain employees equal to 1% of net income with a five year vesting schedule. During the three and six months ended April 30, 2007 the Company recorded approximately $24,000 and $48,000, respectively, as compensation expense related to this plan. During the three and six months ended April 30, 2006 the Company recorded approximately $8,000 and $11,000, respectively, as compensation expense. At April 30, 2007 the Company has approximately $404,000 to be recognized as compensation expense over the remaining vesting period. The amount to be recognized in future years as compensation expense is based on the fair value of the Company’s member units as of April 30, 2007. At April 30, 2007, the Company had approximately 7,300 vested and 71,000 unvested equivalent units outstanding under this plan.
11
GOLDEN GRAIN ENERGY, LLC
Notes to Financial Statements
(Unaudited)
April 30, 2007
8. SELF-INSURANCE
The Company participates in a captive reinsurance company (Captive). The Captive reinsures losses related to workman’s compensation, commercial property and general liability. Premiums are accrued by a charge to income for the period to which the premium relates and is remitted by our insurer to the captive reinsurer. The Captive reinsures catastrophic losses in excess of a predetermined amount. The Company’s premiums are structured such that the Company has made a prepaid collateral deposit estimated for losses related to the above coverage. The Captive insurer has estimated and collected an amount in excess of the estimated losses but less than the catastrophic loss limit insured by the Captive. The Company can not be assessed over the amount in the collateral fund.
9. COMMITMENTS, CONTINGENCIES AND AGREEMENTS
Ethanol marketing agreement and major customers
The Company has entered into a marketing agreement with a marketing company, in which the Company has an investment, for the exclusive rights to market, sell and distribute the entire ethanol inventory produced by the Company. The Company paid approximately $38,000 and $76,000 in marketing fees for the three and six months ended April 30, 2007 and $35,000 and $90,000 for the three and six months ended April 30, 2006, respectively. The marketing fees are included in revenues.
The Company sells 100% of its ethanol product under this marketing agreement. During the three and six months ended April 30, 2007, net sales to that customer were approximately $30,173,000 and $59,675,000, respectively. Net sales to that customer for the three and six months ended April 30, 2006 were approximately $25,003,000 and $44,982,000 respectively. At April 30, 2007 amounts due from this customer included in receivables was approximately $4,282,000.
Distiller grain marketing agreement and major customer
The Company has entered into a marketing agreement with an international marketing company for the exclusive rights to market all of the distiller grains produced by the Company. The agreement extends till either party gives a minimum of 120 day notice. The Company paid approximately $74,000 and $136,000 in marketing fees for the three and six months ended April 30, 2007 and $52,000 and $109,000 for the three and six months ended April 30, 2006, respectively. The marketing fees are included in revenues.
The Company sells 100% of its distiller’s grain product under this marketing agreement. During the three and six months ended April 30, 2007, net sales to that customer were approximately $3,586,000 and $6,913,000, respectively. Net sales to that customer for the three and six months ended April 30, 2006 were $2,612,000 and $5,163,000, respectively. At April 30, 2007, amounts due from this customer included in receivables was approximately $379,000.
Process Improvement
The Company has a process improvement contract with a total estimated cost of $877,000 of which approximately $278,000 has been incurred through April 30, 2007. The project is estimated to be completed in August 2007.
Grain Storage
In December 2005, the Company entered into an agreement with an unrelated party to construct a 375,000 bushel bin for corn storage. Project costs through April 30, 2007 were approximately $760,000 and are estimated to total approximately $810,000. The project is estimated to be completed in June 2007.
Plant Expansion
The Company started construction on a plant expansion in April, 2006. A design build contract with a member was executed in June 2006. Project costs through April 30, 2007 were approximately $42.4 million and are expected to total approximately $50,700,000 million, which includes approximately $500,000 of an early completion bonus expected to be paid the contractor. The majority of the plant expansion cost will be paid to a contractor who is also a member.
12
GOLDEN GRAIN ENERGY, LLC
Notes to Financial Statements
(Unaudited)
April 30, 2007
10. RISK MANAGEMENT
The Company’s activities expose it to a variety of market risks, including the effects of changes in commodity prices. These financial exposures are monitored and managed by the Company as an integral part of its overall risk-management program. The Company’s risk management program focuses on the unpredictability of financial and commodities markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.
To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange traded futures contracts to reduce its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts and uses exchange traded futures contracts to reduce price risk. Exchange-traded futures contracts are valued at market price. Changes in market price related to purchases of corn and natural gas are recorded in cost of goods sold and changes in market prices related to sale of ethanol are recorded in revenues. At April 30, 2007, the fair value of derivative liabilities of approximately $758,000 is classified as derivative instruments on the balance sheet. Net realized and unrealized gains (losses) included in costs of goods sold for the three and six months ended April 30, 2007 were approximately $(2,564,000) and $(57,000), respectively, as related to purchase contracts. At October 31, 2006, the fair value of derivative assets of approximately $3,272,000 is classified as derivative instruments on the balance sheet. Net realized and unrealized gains (losses) included in costs of goods sold for the three and six months ended April 30, 2006 were approximately $967,000 and $1,427,000 related to the purchase contracts and net realized and unrealized (losses) included in sales of $(1,262,000) and $(6,283,000) contracts related to sales contracts, respectively. The Company has partially hedged their exposure with forward and futures contracts related to corn through March 2008. Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed “normal purchases and normal sales” under FASB Statement No. 133, as amended and, therefore, are not marked to market in the Company’s financial statements. At April 30, 2007, the Company had outstanding commitments to purchase approximately $623,000 of natural gas through June 2007, $45,448,000 of corn through January 2008, of which approximately $31,727,000 is with related parties, and $311,000 for denaturant through May 2007 under forward contracts, in which the related commodity had not been delivered. The Company has also entered into basis contracts for approximately 2,834,000 gallons of denaturant through December 2007 verses the Reformulated Gasoline Blend stock for Oxygen Blended (RBOB) Futures.
13
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward Looking Statements
This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “may,” “will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties, including, but not limited to those listed below and those business risks and factors described elsewhere in this report and our other Securities and Exchange Commission filings.
· Changes in the availability and price of corn;
· Ethanol supply in excess of demand;
· Our ability to implement our expansion plans;
· Changes in the environmental regulations that apply to our plant operations or plant expansion;
· Changes in our business strategy, capital improvements or development plans;
· Changes in plant production capacity or technical difficulties in operating the plant;
· Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;
· Lack of transport, storage and blending infrastructure preventing ethanol from reaching high demand markets;
· Changes in federal and/or state laws (including the elimination of any federal and/or state ethanol tax incentives);
· Changes and advances in ethanol production technology;
· Additional ethanol plants built in close proximity to our ethanol facility in north central Iowa;
· Competition from alternative fuel additives;
· Changes in petroleum prices;
· Our ability to generate free cash flow to invest in our business and service our debt; and
· Our ability to retain key employees and maintain labor relations.
Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in this report. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future
14
results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.
Overview
Golden Grain Energy, LLC was formed as an Iowa limited liability company on March 18, 2002, for the purpose of constructing, owning and operating a fuel-grade ethanol plant near Mason City in north central Iowa. Since December 2004, we have been engaged in the production of ethanol and distillers grains at the plant. Our plant currently produces approximately 60 million gallons of ethanol per year. Our revenues are derived primarily from the sale and distribution of our ethanol and distillers grains throughout the continental United States.
We are currently nearing completion of an expansion of our ethanol plant. We are adding capacity to produce an additional approximately 40 to 50 million gallons of ethanol per year. We anticipate that the expansion project will be complete in June 2007. We expect to add 10 full time employees once the expansion is fully operational. We expect to fund our operations during the next 12 months using cash flow from our continuing operations and our credit facilities.
We are subject to industry-wide factors that affect our operating and financial performance. These factors include, but are not limited to, the available supply and cost of corn from which our ethanol and distillers grains are produced; the cost of natural gas, which we use in the production process; the market selling price of our ethanol and distillers grains; dependence on our ethanol marketer and distillers grains marketer to market and distribute our products; the intensely competitive nature of the ethanol industry; possible legislation at the federal, state and/or local level; changes in federal ethanol tax incentives and the cost of complying with extensive environmental laws that regulate our industry.
Our two largest costs of production, over which we have no control, are corn and natural gas. The cost of corn is affected primarily by supply and demand factors such as crop production, carryout, exports, government policies and programs, risk management and weather. Despite strong corn yields over the last three growing seasons, corn prices have risen due in part to additional demand from the ethanol industry. As more ethanol production capacity comes online, we expect the price of corn to continue to rise. Natural gas prices fluctuate with the energy complex in general. Over the last few years, natural gas prices have trended higher than average and it appears prices will continue to trend higher due to the high price of alternative fuels such as fuel oil.
Results of Operations for the Three Months Ended April 30, 2007 and 2006
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the three months ended April 30, 2007 and 2006:
| Three Months Ended |
| Three Months Ended |
| |||||||
Income Statement Data |
| Amount |
| % |
| Amount |
| % |
| ||
Revenues |
| $ | 33,721,324 |
| 100.00 |
| $ | 26,352,327 |
| 100.0 |
|
|
|
|
|
|
|
|
|
|
| ||
Cost of Goods Sold |
| $ | 29,546,527 |
| 87.6 |
| $ | 16,000,525 |
| 60.7 |
|
|
|
|
|
|
|
|
|
|
| ||
Gross Profit |
| $ | 4,174,797 |
| 12.4 |
| $ | 10,351,802 |
| 39.3 |
|
|
|
|
|
|
|
|
|
|
| ||
Operating Expenses |
| $ | 756,487 |
| 2.2 |
| $ | 369,240 |
| 1.4 |
|
|
|
|
|
|
|
|
|
|
| ||
Operating Income |
| $ | 3,418,310 |
| 10.1 |
| $ | 9,982,562 |
| 37.9 |
|
|
|
|
|
|
|
|
|
|
| ||
Other Income (Expense) |
| $ | 135,479 |
| 0.4 |
| $ | (371,170 | ) | (1.4 | ) |
|
|
|
|
|
|
|
|
|
| ||
Net Income |
| $ | 3,553,789 |
| 10.5 |
| $ | 9,611,392 |
| 36.5 |
|
15
Revenues. Revenues from operations for the three month period ended April 30, 2007 totaled approximately $33,721,000 resulting from the sale of ethanol and distillers grains. In the three month period ended April 30, 2007, ethanol comprised approximately 90% of our sales and DDGS comprised approximately 10% percent of our sales. Revenues were significantly higher for the fiscal quarter ended April 30, 2007, compared to the same period of 2006 due to both an increase in the average selling price for the ethanol we sold as well as increased production of ethanol and distillers grains by our plant. The average price we received for our ethanol increased approximately 9% for the second fiscal quarter of 2007 as compared to the same period of 2006. For the three months ended April 30, 2007, our ethanol production increased by approximately 11% as compared to the same period of 2006. In addition, revenues for the quarter ended April 30, 2007 were not decreased from a loss on derivative instruments compared to a loss of approximately $1,262,000 for the same period of 2006.
The price we received for our distillers grains increased approximately 20% in the fiscal quarter ending April 30, 2007 as compared to the same period of 2006. Management expects that distillers grains prices will decrease slightly in the foreseeable future as the supply of distillers grains increases due to increased ethanol production. However, if current high corn prices persist, it may positively affect the price of our distillers grains. Many corn users may substitute distillers grains as feed for livestock which could support distillers grains prices during periods when corn prices are high. The higher prices we receive for our distillers grains somewhat offsets higher prices we pay for corn.
Ethanol prices remained strong during the three month period ending April 30, 2007. Management currently expects ethanol prices to remain higher in the short-term as compared to historical averages. Management believes the industry will need to continue to grow demand in order to sustain price levels above historical averages on a long-term basis. According to the Renewable Fuels Association, as of May 22, 2007, there were 120 ethanol plants in operation nationwide with the capacity to produce nearly 6.2 billion gallons of ethanol annually. An additional 77 new plants and eight expansions are currently under construction, which will add an additional estimated 6.4 billion gallons of annual production capacity. Unless the new supply is equally met with demand, downward pressure on ethanol prices could occur. If ethanol prices start to decline, our earnings will decline in the process, especially if corn costs remain high.
Our revenues and profits are impacted by federal ethanol supports and tax incentives, such as the VEETC blending credit and the RFS. Changes to these supports or incentives could significantly impact demand for ethanol. The passage of the Volumetric Ethanol Excise Tax Credit (“VEETC”) is expected to provide the flexibility necessary to expand ethanol blending into higher blends of ethanol such as E85. The most recent ethanol supports are contained in the Energy Policy Act of 2005. Most notably, the Act creates a Renewable Fuels Standard (“RFS”) which was designed to favorably impact the ethanol industry by enhancing both the production and use of ethanol. 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 requires the fuel refining industry as a whole to use 4 billion gallons of renewable fuels in 2006, increasing to 7.5 billion gallons by 2012. The RFS requirement for 2007 is approximately 4.5 billion gallons of renewable fuels.
In April 2007, the EPA adopted a final rule that fully implements the RFS requirement. In addition to fully implementing the RFS requirement, the rule creates a credit trading program that is designed to allow the fuel refining industry as a whole to meet the RFS requirement in the most cost effective manner possible. The credit trading program allows refiners who blend more renewable fuels than they are required to sell credits to refiners who blend less renewable fuels than they are required. This credit trading program was designed to decrease any potential burden the RFS might place on small fuel refiners.
In 2006, significantly more ethanol was blended than was required by the RFS. The RFS for 2006 required the blending of 4 billion gallons of renewable fuels. The ethanol industry alone produced nearly 5 billion gallons of ethanol in 2006. For this reason, the RFS likely did not significantly increase demand for ethanol in 2006. Additional demand for ethanol may have come from fuel blenders replacing MTBE with ethanol as the oxygenate in reformulated fuel required for carbon monoxide non-attainment areas in the winter months. If this is the case, we expect it will create some slight seasonality to the demand for ethanol, with increases in demand occurring during the winter months.
16
We depend on our ethanol marketer, Renewable Products Marketing Group (RPMG), to find buyers for our ethanol at commercially reasonable prices. This is increasingly important as the supply of ethanol continues to expand. The ethanol industry is expanding production at a rapid pace such that production capacity in the industry in 2007 is projected to be significantly higher than the 2007 RFS amount. This means the ethanol industry must continue to generate demand for ethanol beyond the minimum floor set by the RFS in order to support current ethanol prices. For this reason, we are highly dependent on RPMG’s ability to market the ethanol we produce in an increasingly crowded ethanol market. A failure by RPMG to market all the ethanol we produce at favorable prices could decrease our profitability.
Demand for ethanol may be further supported if Congress increases the RFS past its current level. In President Bush’s 2007 State of the Union address, the President indicated a desire to increase the RFS to 35 billion gallons by 2017. This would be a significant increase over the current RFS that will reach 7.5 billion gallons by 2012. To date, there has been no action by Congress to increase the RFS. If the RFS were to increase it could significantly increase demand for ethanol and would likely offset some of the increased production capacity that is currently being built in the ethanol industry and the resulting increased ethanol supply.
Demand for ethanol may remain strong as a result of increased consumption of E85 fuel. E85 fuel is a blend of 85% ethanol and 15% gasoline. According to the Energy Information Administration, E85 consumption is projected to increase from a national total of 11 million gallons in 2003 to 47 million gallons in 2025. E85 can be used as an aviation fuel, as reported by the National Corn Growers Association, and as a hydrogen source for fuel cells. According to the Renewable Fuels Association, there are currently more than 5 million flexible fuel vehicles capable of operating on E85 in the United States and automakers such as Ford and General Motors have indicated plans to produce several million more flexible fuel vehicles per year. The National Ethanol Vehicle Coalition reports that there are currently approximately 1,150 retail gasoline stations supplying E85. The number of retail E85 suppliers increases significantly each year, however, this remains a relatively small percentage of the total number of U.S. retail gasoline stations, which is approximately 170,000. As public awareness of ethanol and E-85 increases along with E-85’s increased availability, management anticipates some growth in demand for ethanol.
Due to the current high corn prices, discussion of cellulose based ethanol has recently increased. 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. Currently, production of cellulosic ethanol is in its infancy. It is technology that is as yet unproven on a commercial scale. However, several companies and researchers have commenced pilot projects to study the feasibility of commercially producing cellulosic ethanol. 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, especially if corn prices remain high. Cellulosic ethanol may also capture more government subsidies and assistance than corn based ethanol. This could decrease demand for our product.
Cost of Goods Sold and Gross Profit. Our cost of goods sold from the production of ethanol and distillers grains is primarily made up of raw grains expenses and energy expenses (natural gas and electricity). Our cost of goods sold increased from approximately $16,000,000 for the quarter ending April 30, 2006 to approximately $29,547,000 for the quarter ending April 30, 2007, thus decreasing our gross profit from 39.3% to 12.4% of revenues. This increase is primarily due to an 86% increase in the average price we paid for corn for the three months ended April 30, 2007 compared to the same period of 2006. In addition to an increased average corn price, our corn consumption increased by approximately 14% for the quarter ended April 30, 2007 compared to the same period of 2006. The increased price we paid for corn and our increased corn consumption due to productions increases combined to significantly increase our total corn costs for the second fiscal quarter of 2007 compared to the same period of 2006. This increase in corn costs significantly increased our cost of goods sold for the second quarter of the 2007 fiscal year compared to the same period of 2006. This increase in cost of goods sold for the three months ended April 30, 2007, more than offset our increased revenues. As a result, our gross profit for the three months ended April 30, 2007 decreased by approximately 148% compared to the same period of 2006.
An increase in corn exports as well as sustained domestic usage of corn for ethanol production has supported current high corn prices. Current corn prices remain high, despite a very large corn crop for the 2006 growing season. The most recent USDA statistics show that the 2006 national corn crop was the third largest corn yield on record, following the 2004 and 2005 corn crops respectively. USDA statistics indicate approximately 10.74
17
billion bushels were harvested in 2006 compared to a 2005 national corn crop of 11.11 billion bushels. This slight drop in production along with significant increases in demand both in the domestic market and export market have lead to the current high prices. Additionally, corn is now being viewed as an “energy commodity” as opposed to strictly a “grain commodity” due to increased exposure of ethanol both at the national and international level. This increased exposure has placed upward pressure on corn prices. The increase in the price of corn has a significant and negative impact on our cost of goods sold. Carryout supplies for the 2007 marketing year appear adequate, however, export demand coupled with the growing ethanol demand for corn may reduce carryout and cause corn prices to continue to rise. Any production shortfall during the 2007 growing season will create increased volatility and will likely increase our cost of corn.
In addition to corn, natural gas is an important input to our manufacturing process. We use natural gas to dry our distillers grains products to moisture contents at which they can be stored for longer time periods and transported greater distances than distiller grains with a higher moisture content. This allows us to market our distillers grains to broader livestock markets, including poultry and swine markets primarily in the continental United States.
For the second fiscal quarter of 2007 we experienced a decrease in our cost of goods sold attributed to natural gas as compared to the same period of 2006. The average price we paid for natural gas prices decreased by approximately 25% for the three months ended April 30, 2007 as compared to the same period of 2006. This decrease in our cost of natural gas occurred despite increased consumption of natural gas by our plant due to increased production of ethanol and distillers grains. As we increase our production of ethanol, distillers grains production will also increase resulting in more consumption of natural gas in our distillers grains drying process. Barring any significant change in natural gas supplies, such as from hurricane disruptions in the south-eastern United States, we anticipate that natural gas prices will remain at their current levels or increase slightly through the remaining two fiscal quarters of 2007.
Cost of goods sold includes an increase of approximately $2,564,000 for the three month period ending April 30, 2007 and a decrease of $967,000 for the three month period ending April 30, 2006 related to our corn and natural gas derivative instruments. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn and natural gas in cost of goods sold as the changes occur. As corn and natural gas prices fluctuate, the value of our derivative instruments 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.
Operating Expenses. Operating expenses for the three month period ended April 30, 2007 totaled approximately $756,000. Operating expenses for the three month period ended April 30, 2006, totaled approximately $369,000. The increase in operating expenses from the three month period ended April 30, 2006 to the three month period ended April 30, 2007 was primarily due to an increase in tax filing fees and an increase in consulting fees.
Operating Income. Operating income for the three month period ended April 30, 2007 totaled approximately $3,418,000. Operating income for the three month period ended April 30, 2006, totaled approximately $9,983,000. The significant decrease in operating income for the three months ended April 30, 2007 compared to the same period of 2006 is primarily attributable to high cost of goods sold due to increased corn prices and loss on derivative instruments which significantly affected our cost of goods sold for the three months ended April 30, 2007.
Other Income (Expense). We had other income for the three month period ended April 30, 2007 of approximately $135,000, which occurred as a result of the net effect of interest expense and interest income realized in the second fiscal quarter of 2007 and income from our investments. The majority of our interest expense for the quarter ended April 30, 2007 has been capitalized as part of our expansion project. We had other expenses for the three month period ended April 30, 2006 of approximately $371,000 primarily consisting of the net effect of approximately $466,000 in interest expense and approximately $86,000 interest income.
18
Results of Operations for the Six Months Ended April 30, 2007 and 2006
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the six months ended April 30, 2007 and 2006:
|
| Six Months Ended |
| Six Months Ended |
| ||||||
Income Statement Data |
| Amount |
| % |
| Amount |
| % |
| ||
Revenues |
| $ | 66,512,351 |
| 100.00 |
| $ | 43,862,643 |
| 100.0 |
|
|
|
|
|
|
|
|
|
|
| ||
Cost of Goods Sold |
| $ | 52,117,737 |
| 78.4 |
| $ | 32,390,678 |
| 73.8 |
|
|
|
|
|
|
|
|
|
|
| ||
Gross Profit |
| $ | 14,394,614 |
| 21.6 |
| $ | 11,471,965 |
| 26.2 |
|
|
|
|
|
|
|
|
|
|
| ||
Operating Expenses |
| $ | 1,474,138 |
| 2.2 |
| $ | 1,139,278 |
| 2.6 |
|
|
|
|
|
|
|
|
|
|
| ||
Operating Income |
| $ | 12,920,476 |
| 19.4 |
| $ | 10,332,687 |
| 23.6 |
|
|
|
|
|
|
|
|
|
|
| ||
Other Income (Expense) |
| $ | 170,802 |
| 0.3 |
| $ | (335,208 | ) | (0.8 | ) |
|
|
|
|
|
|
|
|
|
| ||
Net Income |
| $ | 13,091,278 |
| 19.70 |
| $ | 9,997,479 |
| 22.8 |
|
Revenues. The increase in revenues from the six months ended April 30, 2007 compared to the six months ended April 30, 2006 is primarily due to a combination of increased production by the ethanol plant and a higher average selling price for ethanol and distillers grains. We experienced approximately a 14% increase in ethanol production for the six months ended April 30, 2007 compared to the same period of 2006. Additionally, we experienced approximately an 18% increase in the price we received for our ethanol for the six months ended April 30, 2007 compared to the same period of 2006. Along with the increase in ethanol production, we experienced a 18% increase in distillers grains production for the six months ended April 30, 2007 compared to the same period of 2006. Additionally, we experienced approximately a 14% increase in the price we received for our distillers grains for the six months ended April 30, 2007 compared to the same period of 2006.
Cost of Goods Sold. Our cost of goods sold as a percentage of revenues increased by approximately 5% for the six months ended April 30, 2007 as compared to the same period of 2006. This increase in cost of goods sold was due primarily to increased corn costs in the first and second fiscal quarters of 2007 compared to the first six months of 2006 and increased consumption of corn due to increased production of ethanol and distillers grains. The average price we paid for corn for the six months ended April 30, 2007 was approximately 81% higher than the price we paid for the same period of 2006. The increase in our cost of goods sold percentage is directly correlated to the increase in the price we paid for corn and our derivative instrument activity during the six months ended April 30, 2007 as compared to the same period of 2006.
Cost of goods sold includes an increase of approximately $57,000 for the six month period ending April 30, 2007 and a decrease of $1,427,000 for the six month period ending April 30, 2006 related to our corn and natural gas derivative instruments. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn and natural gas in cost of goods sold as the changes occur. As corn and natural gas prices fluctuate, the value of our derivative instruments 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.
Operating Expenses. Our operating expenses as a percentage of revenues decreased slightly from 2.6% to 2.2% for the six months ended April 30, 2006 and 2007 respectively. Because the majority of our operating expenses are fixed, the percentage decrease is caused by the increase in total revenues from 2006 to 2007.
19
Operating Income. Our income from operations increased from approximately $10,333,000 for the six months ended April 30, 2006 to approximately $12,920,000 for the six months ended April 30, 2007. This increase in operating income was primarily the result of a significant increase in revenues for the six months ended April 30, 2007 compared to the same period of 2006. Our income from operations as a percentage of revenues decreased by approximately 4% for the six months ended April 30, 2007 compared to the same period of 2006. This lower percentage of income from operations is primarily the result of increased cost of goods sold due to increased corn costs.
Other Income (Expense). Our other income (expense) as a percentage of revenues was 0.3% and (0.8)% for the six months ended April 30, 2007 and 2006, respectively. The change resulted from decreased interest expense for the six months ended April 30, 2007 compared to the same period of 2006. The majority of our interest expense for the six months ended April 30, 2007 has been capitalized as part of our expansion project.
Changes in Financial Condition for the Six Months Ended April 30, 2007
Assets totaled approximately $116,492,000 at April 30, 2007 compared to approximately $97,946,000 at October 31, 2006. Current assets totaled approximately $11,582,000 at April 30, 2007 down from approximately $21,759,000 at October 31, 2006. The change in current assets resulted from (i) lower accounts receivable as payments from RPMG have been kept more current during the current fiscal year with their payments to the Company (ii) a significant decrease in our cash and equivalents due to a distribution made to our members at the end of January 2007 that was issued for unit holders of record as of January 1, 2007; and (iii) our derivative instruments being classified as an asset (unrealized gain) as of October 31, 2006 and classified as a liability (unrealized loss) as of April 30, 2007.
Current liabilities totaled approximately $12,436,000 at April 30, 2007 compared to approximately $12,726,000 at October 31, 2006. The change resulted primarily from the net effect of a decrease in the current portion of long-term debt due to an early loan payment made in November 2006 and an increase in accounts payable due to an increase in the construction retainer.
Long-term liabilities, net of current maturities, totaled approximately $38,163,000 at April 30, 2007, up from approximately $10,405,000 at October 31, 2006. This increase was primarily the result of the new construction loan we executed in November 2006 for our expansion project. As of April 30, 2007 the construction loan had a balance of $15,000,000 and $11,800,000 on the line of credit.
Distribution to Members
On December 18, 2006, our board of directors authorized the payment of a distribution to members of the Company of record on January 1, 2007. The board authorized a total distribution of $22,014,000 which equates to a distribution of $0.90 per membership unit. The distribution checks were sent to the members of the Company on January 29, 2007.
Plant Expansion
We are in the process of expanding our plant to add an additional 40 to 50 million gallons per year of ethanol production capacity. In April 2006 we received a Title V emissions permit which was required prior to commencing construction of the expansion. On May 12, 2006, construction of the expansion began. We signed a design-build agreement for the expansion on June 19, 2006 with Fagen, Inc. We currently expect the expansion to be completed sometime in June 2007, however, there is no assurance or guarantee that construction will stay on schedule or that we will be able to operate at expanded production levels by summer 2007.
On January 12, 2007, we closed on a land purchase agreement for 54 acres of land adjacent to our existing property. This land was necessary for our plant expansion project. The total purchase price for the land was approximately $539,000.
We currently estimate the cost of the expansion project to be approximately $50,700,000. This estimate is subject to change as the expansion project nears completion and includes approximately $500,000 of an early
20
completion bonus expected to be paid to the contractor. We have financed the expansion to date using cash we have on hand and executed a new term loan. We do not expect to seek additional equity from our members for the expansion project. We anticipate the expansion will most likely add 10 employees to the current staff of 33 and will increase our usage of northern Iowa corn from 20 million to approximately 35 million bushels annually. As of April 30, 2007, we had hired an additional 3 employees for a total of 36 employees. As of May 25, 2007, we had 38 employees.
Liquidity and Capital Resources
The following table shows cash flows for the six months ended April 30, 2007 and 2006:
| Six Months Ended April 30 |
| |||||
|
| 2007 |
| 2006 |
| ||
Net cash provided by operating activities |
| $ | 19,615,820 |
| $ | 18,200,056 |
|
Net cash (used in) investing activities |
| ($27,912,038 | ) | ($6,155,342 | ) | ||
Net cash provided by (used in) financing activities |
| $ | 202,624 |
| ($13,017,985 | ) | |
Cash Flow From Operations
The increase in net cash flow provided from operating activities for the six months ended April 30, 2007 compared to six months ended April 30, 2006 was primarily due to strong net income from continuing plant operations. Our capital needs are being adequately met through cash from our operating activities and our current credit facilities.
Cash Flow From Investing Activities
Our cash flow used in investing activities increased significantly for the six months ended April 30, 2007 compared to same period in 2006 was primarily due to construction costs for our expansion project. We also invested approximately $5,000,000 in a development stage company in the ethanol industry.
Cash Flow From Financing Activities.
Our cash flow provided by financing activities for the six months ended April 30, 2007 was primarily due to a distribution we issued to our members net of financing received for our expansion project. Cash used in financing activities for the same period in 2006 was primarily due to the redemption of membership units and long-term debt payments.
Short-Term and Long-Term Debt Sources
In November 2006, we restructured our existing debt financing and line of credit and we entered into a new credit facility for our expansion project with our lender Home Federal Savings Bank of Rochester, Minnesota. Our restructured credit arrangement consists of a master credit agreement with three supplements. The total value of the credit facility is $77,000,000, however this included the $32,000,000 value of the initial term loan to construct the ethanol plant, of which, approximately $12,271,000 was outstanding at the time we executed the restructured credit facility. The total new funds available following the restructured credit facility was $45,000,000, split between a new term loan of $30,000,000 and a revolving line of credit of $15,000,000. To secure this master credit agreement, we executed a mortgage on substantially all of our assets in favor of Home Federal in the amount of $77,000,000.
The master credit agreement supplies terms that are applicable to all three parts of the credit facility. The terms that are specific to the original term loan, line of credit, and expansion loan are set out in three supplements to the master credit agreement.
The first supplement to the master credit agreement concerns the restructured term loan for the Company’s initial plant construction. The original term loan for the plant construction was entered into in 2004 and was for approximately $32,000,000. On November 14, 2006, when the new master credit agreement was executed, there
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was a total balance on the initial term loan of approximately $12,271,000. The Company’s monthly payment for the existing term loan is approximately $222,000 as adjusted from time to time based on changes to the prime rate. The maximum interest rate chargeable under the restructured initial term loan prior to April 1, 2008 is 8% per year and the maximum thereafter is 10% per year. The maturity date of this loan is March 1, 2015. As of April 30, 2007, the remaining principal balance of this term loan was approximately $11,207,000 with approximately $4,173,000 in a restricted cash account that can be used to prepay this loan balance once the balance of the loan reaches that of the restricted cash account.
The second supplement to the master credit agreement amends the Company’s existing revolving line of credit with Home Federal. The amount available to the Company pursuant to the line of credit is $15,000,000 through October 31, 2007 and then decreases each year until the line of credit’s maturity date of August 1, 2017. The amount of interest chargeable pursuant to the line of credit is the prime rate minus a percentage that is calculated based on the ratio of the Company’s total indebtedness to its tangible net worth. There is an annual fee for the line of credit of 1% of the yearly amount available under the line of credit. As of April 30, 2007, the Company had $11,800,000 outstanding on this line of credit.
The third supplement to the master credit agreement is a new term loan to finance our ethanol plant expansion. The amount of the expansion loan is $30,000,000. Following completion of the expansion, we can select to pay interest based either on a fixed rate or the prime rate minus a percentage calculated based on the ratio of our total debt versus our tangible net worth. Any potion of the loan that is under a fixed rate is subject to a prepayment fee payable to Home Federal. The expansion loan’s maturity date is August 1, 2017. As of April 30, 2007, we have received disbursements from Home Federal on the expansion loan of $15,000,000. The remaining amount of the loan will be disbursed as necessary to meet expansion requirements. We will make our first payment on our expansion loan once the plant expansion is complete and the construction loan is converted to a term loan.
As interest rates increase, we will incur higher interest payments, which could adversely affect our net income. Our credit agreements contain restrictions and financial covenants to which we are subject during the term of the agreements. Specifically, we must maintain a minimum of a $4,000,000 deposit into a restricted bank account as defined in our loan agreements. As of April 30, 2007, we had deposits in excess of $4,000,000 in a restricted account thus fulfilling the bank obligation under our loan agreement. Once the original loan matures, or is paid off when the balance of the restricted cash account reaches that of the loan balance, this restricted cash account is no longer a requirement. We have other restrictive covenants which require minimum financial ratios be recognized by the Company. Further restrictions limit distributions to 65% of our net income, provided tangible assets to total debt exceed 2:1.
Covenants
Our credit agreements with Home Federal are subject to numerous protective covenants requiring us to maintain various financial ratios. As of April 30, 2007, the Company is in compliance with all loan covenants pursuant to its credit agreements with Home Federal. With the exception of our capital expenditure covenant, we expect to be in compliance with our loan covenants for the rest of fiscal year 2007. Despite the fact that we may be out of compliance with our capital expenditure covenant, Home Federal has indicated that this covenant violation will be waived should it be violated during the year.
Grants and Government Programs
We entered into an agreement with the Iowa Department of Economic Development for funding through the State of Iowa’s Value-Added Agricultural Products and Processes Financial Assistance Program (“VAAPPFAP”) in conjunction with our original plant construction. Under this program, we received a $100,000 forgivable loan and a zero percent interest loan of $300,000 on a 15-year amortization with a five-year balloon payment. On February 28, 2006, we received confirmation from the Iowa Department of Economic Development that the $100,000 loan was forgiven. We started making payments on the $300,000 zero percent interest loan in January 2006. The balance on this loan as of April 30, 2007 was approximately $273,000.
In December 2006 we received the first payment from our semi-annual economic development grants equal to the amount of the tax assessments imposed on our ethanol plant by Cerro Gordo County, the county in which our
22
ethanol plant is located. The amount of the first payment was approximately $177,000. Based upon our 2006 assessment, these grants are expected to total approximately $4,000,000, which will be paid semi-annually over a 10-year period. In exchange for these grants, we must continue to satisfy certain conditions, including the full-time employment of a minimum of 30 individuals, monthly payment of a special fixed-user fee for the water utilities used by the plant plus a regular water fee calculated based on actual plant usage times Mason City’s regular water rate ordinance.
The Iowa Department of Economic Development has approved us for participation in the New Jobs and Income Program. Under the Program, we are eligible for the following benefits provided we continue to meet certain Program requirements:
· Funding for training new employees through a supplemental new jobs withholding credit equal to 1.5% of the gross wages of the new jobs created by the plant;
· A refund of 100% of the sales, service and use taxes paid to contractors and subcontractors during the construction phase of the plant (excluding local option sales taxes);
· A 6.5% research activities tax credit based on increasing research activities within the State of Iowa; and
· An investment tax credit equal to 10% of our capital investment or approximately $5,110,000, whichever amount is less. This Iowa tax credit may be carried forward for up to 7 years until depleted.
In order to receive these benefits, we must create at least 24 full-time non-management employee positions at a median wage of $16.35 per hour and these jobs must be maintained for at least five years. We must pay at least 80% of the cost of a standard medical and dental insurance plan and offer a pension or profit sharing plan to our full-time employees. A worker productivity and safety improvement program must also be implemented and maintained. We have until November 20, 2007 to satisfy these requirements. If we fail to meet the participation requirements of the New Jobs and Income Program, we may have to repay to the local taxing authority and the Iowa Department of Revenue and Finance a portion or the total value of any incentives received.
The Iowa Department of Economic Development has approved our application for Enterprise Zone Program benefits in conjunction with our plant expansion. The award includes the following incentives:
· Supplemental New Jobs credit;
· A 5% investment tax credit; and
· A refund of State of Iowa sales tax paid on construction materials.
Critical Accounting Estimates
Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Of the significant accounting policies described in the notes to our financial statements, we believe that the following are the most critical:
Derivative Instruments
We enter into derivative instruments to hedge our exposure to price risk related to forecasted corn and natural gas purchases and forward corn purchase contracts. We occasionally also enter into derivative contracts to hedge our exposure to price risk as it relates to ethanol sales. We do not typically enter into derivative instruments other than for hedging purposes. All derivative instruments except for those that fall under normal purchase and sale exclusions are recognized on the April 30, 2007 balance sheet at their fair market value. Currently, none of our derivative instruments are classified as cash-flow hedges for accounting purposes. On the date the derivative instrument is entered into, we will designate the derivative as either a hedge of the variability of cash flows of a forecasted transaction or will not designate the derivative as a hedge. Changes in the fair value of a derivative that is designated as, and meets all of the required criteria for, a cash flow hedge are recorded in accumulated other comprehensive income and reclassified into earnings as the hedged items affect earnings. Changes in the fair value of a derivative that is not designated as a hedge are recorded in current period earnings. Although certain derivative
23
instruments may not be designated as, and accounted for, as a cash flow hedge, we believe our derivative instruments are effective economic hedges of specified risks.
During the three and six months ended April 30, 2007, the Company recorded a combined realized and unrealized loss for derivatives from corn and natural gas of approximately $2,564,000 and $57,000, respectively. For the three and six months ended April 30, 2006, the Company recorded a combined realized and unrealized gain for derivatives from corn and natural gas of approximately $967,000 and $1,433,000, respectively. These losses and gains are recorded in cost of goods sold. We recorded no gain or loss as a result of ethanol sales contracts during the three and six months ended April 30, 2007 and we had a loss of approximately $1,262,000 and $6,283,000 for the same period of 2006.
Grants receivable and deferred revenue
Grants receivables are recorded when the payments to be received can be estimated and when payment is reasonably assured. The Company recorded a grant receivable and corresponding deferred revenue of approximately $2,683,000 for the tax increment financing monies to be received over a 10 year period. These grants were recorded at their net present value using a discount rate of 8%. Related deferred revenue was recorded and is being amortized into income as a reduction of property taxes over the life of the grant. As of April 30, 2007 grant receivable was approximately $2,700,000 and corresponding deferred revenue was approximately $2,670,000.
Off-Balance Sheet Arrangements.
We currently have no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes pursuant to the requirements of SFAS 133, Accounting for Derivative Instruments and Hedging Activities.
Interest Rate Risk
We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from holding a revolving letter of credit and two term notes which bear variable interest rates. Specifically, we have approximately $26,800,000 outstanding in variable rate, long-term debt as of April 30, 2007. The specifics of each note are discussed in greater detail in “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Short-Term and Long-Term Debt Sources.”
Commodity Price Risk
We seek to minimize the risks from fluctuations in the prices raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distillers grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.
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As of April 30, 2007, we have price protection in place for approximately 60% of our anticipated corn usage needs through March 2008. As we move forward, additional protection may be necessary. 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. When we move forward into the fall harvest months, additional price protection may be required to solidify our margins for the remainder of fiscal year 2007 and into fiscal year 2008. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for the Company.
As of April 30, 2007, we have price protection in place for approximately 65% of our anticipated natural gas needs through June 2007. Additional price protection for fiscal year 2007 natural gas purchases may be necessary as we attempt to further reduce our susceptibility to price increases. However, we may not be able to secure natural gas for prices less than current market price and we may not recover high costs of production resulting from high natural gas prices, which may raise our costs of production and reduce our net income.
As of April 30, 2007, we have a purchase commitment for additional denaturant deliveries for 100% of our anticipated denaturant usage through December 2007 which are basis contracts verses the Reformulated Gasoline Blend stock for Oxygen Blended (RBOB) futures.
A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the fair value of our corn and natural gas requirements and average ethanol price as of April 30, 2007, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from April 30, 2007. As of April 30, 2007 approximately 51% of our estimated corn usage and approximately 4% of natural gas usage over the next 12 months was subject to fixed price or index contracts where a price has been established with an exchange. The results of this analysis, which may differ from actual results, are as follows:
|
| Estimated Volume |
| Unit of |
| Hypothetical |
| Approximate |
| |
Natural Gas |
| 2,538,000 |
| MMBTU |
| 10 | % | $ | 1,902,000 |
|
Ethanol |
| 92,300,000 |
| Gallons |
| 10 | % | $ | 18,498,000 |
|
Corn |
| 32,105,000 |
| Bushels |
| 10 | % | $ | 5,991,000 |
|
Liability Risk
We participate in a captive reinsurance company (“Captive”). The Captive reinsures losses related to workman’s compensation, commercial property and general liability. Premiums are accrued by a charge to income for the period to which the premium relates and is remitted by our insurer to the captive reinsurer. The Captive reinsures catastrophic losses in excess of a predetermined amount. Our premiums are structured such that we have made a prepaid collateral deposit estimated for losses related to the above coverage. The Captive insurer has estimated and collected an amount in excess of the estimated losses but less than the catastrophic loss limit insured by the Captive. We can not be assessed over the amount in the collateral fund.
ITEM 4. CONTROLS AND PROCEDURES.
Our management, including our President and Chief Executive Officer (the principal executive officer), Walter Wendland, along with our Chief Financial Officer, (the principal financial officer), Christine Marchand, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of April 30, 2007. Based upon this review and evaluation, these officers believe that our disclosure controls and procedures are effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission.
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Our management, consisting of our principal executive officer and principal financial officer, have reviewed and evaluated any changes in our internal control over financial reporting that occurred as of April 30, 2007 and there has been no change that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS
Increases in the price of corn would reduce our profitability. Our results of operations and financial condition are significantly affected by the cost and supply of corn. Changes in the price and supply of corn are subject to and determined by market forces over which we have no control. The price at which we purchase corn has risen substantially in the last year and we expect the price to continue to increase. In 2006, despite the third largest corn yield on record of approximately 10.74 billion bushels, the price we paid for corn increased 75% in the first fiscal quarter of 2007 as compared to the same period of 2006.
Increases in demand for corn from both the world foodstuff markets and from increased production of ethanol have pushed with price of corn. We expect demand for corn from the ethanol industry to continue to expand. The Renewable Fuels Association estimates as of May 22, 2007, there were 120 ethanol plants in operation nationwide with the capacity to produce nearly 6.2 billion gallons of ethanol annually. An additional 77 new plants and eight expansions are currently under construction, which will add an additional estimated 6.4 billion gallons of annual production capacity. Approximately 90% of the ethanol produced in the United States uses corn as its feedstock. This increased supply of ethanol will continue to increase demand for corn.
If the demand for corn continues to increase so will the price we pay for corn. Since our revenues depend on the spread between the selling price of our ethanol and the price we pay for corn, increases in corn prices affect our ability to generate a profit. This could negatively affect our future profitability.
New plants under construction or decreases in the demand for ethanol may result in excess production capacity in our industry. The supply of domestically produced ethanol is at an all-time high. As of May 22, 2007, there were 120 ethanol plants in operation nationwide with the capacity to produce nearly 6.2 billion gallons of ethanol annually. An additional 77 new plants and eight expansions are currently under construction, which will add an additional estimated 6.4 billion gallons of annual production capacity. Iowa alone is estimated to have produced approximately 1.5 billion gallons of ethanol in 2006. Excess capacity in the ethanol industry would have an adverse impact on our results of operations, cash flows and general financial condition. If the demand for ethanol does not grow at the same pace as increases in supply, we would expect the selling price of ethanol to decline. If excess capacity in the ethanol industry occurs, the market price of ethanol may decline to a level that is inadequate to generate sufficient cash flow to cover our costs.
We are in the process of expanding our rail infrastructure to accommodate our expansion project which could be delayed and could lead to decreased revenues. We are in the process of expanding our rail infrastructure to accommodate increased ethanol and distillers grains production from our expansion project. As of April 30, 2007, our rail expansion was not complete. Our existing rail infrastructure cannot support our anticipated increases in production from our expansion project. If our rail infrastructure expansion is not complete by the time our expansion is operational, we may not be able to operate our expanded ethanol plant at full capacity due to our likely inability to load and ship the ethanol and distillers grains we will produce on rail cars for transportation. If the rail infrastructure expansion is not complete and we cannot operate our expanded plant at full capacity we may experience decreased revenues which could affect our profitable operation of the ethanol plant.
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Carbon dioxide may be regulated in the future by the EPA as an air pollutant requiring us to obtain additional permits and install additional environmental mitigation equipment, which could adversely affect our financial performance. The Supreme Court recently decided a case in which it ruled that carbon dioxide is an air pollutant under the Clean Air Act for the purposes of motor vehicle emissions. The lawsuit sought to require the EPA to regulate carbon dioxide in vehicle emissions. Similar lawsuits have been filed seeking to require the EPA to regulate carbon dioxide emissions from stationary sources such as our ethanol plant under the Clean Air Act. Our plant produces a significant amount of carbon dioxide that we currently vent into the atmosphere. While there are currently no regulations applicable to us concerning carbon dioxide, if the EPA or the State of Iowa regulate carbon dioxide emissions by plants such as ours, we may have to apply for additional permits or we may be required to install carbon dioxide mitigation equipment or take other as yet unknown steps to comply with these potential regulations. Compliance with any future regulation of carbon dioxide, if it occurs, could be costly and may prevent us from operating the ethanol plant profitably which could decrease or eliminate the value of our units.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held our annual members meeting on February 15, 2007 for the purpose of electing three directors to our board of directors and approving two amendments to our operating agreement. We had three nominees for the three vacant director positions. Votes were solicited in person and by proxy.
Election of Directors
The following persons were nominated and the three nominees receiving the greatest number of votes were elected to serve on our board of directors until the 2010 annual members meeting and until their successors are duly elected and qualified:
| Votes For |
| |
Dave Sovereign (incumbent) |
| 10,777,150 |
|
Stan Laures (incumbent) |
| 10,587,150 |
|
Ron Pumphrey (incumbent) |
| 10,713,150 |
|
Incumbents Dave Sovereign, Stan Laures and Ron Pumphrey were reelected to the board of directors for three year terms. The other directors whose terms of office continued after the meeting are Jerry Calease, Marion Cagley, Steve Sukup, Steve Core, Steve Eastman, Leslie Hansen, Bernard Retterath, Jim Boeding, and Duane Lynch.
Operating Agreement Amendments
We proposed two amendments to our operating agreement at our annual member meeting. The proposed amendment number one increased the number of units the Company is authorized to issue without a vote by the members to 100,000,000. The proposed amendment number two allowed the board of directors to establish a minimum number of units that may be transferred in any one transaction. Both of the proposed amendments to the operating agreement were approved by the members. The votes were as follows for the two amendments:
|
| For |
| Against |
| Abstain |
|
Amendment One — Authorized Units |
| 11,023,150 |
| 6,485,500 |
| 209,500 |
|
Amendment Two — Minimum Transfer Limit |
| 11,630,500 |
| 5,886,150 |
| 211,500 |
|
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ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
(a) The following exhibits are filed as part of this report.
Exhibit No. |
| Exhibit |
| Filed Herewith |
| Incorporated by Reference |
|
31.1 |
| Certificate Pursuant to 17 CFR 240.13a-14 (a) |
| X |
|
|
|
31.2 |
| Certificate Pursuant to 17 CFR 240.13a-14 (a) |
| X |
|
|
|
32.1 |
| Certificate Pursuant to 18 U.S.C. Section 1350 |
| X |
|
|
|
32.2 |
| Certificate Pursuant to 18 U.S.C. Section 1350 |
| X |
|
|
|
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| GOLDEN GRAIN ENERGY, L.L.C. |
| |||||||
|
|
|
|
|
| ||||
|
|
|
|
|
| ||||
Date: | June 11, 2007 |
| /s/ Walter Wendland |
| |||||
|
|
|
| Walter Wendland |
| ||||
|
|
|
| President and Chief Executive Officer |
| ||||
|
|
|
| (Principal Executive Officer) |
| ||||
|
|
|
|
|
| ||||
|
|
|
|
|
| ||||
|
|
|
|
|
| ||||
Date: | June 11, 2007 |
| /s/ Christine Marchand |
| |||||
|
|
|
| Christine Marchand |
| ||||
|
|
|
| Chief Financial Officer |
| ||||
|
|
|
| (Principal Financial and Accounting Officer) |
| ||||
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