UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended April 30, 2010
OR
o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from to .
COMMISSION FILE NUMBER 000-51177
GOLDEN GRAIN ENERGY, LLC
(Exact name of registrant as specified in its charter)
Iowa |
| 02-0575361 |
(State or other jurisdiction of |
| (I.R.S. Employer Identification No.) |
1822 43rd Street SW, Mason City, Iowa 50401
(Address of principal executive offices)
(641) 423-8525
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer £ |
| Accelerated Filer ¨ |
Non-Accelerated Filer T |
| Smaller Reporting Company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes T No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
As of June 9, 2010, there were 27,840,000 Class A membership units outstanding and 920,000 Class B membership units outstanding.
GOLDEN GRAIN ENERGY, LLC
Consolidated Balance Sheets
ASSETS |
| April 30, 2010 |
| October 31, 2009 |
| ||
|
| (Unaudited) |
| (Audited) |
| ||
Current Assets |
|
|
|
|
| ||
Cash and equivalents |
| $ | 9,168,984 |
| $ | — |
|
Accounts receivable |
| 1,449,037 |
| 8,688,389 |
| ||
Other receivables |
| 428,308 |
| 483,871 |
| ||
Due from broker |
| 1,119,171 |
| 1,767,870 |
| ||
Inventory |
| 5,774,830 |
| 4,460,088 |
| ||
Prepaid expenses and other |
| 1,133,369 |
| 829,601 |
| ||
Total current assets |
| 19,073,699 |
| 16,229,819 |
| ||
|
|
|
|
|
| ||
Property and Equipment |
|
|
|
|
| ||
Land and land improvements |
| 11,262,333 |
| 11,262,333 |
| ||
Building and grounds |
| 25,366,370 |
| 25,366,370 |
| ||
Grain handling equipment |
| 13,356,924 |
| 13,029,583 |
| ||
Office equipment |
| 320,493 |
| 320,493 |
| ||
Plant and process equipment |
| 67,139,607 |
| 66,771,971 |
| ||
Construction in progress |
| 314,061 |
| 622,748 |
| ||
|
| 117,759,788 |
| 117,373,498 |
| ||
Less accumulated depreciation |
| 34,517,275 |
| 29,925,258 |
| ||
Net property and equipment |
| 83,242,513 |
| 87,448,240 |
| ||
|
|
|
|
|
| ||
Other Assets |
|
|
|
|
| ||
Investments |
| 15,768,476 |
| 13,754,527 |
| ||
Grant receivable, net of current portion |
| 2,785,643 |
| 3,154,344 |
| ||
Debt issuance costs, net of accumulated amortization (2010 $124,589; 2009 $107,204) |
| 252,075 |
| 269,460 |
| ||
Total other assets |
| 18,806,194 |
| 17,178,331 |
| ||
|
|
|
|
|
| ||
Total Assets |
| $ | 121,122,406 |
| $ | 120,856,390 |
|
Notes to Consolidated Financial Statements are an integral part of this Statement.
GOLDEN GRAIN ENERGY, LLC
Consolidated Balance Sheets
LIABILITIES AND MEMBERS’ EQUITY |
| April 30, 2010 |
| October 31, 2009 |
| ||
|
| (Unaudited) |
| (Audited) |
| ||
Current Liabilities |
|
|
|
|
| ||
Outstanding checks in excess of bank balance |
| $ | — |
| $ | 567,340 |
|
Current portion long-term debt |
| 2,900,585 |
| 2,624,164 |
| ||
Accounts payable |
| 3,025,460 |
| 3,362,520 |
| ||
Accrued expenses |
| 1,048,767 |
| 930,526 |
| ||
Derivative instruments |
| 248,473 |
| 1,051,844 |
| ||
Deferred revenue |
| 359,794 |
| 348,496 |
| ||
Total current liabilities |
| 7,583,079 |
| 8,884,890 |
| ||
|
|
|
|
|
| ||
Long-term Liabilities |
|
|
|
|
| ||
Deferred compensation |
| 86,160 |
| 127,221 |
| ||
Long-term debt, net of current maturities |
| 21,813,281 |
| 30,134,436 |
| ||
Deferred revenue, net of current portion |
| 2,371,432 |
| 2,556,978 |
| ||
Total long-term liabilities |
| 24,270,873 |
| 32,818,635 |
| ||
|
|
|
|
|
| ||
Commitments and Contingencies |
|
|
|
|
| ||
|
|
|
|
|
| ||
Members’ Equity (28,760,000 units issued and outstanding in 2010 and 2009 respectively) |
| 89,268,454 |
| 79,152,865 |
| ||
|
|
|
|
|
| ||
Total Liabilities and Members’ Equity |
| $ | 121,122,406 |
| $ | 120,856,390 |
|
Notes to Consolidated Financial Statements are an integral part of this Statement.
GOLDEN GRAIN ENERGY, LLC
Consolidated Statements of Operations (Unaudited)
|
| Three Months Ended |
| Three Months Ended |
| Six Months Ended |
| Six Months Ended |
| ||||
|
| April 30, 2010 |
| April 30, 2009 |
| April 30, 2010 |
| April 30, 2009 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenues |
| $ | 44,027,018 |
| $ | 52,041,270 |
| $ | 102,843,625 |
| $ | 93,626,243 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of Goods Sold |
| 43,248,727 |
| 50,307,578 |
| 92,856,214 |
| 98,226,876 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross Profit (Loss) |
| 778,291 |
| 1,733,692 |
| 9,987,411 |
| (4,600,633 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating Expenses |
| 611,864 |
| 534,680 |
| 1,273,542 |
| 928,250 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating Income (Loss) |
| 166,427 |
| 1,199,012 |
| 8,713,869 |
| (5,528,883 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Other Income (Expense) |
|
|
|
|
|
|
|
|
| ||||
Interest income |
| 23,100 |
| 1,848 |
| 57,390 |
| 7,543 |
| ||||
Interest expense |
| (390,571 | ) | (436,995 | ) | (835,127 | ) | (1,114,792 | ) | ||||
Equity in net income (loss) of investments |
| 1,090,310 |
| 176,963 |
| 2,179,457 |
| (168,062 | ) | ||||
|
| 722,839 |
| (258,184 | ) | 1,401,720 |
| (1,275,311 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Income (Loss) |
| $ | 889,266 |
| $ | 940,828 |
| $ | 10,115,589 |
| $ | (6,804,194 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Basic & diluted net income (loss) per unit |
| $ | 0.03 |
| $ | 0.04 |
| $ | 0.35 |
| $ | (0.28 | ) |
Weighted average units outstanding for the calculation of basic & diluted net income (loss) per unit |
| 28,760,000 |
| 24,739,333 |
| 28,760,000 |
| 24,599,667 |
| ||||
Distributions Per Unit |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Notes to Consolidated Financial Statements are an integral part of this Statement.
GOLDEN GRAIN ENERGY, LLC
Consolidated Statements of Cash Flows (Unaudited)
|
| Six Months Ended |
| Six Months Ended |
| ||
|
| April 30, 2010 |
| April 30, 2009 |
| ||
|
|
|
|
|
| ||
Cash Flows from Operating Activities |
|
|
|
|
| ||
Net income (loss) |
| $ | 10,115,589 |
| $ | (6,804,194 | ) |
Adjustments to reconcile net income (loss) to net cash from operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 4,609,402 |
| 4,408,203 |
| ||
Unrealized (gain) on risk management activities |
| (803,371 | ) | (2,947,198 | ) | ||
Amortization of deferred revenue |
| (174,248 | ) | (178,558 | ) | ||
Accretion of interest on grant receivable |
| (88,939 | ) | (120,422 | ) | ||
Undistributed (earnings) losses in excess of distributions from investments |
| (2,013,949 | ) | 168,062 |
| ||
Deferred compensation expense (benefit) |
| 40,452 |
| (22,093 | ) | ||
Change in assets and liabilities |
|
|
|
|
| ||
Accounts receivable |
| 7,239,352 |
| (2,331,600 | ) | ||
Inventory |
| (1,314,742 | ) | 622,325 |
| ||
Due from broker |
| 648,699 |
| 3,897,795 |
| ||
Prepaid expenses and other |
| (243,468 | ) | (384,268 | ) | ||
Accounts payable |
| (337,060 | ) | 643,810 |
| ||
Accrued expenses |
| 118,241 |
| (2,692,318 | ) | ||
Deferred compensation payable |
| (81,513 | ) | (61,087 | ) | ||
Net cash provided by (used in) operating activities |
| 17,714,445 |
| (5,801,543 | ) | ||
|
|
|
|
|
| ||
Cash Flows from Investing Activities |
|
|
|
|
| ||
Capital expenditures |
| (386,290 | ) | (2,249,480 | ) | ||
Purchase of investments |
| — |
| (155,344 | ) | ||
Net cash (used in) investing activities |
| (386,290 | ) | (2,404,824 | ) | ||
|
|
|
|
|
| ||
Cash Flows from Financing Activities |
|
|
|
|
| ||
(Decrease) in outstanding checks in excess of bank balance |
| (567,340 | ) | (871,632 | ) | ||
Payments for long-term debt |
| (8,044,734 | ) | (1,234,661 | ) | ||
Proceeds from long-term debt |
| — |
| 8,200,000 |
| ||
Contributions from members |
| — |
| 2,747,500 |
| ||
Payments received on grant receivable |
| 452,903 |
| 368,452 |
| ||
Payments for offering costs |
| — |
| (48,144 | ) | ||
Net cash provided by (used in) in financing activities |
| (8,159,171 | ) | 9,161,515 |
| ||
|
|
|
|
|
| ||
Net Increase in Cash and Equivalents |
| 9,168,984 |
| 955,148 |
| ||
|
|
|
|
|
| ||
Cash and Equivalents — Beginning of Period |
| — |
| — |
| ||
|
|
|
|
|
| ||
Cash and Equivalents — End of Period |
| $ | 9,168,984 |
| $ | 955,148 |
|
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Supplemental Cash Flow Information |
|
|
|
|
| ||
Interest paid net of capitalized interest (2010 $0 and 2009 $90,727) |
| $ | 879,970 |
| $ | 1,085,008 |
|
Notes to Consolidated Financial Statements are an integral part of this Statement.
GOLDEN GRAIN ENERGY, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated 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, 2009, contained in the Company’s annual report on Form 10-K for 2009.
In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments.
Nature of Business
Golden Grain Energy, LLC (Golden Grain Energy) is approximately a 110 million gallon annual production ethanol plant near Mason City, Iowa. The Company sells its production of ethanol, distillers grains with solubles and corn oil primarily in the continental United States. The Company was a majority owner in Corn Oil Bio-Solutions, LLC (COBS) a biodiesel production plant in the development process, near Mason City, Iowa. Due to management’s uncertainty regarding the project’s feasibility an impairment loss of $2,400,000 was taken during the quarter ended July 31, 2009 which eliminates all net assets of COBS. In addition, the non-controlling interest of $600,000 was written off during the quarter ended July 31, 2009.
Principles of consolidation:
The accompanying consolidated financial statements include the accounts of Golden Grain Energy and its now dormant majority owned subsidiary COBS, collectively, the Company. All significant intercompany account balances and transactions have been eliminated.
Organization
Golden Grain Energy is organized as an Iowa limited liability company. The members’ liability is limited as specified in Golden Grain Energy’s operating agreement and pursuant to the Iowa Limited Liability Company Act.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.
Investments
The Company has less than a 20% investment interest in five unlisted companies in related industries. These investments are being accounted for by the equity method of accounting under which the Company’s share of net income is recognized as income in the Company’s income statement and added to the investment account. Distributions or dividends received from the investments are treated as a reduction of the investment account.
The fiscal years of Renewable Products Marketing Group, LLC (RPMG), Guardian Eagle, LLC and Guardian Energy, LLC end on September 30 and the fiscal years of Absolute Energy, LLC and Homeland Energy Solutions, LLC end on December 31. The Company consistently follows the practice of recognizing the net income based on the most recent reliable data. Therefore, the net income which is reported in the Company’s income statement for all companies is based on the quarter ended March 31, 2010.
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, loading of the goods or when the customer picks up the goods. Collectability of revenue is reasonably assured based on historical evidence of collectability between the Company and its customers. Interest income is recognized as earned.
GOLDEN GRAIN ENERGY, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
Shipping costs incurred by the Company in the sale of ethanol and corn oil are not specifically identifiable and as a result, revenue from the sale of ethanol and corn oil are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of distiller grain products are included in cost of goods sold.
Inventory
Inventories are generally valued at the lower of cost (first-in, first-out) or market. In the valuation of inventories and purchase commitments, market is based on current replacement values except that it does not exceed net realizable values and is not less than net realizable values reduced by allowances for approximate normal profit margin.
Investment in commodities contracts, derivative instruments and hedging activities
The Company evaluates its contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting and treated as normal purchases or normal sales if documented as such. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.
The Company enters into short-term cash, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. All of the Company’s derivatives, other than those excluded under the normal purchases and sales exclusion, are designated as non-hedge derivatives, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.
As part of its trading activity, the Company uses futures and option contracts through regulated commodity exchanges to manage its risk related to pricing 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 are included as a component of cost of goods sold and derivative contracts related to ethanol are included as a component of revenues in the accompanying financial statements. The fair values of contracts entered through commodity exchanges 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 Class A and B units outstanding during the period.
Environmental liabilities
The Company’s operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdiction in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its locations. Accordingly, the Company has adopted policies, practices and procedures in the areas of pollution control, occupational health and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability which could result from such events. Environmental liabilities are recorded when the Company’s liability is probable and the costs can be reasonably estimated. No expense has been recorded as of April 30, 2010 or October 31, 2009 for environmental liabilities.
Fair Value
Financial instruments include cash and equivalents, receivables, due from broker, accounts payable, accrued expenses, long-term debt and derivative instruments. Management believes the fair value of each of these instruments approximates their carrying value in the balance sheet as of the balance sheet date except for long-term debt. The fair value of derivative financial instruments is based on quoted market prices. The fair value of other current financial instruments is estimated to approximate carrying value due to the short-term nature of these instruments. The fair value of the long-term debt is estimated at approximately $25,997,000 based on
GOLDEN GRAIN ENERGY, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
anticipated interest rates which management believes would currently be available to the Company for similar issues of debt, taking into account the current credit risk of the Company and the other market factors.
2. INVENTORY
Inventory consisted of the following as of April 30, 2010 and October 31, 2009:
|
| April 30, 2010 |
| October 31, 2009 |
| ||
Raw Materials |
| $ | 3,026,221 |
| $ | 2,466,680 |
|
Work in Process |
| 1,095,000 |
| 1,190,905 |
| ||
Finished Goods |
| 1,653,609 |
| 802,503 |
| ||
Totals |
| $ | 5,774,830 |
| $ | 4,460,088 |
|
3. BANK FINANCING
The Company had the following amounts outstanding under credit agreements.
|
| April 30, 2010 |
| October 31, 2009 |
| ||
Line of credit agreement for $20,000,000 requiring monthly interest payments at prime minus a rate based on the Company’s total indebtedness to its tangible net worth adjusted annually with a 6% floor effective March 1, 2009. (6% as of April 30, 2010) (a) |
| $ | — |
| $ | 6,900,000 |
|
|
|
|
|
|
| ||
Fixed rate term loan requiring monthly interest payment at 6.7% in addition to monthly principal payments of approximately $75,000. (a) |
| 8,580,278 |
| 9,024,939 |
| ||
|
|
|
|
|
| ||
Variable rate term loan requiring monthly interest payments at prime minus a rate based on the Company’s total indebtedness to its tangible net worth adjusted annually with a floor of 6% in addition to monthly principal payments of approximately $140,000. (6% as of April 30, 2010) (a) |
| 15,705,669 |
| 16,376,354 |
| ||
|
|
|
|
|
| ||
Other notes payable |
| 427,919 |
| 457,307 |
| ||
|
| 24,713,866 |
| 32,758,600 |
| ||
Less amounts due within one year |
| 2,900,585 |
| 2,624,164 |
| ||
Total |
| $ | 21,813,281 |
| $ | 30,134,436 |
|
(a) The credit agreement with the bank expires in August 2017 and is secured by substantially all of the assets of the Company. The Company has restrictive covenants including, but not limited to, requiring minimum financial ratios and limitations on capital expenditures, investments and distributions.
The estimated maturities of long-term debt for the period ending April 30, 2010 are as follows:
2010 |
| $ | 2,900,585 |
|
2011 |
| 2,858,647 |
| |
2012 |
| 3,047,875 |
| |
2013 |
| 3,246,120 |
| |
2014 |
| 3,437,328 |
| |
Thereafter |
| 9,223,311 |
| |
Total |
| $ | 24,713,866 |
|
GOLDEN GRAIN ENERGY, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
4. RELATED PARTY TRANSACTIONS
The Company purchased corn and materials from members of its Board of Directors that own or manage elevators. Purchases during the three and six months ended April 30, 2010 totaled approximately $13,349,000 and $32,571,000, respectively and during the three and six months ended April 30, 2009 totaled approximately $14,922,000 and $36,424,000, respectively
The Company entered into an agreement with Homeland Energy Solutions, LLC in December 2008. Pursuant to the agreement, the companies have agreed to split the compensation costs associated with each position covered by the agreement partially in an effort to reduce the costs of administrative overhead. The Company recorded a reduction of approximately $104,000 and $202,000 to operating expenses during the three and six months ended April 30, 2010 and $115,000 and $165,000 for the three and six months ended April 30, 2009, respectively.
5. EMPLOYEE BENEFIT PLANS
The Company has a deferred phantom unit compensation plan for certain employees equal to 1% of net income. One-third of the amount is paid in cash immediately and the other two-thirds have a five year vesting schedule. During the three and six months ended April 30, 2010 the Company recorded compensation expense related to this plan of approximately $29,000 and $40,000, respectively and for the three and six months ended April 30, 2009, the Company recorded compensation expense (benefit) of approximately $39,000 and $(22,000). As of April 30, 2010 and October 31, 2009, the Company had a liability of approximately $86,000 and $127,000 outstanding as deferred compensation and has approximately $187,000 to be recognized as future compensation expense over the weighted average vesting period of approximately 3 years. The amount to be recognized in future years as compensation expense is estimated based on the fair value of the Company’s membership units as of April 30, 2010. Fair value is determined by recent trading activity of the Company’s membership units. The Company had approximately 75,000 unvested equivalent phantom units outstanding under this plan as of April 30, 2010.
6. COMMITMENTS, CONTINGENCIES AND AGREEMENTS
Ethanol, Distiller’s grain and Corn Oil marketing agreements 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 and corn oil inventory produced by the Company. The marketing fees are presented net in revenues.
The Company executed a Distiller’s Grains Marketing Agreement in November 2007 for successive renewable one year periods. The Company will sell 100% of its distiller’s grain product under this marketing agreement. The marketing fees are presented net in revenues.
Approximate sales and marketing fees related to the agreements in place as of April 30 are as follows:
|
| Three Months |
| Six Months |
| Three Months |
| Six Months |
| |
|
| April 30, 2010 |
| April 30, 2009 |
| |||||
Sales ethanol & corn oil |
| $ | 36,356,000 |
| 87,138,000 |
| 42,671,000 |
| 76,092,000 |
|
Sales distiller grains |
| 7,161,000 |
| 15,448,000 |
| 9,694,000 |
| 18,111,000 |
| |
|
|
|
|
|
|
|
|
|
| |
Marketing fees ethanol & corn oil |
| 120,000 |
| 207,000 |
| 133,000 |
| 233,000 |
| |
Marketing fees distiller grains |
| 182,000 |
| 347,000 |
| 190,000 |
| 343,000 |
| |
|
| As of April 30, |
| As of October |
|
Amount due from ethanol & corn oil marketer |
| 1,240,000 |
| 8,112,000 |
|
Amount due from distiller marketer |
| 209,000 |
| 576,000 |
|
GOLDEN GRAIN ENERGY, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
7. RISK MANAGEMENT
The Company’s activities expose it to a variety of market risks, including the effects of changes in commodity prices. These financial exposures are monitored and managed by the Company as an integral part of its overall risk-management program. The Company’s risk management program focuses on the unpredictability of financial and commodities markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.
To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange traded futures contracts to reduce its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts and uses exchange traded futures contracts to reduce price risk. Exchange-traded futures contracts are valued at market price. Changes in market price of contracts related to corn and natural gas are recorded in cost of goods sold and changes in market prices of contracts related to sale of ethanol are recorded in revenues.
Unrealized gains and losses on forward contracts are deemed “normal purchases” under derivative accounting guidelines and, therefore, are not marked to market in the Company’s financial statements. The following table represents the approximate amount of realized gains (losses) and changes in fair value recognized in earnings on commodity contracts for period ended April 30, 2010 and 2009 and the fair value of derivatives as of April 30, 2010 and October 31, 2009:
|
| Income Statement |
| Realized |
| Unrealized |
| Total Gain |
| |
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
| |
· Commodity Contracts for the three months ended April 30, 2010 |
| Revenue |
| $ | 975,000 | ) | (164,000 | ) | 811,000 | ) |
· Commodity Contracts for the six months ended April 30, 2010 |
| Revenue |
| $ | 975,000 |
| (164,000 | ) | 811,000 |
|
· Commodity Contracts for the three months ended April 30, 2009 |
| Cost of Goods Sold |
| $ | (2,724,000 | ) | 3,098,000 |
| 374,000 |
|
· Commodity Contracts for the six months ended April 30, 2009 |
| Cost of Goods Sold |
| $ | 62,000 |
| (559,000 | ) | (497,000 | ) |
Lower of cost or market adjustment on forward contracts deemed “normal purchases” for the six months ended April 30, 2009 |
| Cost of Goods Sold |
| $ | — |
| (2,611,000 | ) | (2,611,000 | ) |
|
| Balance Sheet |
| April 30, 2010 |
| October 31, 2009 |
| ||
Futures contracts through July 2011 |
| Current (Liabilities) |
| $ | (248,000 | ) | $ | (1,052,000 | ) |
GOLDEN GRAIN ENERGY, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
As of April 30, 2010, the Company had approximately these outstanding commitments for purchases:
|
| Commitments |
| Amount (a) |
| |
Corn — fixed price |
| March 2011 |
| $ | 6,919,000 |
|
Corn — basis contract |
| March 2011 |
| $ | 18,196,000 |
|
(a) Approximately $20,233,000 is with related parties.
8. FAIR VALUE MEASUREMENTS
Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1: Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3: Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Derivative financial instruments: Commodity futures and exchange-traded commodity options contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from markets such as the CBOT and NYMEX. Crush swaps are bundled contracts or combined contracts that include a portion of corn, ethanol and natural gas rolled into a single trading instrument. These contracts are reported at fair value utilizing Level 2 inputs and are based on the various trading activity of the components of each segment of the bundled contract.
The following table summarizes financial assets and financial liabilities measured at the approximate fair value on a recurring basis as segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| ||
Liabilities, derivative financial instruments |
|
|
|
|
|
|
|
|
| ||
· April 30, 2010 |
| $ | 248,000 |
| — |
| $ | 248,000 |
| — |
|
· October 31, 2009 |
| 1,052,000 |
| — |
| 1,052,000 |
| — |
| ||
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 volatility of corn and natural gas;
· Decreases in the market price of ethanol, distillers grains and corn oil;
· Our ability to satisfy the financial covenants contained in our credit agreements with our lender;
· Our ability to profitably operate the ethanol plant and maintain a positive spread between the selling price of our products and our raw material costs;
· Hedging activities that negatively impact our operations;
· Ethanol and distillers grains supply exceeding demand and corresponding price reductions;
· Our ability to generate additional revenue through the sale of corn oil;
· Our ability to generate free cash flow to invest in our business and service our debt;
· Changes in the environmental regulations that apply to our plant operations;
· 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 our products 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;
· Competition from alternative fuel additives;
· Changes in interest rates or the lack of credit availability;
· Changes in legislation including the Renewable Fuel Standard and VEETC; and
· Our ability to retain key employees and maintain labor relations.
Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in this report. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements with these cautionary statements.
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 and have produced corn oil since February 2009. References to “we,” “us,” “our” and the “Company” refer to Golden Grain Energy, LLC. We have capacity to produce approximately 110 million gallons of ethanol per year.
Our revenue is derived primarily from the sale and distribution of our ethanol, distillers grains and corn oil. We market our products through professional third party marketers. Our ethanol and corn oil are marketed by Renewable Products Marketing Group, LLC (RPMG). Our distillers grains are marketed by Hawkeye Gold, LLC (Hawkeye Gold).
There have been a number of recent developments in legislation that impacts the ethanol industry. One such development concerns the federal Renewable Fuels Standard (RFS). The ethanol industry is benefited by the RFS which requires that a certain amount of renewable fuels must be used in the United States each year. In February 2010, the EPA issued new regulations governing the RFS. These new regulations have been called RFS2. The most controversial part of RFS2 involves what is commonly referred to as the lifecycle analysis of greenhouse gas emissions. Specifically, the EPA adopted rules to determine which renewable fuels provided sufficient reductions in greenhouse gases, compared to conventional gasoline, to qualify under the RFS program. RFS2 establishes a tiered approach, where regular renewable fuels are required to accomplish a 20% greenhouse gas reduction compared to gasoline, advanced biofuels and biomass-based biodiesel must accomplish a 50% reduction in greenhouse gases, and cellulosic biofuels must accomplish a 60% reduction in greenhouse gases. Any fuels that fail to meet this standard cannot be used by fuel blenders to satisfy their obligations under the RFS program. The scientific method of calculating these greenhouse gas reductions has been a contentious issue. Many in the ethanol industry were concerned that corn based ethanol would not meet the 20% greenhouse gas reduction requirement based on certain parts of the environmental impact model that many in the ethanol industry believed was scientifically suspect. However, RFS2 as adopted by the EPA provides that corn-based ethanol from modern ethanol production processes does meet the definition of a renewable fuel under the RFS program. Our ethanol plant was grandfathered into the RFS due to the fact that it was constructed prior to the effective date of the lifecycle greenhouse gas requirement and is not required to prove compliance with the lifecycle greenhouse gas reductions. Further, certain provisions of RFS2 as adopted may disproportionately benefit ethanol produced from sugarcane. This could make sugarcane based ethanol, which is primarily produced in Brazil, more competitive in the United States ethanol market. If this were to occur, it could reduce demand for the ethanol that we produce.
In addition to RFS2 which included greenhouse gas reduction requirements, in 2009, California passed a Low Carbon Fuels Standard (LCFS). The California LCFS requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which are measured using a lifecycle analysis, similar to RFS2. Management believes that this lifecycle analysis is based on unsound scientific principles that unfairly disadvantages corn based ethanol. Management believes that these new regulations will preclude corn based ethanol produced in the Midwest from being used in California. California represents a significant ethanol demand market. If we are unable to supply ethanol to California, it could significantly reduce demand for the ethanol we produce. Several lawsuits have been filed challenging the California LCFS.
Ethanol production in the United States is benefited by various tax incentives. The most significant of these tax incentives is the federal Volumetric Ethanol Excise Tax Credit (VEETC). VEETC provides a volumetric ethanol excise tax credit of 4.5 cents per gallon of ethanol blended with gasoline at a rate of 10%. VEETC is scheduled to expire on December 31, 2010. If this tax credit is not renewed, it likely would have a negative impact on the price of ethanol and demand for ethanol in the marketplace. On December 31, 2009, the biodiesel blenders’ credit was allowed to expire. Recently, the House passed legislation to reinstate the biodiesel blenders’ credit until December 31, 2010 but it is awaiting approval from the Senate. However, the bills passed by the House and Senate must be reconciled and the final bill must be signed by the President before the tax credit will be reinstated. If VEETC is allowed to expire, it could negatively impact demand for ethanol and may harm our financial condition.
Results of Operations for the Three Months Ended April 30, 2010 and 2009
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, 2010 and 2009:
|
| Three Months Ended |
| Three Months Ended |
| ||||||
Income Statement Data |
| Amount |
| % |
| Amount |
| % |
| ||
Revenues |
| $ | 44,027,018 |
| 100.0 |
| $ | 52,041,270 |
| 100.0 |
|
|
|
|
|
|
|
|
|
| |||
Cost of Goods Sold |
| $ | 43,248,727 |
| 98.2 |
| $ | 50,307,578 |
| 96.7 |
|
|
|
|
|
|
|
|
|
|
| ||
Gross Profit |
| $ | 778,291 |
| 1.8 |
| $ | 1,733,692 |
| 3.3 |
|
|
|
|
|
|
|
|
|
|
| ||
Operating Expenses |
| $ | 611,864 |
| 1.4 |
| $ | 534,680 |
| 1.0 |
|
|
|
|
|
|
|
|
|
|
| ||
Operating Income |
| $ | 166,427 |
| 0.4 |
| $ | 1,199,012 |
| 2.3 |
|
|
|
|
|
|
|
|
|
|
| ||
Other Income (Expense) |
| $ | 722,839 |
| 1.6 |
| $ | (258,184 | ) | 0.5 |
|
|
|
|
|
|
|
|
|
|
| ||
Net Income |
| $ | 889,266 |
| 2.0 |
| $ | 940,828 |
| 1.8 |
|
Revenues. Our total revenues were significantly lower for our second quarter of 2010 compared to the same period of 2009, primarily as a result of decreased ethanol and distillers grains sales. The total gallons of ethanol we sold during our second quarter of 2010 was approximately 18% lower than the total gallons that we sold during our second quarter of 2009. In addition, the total tons of distillers grains we sold during our second quarter of 2010 was approximately 6% lower than the total tons of distillers grains we sold during our second quarter of 2009. We attribute this decrease in ethanol and distillers grains sales during our second quarter of 2010 with an increase in the amount of finished goods inventory on hand and a scheduled plant shutdown for maintenance that occurred during our second quarter of 2010. During our 2009 fiscal year, we had plant shutdowns for maintenance during January and May of 2009.
For our second quarter of 2010, ethanol sales accounted for approximately 83% of our revenues, distillers grains sales accounted for approximately 16% of our revenues and corn oil sales accounted for approximately 1% of our revenues. For our second quarter of 2009, ethanol sales accounted for approximately 81% of our revenues, distillers grains sales accounted for approximately 18% of our revenues and corn oil sales accounted for approximately 1% of our revenues.
The average price we received for our ethanol was approximately 3% higher for our second quarter of 2010 compared to our second quarter of 2009. Management attributes this increase in ethanol prices with increased gas prices during our second quarter of 2010 compared to our second quarter of 2009. Management anticipates that ethanol prices will remain relatively stable during the rest of our 2010 fiscal year with the typical price and demand increases during the summer driving season. However, management anticipates that if the EPA approves a 15% ethanol blend for standard (non-flex fuel) vehicles, it could positively impact ethanol demand and ethanol prices during the latter part of our 2010 fiscal year. Conversely, ethanol prices could be hurt if additional ethanol supply enters the market without corresponding increases in ethanol demand. This could result if the 15% blend is not implemented and the ethanol industry reaches the blending wall of approximately 13.5 billion gallons of ethanol during our 2010 fiscal year. We also experienced an approximately $811,000 combined realized and unrealized gain for the three month period ended April 30, 2010 related to ethanol swaps which increased our revenues. We had no ethanol related gains or losses from ethanol swaps for the same period of 2009.
During our second quarter of 2010, the average price we received for our dried distillers grains decreased by approximately 23% compared to our second quarter of 2009. Management attributes this decrease in dried distillers grains prices with lower corn prices and increased local supply of dried distillers grains as a result of
increased ethanol and distillers grains production in our local market. During our second quarter of 2010, the average price we received for our modified distillers grains decreased by approximately 39% compared to our second quarter of 2009. Management believes that the decrease in modified distillers grains prices was a result of lower corn prices and increased local supply of distillers grains. Management believes that the impact of increased ethanol and distillers grains production in our local market is greater for modified distillers grains compared to dried distillers grains. Further, management anticipates that distillers grains prices will continue to follow corn prices. Management anticipates that distillers grains prices will follow their usual annual trend of increasing into the end of June and early July and then falling into the end of summer and early fall. However, any volatility in the corn market could impact the prices of distillers grains.
The average price of our corn oil increased by approximately 56% during our second quarter of 2010 compared to the same period of 2009. Total pounds of corn oil sold during our second quarter of 2010 decreased by approximately 39% compared to our second quarter of 2009. This decrease in corn oil sales was the result of decreased corn oil production during our second quarter of 2010. We have continued to experience reliability issues with our corn oil extraction equipment. However, after the end of our second quarter of 2010, our corn oil extraction equipment has been operating at capacity. We are continuing to fine tune the operation of our corn oil extraction equipment. Management anticipates that corn oil prices will be relatively flat for the rest of our 2010 fiscal year unless the federal biodiesel blenders’ credit is reinstated. If the credit is reinstated, it may result in increased corn oil demand that could positively impact corn oil prices.
Cost of Goods Sold. Our cost of goods sold was significantly lower for our second quarter of 2010 compared to our second quarter of 2009. This decrease in cost of goods sold was primarily the result of a decrease in the amount of corn that we used in the production process due to our reduced production of ethanol and distillers grains during the 2010 period. Bushels of corn purchased and ground during our second quarter of 2010 decreased by approximately 9% compared to our second quarter of 2009. We attribute this decrease in our corn purchases with our decreased ethanol and distillers grains production during the 2010 period. In addition, our average corn cost per bushel decreased by approximately 7% during our second quarter of 2010 compared to our second quarter of 2009. Management attributes this decrease in our average cost per bushel of corn with increased corn supply in the market.
Management anticipates that corn prices will remain in a trading range in the next several months similar to that over the past few months. However, corn prices could increase during our 2010 fiscal year should we experience unfavorable weather conditions which affect expected corn yields for the fall of 2010. In addition, if demand for corn increases significantly, such as from improved global economic conditions or from increased ethanol production in the United States due to the implementation of a 15% ethanol blend, we could experience increased corn prices. The Archer Daniels Midland ethanol plant in Cedar Rapids is scheduled to start operations in the summer of 2010 which could increase local demand for corn and result in higher corn prices in our local market. Management does not anticipate having difficulty securing all the corn that it requires to operate the ethanol plant at capacity in the next 12 months.
Our natural gas costs significantly decreased during our second quarter of 2010 compared to the same period of 2009. The average cost per mmBtu of natural gas decreased by approximately 8% during our second quarter of 2010 compared to our second quarter of 2009. Management attributes this decrease in natural gas costs with higher fixed price natural gas contracts that we had during two months of our second quarter of 2009 which were above market rates. These natural gas contracts increased the average price we paid for natural gas during our second quarter of 2009. In addition, we decreased our natural gas consumption during our second quarter of 2010 by approximately 8% compared to our second quarter of 2009. Our natural gas consumption was lower during the 2010 period as a result of decreased ethanol and distillers grains production during our second quarter of 2010 compared to the same period of 2009.
Management anticipates that natural gas prices will be relatively stable in the next several months. However, should we experience more robust economic recovery, it could increase demand for energy which could lead to increases in natural gas prices. Further, should we experience any natural gas supply disruptions, including disruptions from hurricane activity, this could result in significant increases in natural gas prices.
Our corn and natural gas derivative instruments produced approximately $41,000 of combined realized and unrealized loss for the three month period ending April 30, 2010, which increased our cost of goods sold. For the three months ending April 30, 2009, our corn and natural gas derivative instruments produced approximately $374,000 of combined realized and unrealized gain, which decreased our cost of goods sold. We recognize the gains or losses that result from 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.
Operating Expenses. We experienced higher operating expenses during our second quarter of 2010 compared to the same period of 2009. This increase in operating expenses during the 2010 period was a result of increased personnel expense and bonus accrual.
Other Income (Expense). We had significantly more other income during our second quarter of 2010 compared to the same period of 2009. We had significantly more interest income during our second quarter of 2010 as a result of having more cash on hand. Our interest expense was lower during our second quarter of 2010 compared to our second quarter of 2009 as a result of decreased principal amounts outstanding on our credit facilities. Our net income in investments significantly increased during our second quarter of 2010 compared to the same period of 2009, primarily due to profitability improvements in the ethanol industry.
Results of Operations for the Six Months Ended April 30, 2010 and 2009
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, 2010 and 2009:
|
| Six Months Ended |
| Six Months Ended |
| ||||||
Income Statement Data |
| Amount |
| % |
| Amount |
| % |
| ||
Revenues |
| $ | 102,843,625 |
| 100.0 |
| $ | 93,626,243 |
| 100.0 |
|
|
|
|
|
|
|
|
|
| |||
Cost of Goods Sold |
| $ | 92,856,214 |
| 90.3 |
| $ | 98,226,876 |
| 104.9 |
|
|
|
|
|
|
|
|
|
|
| ||
Gross Profit (Loss) |
| $ | 9,987,411 |
| 9.7 |
| $ | (4,600,633 | ) | 4.9 |
|
|
|
|
|
|
|
|
|
|
| ||
Operating Expenses |
| $ | 1,273,542 |
| 1.2 |
| $ | 928,250 |
| 1.0 |
|
|
|
|
|
|
|
|
|
|
| ||
Operating Income (Loss) |
| $ | 8,713,869 |
| 8.5 |
| $ | (5,528,883 | ) | 5.9 |
|
|
|
|
|
|
|
|
|
|
| ||
Other Income (Expense) |
| $ | 1,401,720 |
| 1.4 |
| $ | (1,275,311 | ) | 1.4 |
|
|
|
|
|
|
|
|
|
|
| ||
Net Income (Loss) |
| $ | 10,115,589 |
| 9.8 |
| $ | (6,804,194 | ) | 7.3 |
|
Revenues. Our total revenues were higher for the six month period ended April 30, 2010 compared to the same period of 2009. This increase in revenue is a result of a significant increase in the average price we received for our ethanol during the first six months of our 2010 fiscal year compared to the same period of 2009. In addition, the average price of our corn oil significantly increased during the first six months of our 2010 fiscal year compared to the same period of 2009. These increases in ethanol and corn oil prices were somewhat offset by lower distillers grains prices that we experienced for the first six months of our 2010 fiscal year compared to the same period of 2009.
The average price we received for our ethanol was approximately 13% higher for the first six months of our 2010 fiscal year compared to the same period of 2009. Management attributes this increase in ethanol prices with an improvement in the ethanol industry, higher gasoline prices and the lack of Brazilian ethanol imports. Our ethanol production and sales for the first six months of our 2010 fiscal year were comparable to our production and sales
during the first six months of our 2009 fiscal year. We also experienced an approximately $811,000 combined realized and unrealized gain for the six month period ended April 30, 2010 related to ethanol swaps which increased our revenues. We had no ethanol related gains or losses from ethanol swaps for the same period of 2009.
The average price we received for our dried distillers grains was approximately 21% lower for the first six months of our 2010 fiscal year compared to the same period of 2009. In addition, the average price we received for our modified distillers grains was approximately 18% lower for the first six months of our 2010 fiscal year compared to the same period of 2009. We sold more tons of distillers grains during the first six months of our 2010 fiscal year compared to the same period of 2009. On a total tons basis, we sold approximately 2% more distillers grains during the first six months of our 2010 fiscal year compared to the same period of 2009. However, we sold significantly more tons of distillers grains in the dried form during the first six months of our 2010 fiscal year compared to the same period of 2009. Management attributes this increase to supply and demand forces in the distillers grains market.
We sold approximately 13% fewer pounds of corn oil during the first six months of our 2010 fiscal year compared to the same period of 2009. Offsetting this decrease in corn oil sales, the average price per pound of corn oil increased by approximately 51% for the first six months of our 2010 fiscal year compared to the same period of 2009.
Cost of Goods Sold. Our cost of goods sold was significantly lower for the first six months of our 2010 fiscal year compared to the same period of our 2009 fiscal year. Our average cost per bushel of corn was approximately 8% lower during the first six months of our 2010 fiscal year compared to the same period of 2009. Partially offsetting this decrease in our average corn cost, we experienced an increase of approximately 4% in the number of bushels of corn we ground during the first six months of our 2010 fiscal year compared to the same period of 2009. Management attributes this increase in the number of bushels of corn we ground during the 2010 period with a decrease in our ethanol conversion efficiency during the 2010 period. We completed plant upgrades and maintenance during our April 2010 shutdown, which have since improved our ethanol conversion efficiencies.
Our natural gas costs decreased during the first six months of our 2010 fiscal year compared to the same period of 2009. The average price we paid per mmBtu of natural gas was approximately 20% lower during the first six months of our 2010 fiscal year compared to the same period of 2009. Our natural gas consumption during the first six months of our 2010 fiscal year was approximately 4% higher compared to the first six months of our 2009 fiscal year. Management attributes this increase in our natural gas consumption with a decrease in efficiencies during the first six months of 2010 and approximately a 9% increase in the amount of distillers grains we sold. However, our ethanol plant efficiency has improved following our April 2010 shutdown as a result of improvements we made at the ethanol plant.
We experienced an approximately $162,000 combined realized and unrealized gain for the six month period ended April 30, 2010 related to our corn and natural gas derivative instruments which decreased our cost of goods sold. By comparison, we experienced an approximately $497,000 combined realized and unrealized loss for the six months ended April 30, 2009 related to our corn and natural gas derivative instruments which increased our cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn and natural gas in cost of goods sold as the changes occur. As corn and natural gas prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance.
Operating Expenses. Our operating expenses were higher for the first six months of our 2010 fiscal year compared to the same period of our 2009 fiscal year, primarily as a result of increased personnel expense, bonus accrual and insurance expense.
Other Income (Expense). Our interest income was higher for the six month period ended April 30, 2010 compared to the same period of 2009 as a result of having more cash on hand during the 2010 period. Our interest expense was lower for the first six months of our 2010 fiscal year compared to the same period of 2009 due to decreased borrowing on our credit facilities during the 2010 period. Our income from our investments was significantly higher for the first six months of our 2010 fiscal year compared to the same period of 2009 due to the general improvement of performance in the ethanol industry.
Changes in Financial Condition for the Six Months Ended April 30, 2010
Current Assets. Our current assets were higher at April 30, 2010 compared to October 31, 2009. The increase is primarily the result of a significant increase in cash that we had on hand at April 30, 2010 due to improved conditions in the ethanol market. As of April 30, 2010, we had more than $9.1 million in cash and equivalents, whereas at October 31, 2009, we were relying on our revolving line of credit for cash to fund our operations. Our accounts receivable at April 30, 2010 significantly decreased compared to October 31, 2009 as a result of a drop in ethanol prices since the end of our 2009 fiscal year, the timing of our plant shut down for maintenance was during the last week of April 2010 and an amendment to our ethanol marketing agreement that now has us holding ethanol shipped via unit trains in our inventory until such time as the unit train is completed. This also results in the increase in our inventory at April 30, 2010 compared to October 31, 2009. The amount of cash that our commodities broker was holding in our margin account at April 30, 2010 compared to October 31, 2009 significantly decreased partially as a result of derivative instrument contracts that were outstanding as of October 31, 2009 but settled by April 30, 2010. Our prepaid expenses were higher at April 30, 2010 compared to October 31, 2009 as a result of an insurance payment we made in November 2009 which covers our insurance premiums for the entire year.
Property and Equipment. The net value of our property and equipment was lower at April 30, 2010 compared to October 31, 2009 primarily as a result of increases in our accumulated depreciation. In addition, we have ongoing construction in progress related to various plant improvements.
Other Assets. Our other assets were higher at April 30, 2010 compared to October 31, 2009 due mainly to the income we recognized during the first six months of our 2010 fiscal year from our various investments.
Current Liabilities. Our current liabilities were lower at April 30, 2010 compared to October 31, 2009. We had no checks outstanding in excess of our bank balances at April 30, 2010. The current portion of our long-term debt was higher at April 30, 2010 compared to October 31, 2009 as a result of a balloon payment that is due on our VAAPPFAP loan in December 2010 which is now included in the current portion of our long-term debt. Our accounts payable was lower at April 30, 2010 compared to October 31, 2009 due to our maintenance shutdown of the plant at the end of April 2010 which reduced the amount of corn and natural gas we purchased at the end of April 2010. The liability associated with our derivative instruments at April 30, 2010 compared to October 31, 2009 significantly decreased due to more favorable derivative instrument positions we had in place at April 30, 2010.
Long-term Liabilities. Our long-term liabilities were lower at April 30, 2010 compared to October 31, 2009, primarily as a result of ongoing payments we made on our term loan with Home Federal and the fact that we have paid off all amounts outstanding on our revolving line of credit with Home Federal as of April 30, 2010. We had $6.9 million outstanding on our revolving line of credit with Home Federal as of October 31, 2010. Our deferred compensation at April 30, 2010 compared to October 31, 2009 decreased as a result of payments we made to certain of our executive officers and key employees pursuant to our deferred compensation plan.
Distributions to Members
We did not make any distributions to our members during the first six months of our 2010 fiscal year. Management anticipates continuing to monitor our cash position and our projections regarding our profitability in determining whether to make a distribution to our members during our 2010 fiscal year. Any such distribution will be subject to approval by our primary lender, Home Federal.
Liquidity and Capital Resources
Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash from our operations to continue to operate the ethanol plant at capacity for the next 12 months. As a result of current conditions in the ethanol market that have presented more favorable operating conditions than we experienced during the beginning of our 2009 fiscal year, we have been able to reduce our reliance on our revolving line of credit. We did not have any amount outstanding on our revolving line of credit as of April 30, 2010 and we had more than $9.1 million in cash on hand as of April 30, 2010.
We do not currently anticipate seeking additional equity or debt financing in the near term. However, should we experience unfavorable operating conditions in the future, we may have to secure additional debt or equity financing for working capital or other purposes.
We do not currently anticipate any significant purchases of property and equipment that would require us to secure additional capital resources in the next 12 months. However, management continues to evaluate conditions in the ethanol industry and explore opportunities to improve the efficiency and profitability of our operations which may require capital expenditures.
The following table shows cash flows for the six months ended April 30, 2010 and 2009:
|
| Six Months Ended April 30 |
| ||||
|
| 2010 |
| 2009 |
| ||
Net cash provided by (used in) operating activities |
| $ | 17,714,445 |
| $ | (5,801,543 | ) |
Net cash (used in) investing activities |
| $ | (386,290 | ) | $ | (2,404,824 | ) |
Net cash provided by (used in) financing activities |
| $ | (8,159,171 | ) | $ | 9,161,515 |
|
Cash Flow From Operations
Our cash flows from operations for the six month period ended April 30, 2010 significantly increased compared to the same period of 2009. This change is primarily related to a significant increase in our net income for first six months of 2010 compared to the same period of 2009. We had net income of more than $10 million for the six months ended April 30, 2010 compared to a net loss of more than $6.8 million for six month period ended April 30, 2009. Another significant change in our cash provided by operations came from the change in accounts receivable due to the timing of our 2010 maintenance shutdown in April compared to the 2009 maintenance shutdowns in January and May.
Cash Flow From Investing Activities
We used significantly less cash for investing activities during the six months ended April 30, 2010 compared to the same period of 2009. During the six months ended April 30, 2009, we used cash primarily for the installation of our corn oil extraction equipment verses significantly fewer capital expenditures during the same six month period for 2010.
Cash Flow From Financing Activities.
During the six month period ended April 30, 2010, we used cash for financing activities primarily as a result of payments we made on our long-term debt and revolving line of credit with Home Federal. By comparison, our financing activities provided cash for our operations during the six month period ended April 30, 2009. We used $8.2 million in advances on our line of credit with Home Federal during the six month period ended April 30, 2009. This was primarily the result of poor operating conditions in the ethanol industry during that time period. We also received proceeds from our equity offering during the 2009 period which provided cash for our operations.
Short-Term and Long-Term Debt Sources
We currently have two credit facilities with our primary lender, Home Federal Savings Bank of Rochester, Minnesota. We have a revolving line of credit and an expansion loan we used to finance our plant expansion project.
Revolving Line of Credit
The amount of our revolving line of credit is $20,000,000 which is available to us until the maturity date on 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 our total indebtedness to our tangible net worth with a minimum annual
interest rate of 6.0%. There is an annual fee for the line of credit of $25,000. As of April 30, 2010, we had $0 outstanding on this line of credit and $20 million available to be drawn.
Expansion Loan
The original principal amount of our expansion loan was $30,000,000. The expansion loan’s maturity date is August 1, 2017. As of April 30, 2010, we had approximately $15,706,000 outstanding on the variable interest portion of our expansion loan at 6.0% interest and approximately $8,580,000 outstanding on the fixed interest portion of the expansion loan at a rate of 6.70% interest. We started making payments on the expansion loan in October 2007 and on July 21, 2008, we elected to secure the fixed interest rate on a portion of our expansion loan.
Our variable interest rates are adjusted annually on March 1st. However, as a result of current low interest rates, our variable interest rate loans will continue to accrued interest at the 6.0% minimum interest rate.
Covenants
Our credit agreements with Home Federal are subject to numerous covenants requiring us to maintain various financial ratios. As of April 30, 2010, we were in compliance with all of our loan covenants with Home Federal. We anticipate that we will be in compliance with our loan covenants for the next 12 months.
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 August 15, 2008 we received confirmation from the Iowa Department of Economic Development that all criteria of the forgivable loan were satisfied and that the $100,000 forgivable portion of the 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, 2010 was approximately $213,000.
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 ethanol plant is located. Based on our 2009 assessment, the total amount of these grants is expected to be approximately $6 million, which will be paid semi-annually over a 10-year period with the final payment being made in 2019.
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:
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, loading of the goods or when the customer picks up the goods. Collectability of revenue is reasonably assured based on historical evidence of collectability between the Company and its customers. Interest income is recognized as earned.
Shipping costs incurred by the Company in the sale of ethanol and corn oil are not specifically identifiable and as a result, revenue from the sale of ethanol and corn oil are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of distiller grain products are included in cost of goods sold.
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, 2010 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 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 quarters ended April 30, 2010 and 2009, the Company recorded combined realized and unrealized gains for derivatives from ethanol, corn and natural gas of approximately $770,000 and $374,000 respectively. These gains are recorded in revenues and cost of goods sold, respectively.
Off-Balance Sheet Arrangements.
We currently have no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to the impact of market fluctuations associated with commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. While we have certain variable interest rate loans, these loans are subject to a minimum interest rate and will not be subject to adjustment until March 1, 2011. 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.
Commodity Price Risk
We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and 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 and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.
As of April 30, 2010, we had price protection in place for approximately 19% of our anticipated corn needs, approximately 7% of our natural gas needs and 14% of our ethanol sales for the next 12 months.
A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas prices and average ethanol price as of April 30, 2010, 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,
2010. The results of this analysis, which may differ from actual results, are as follows:
|
| Estimated Volume |
| Unit of Measure |
| Hypothetical |
| Approximate Adverse Change to Income |
| |
Natural Gas |
| 2,933,000 |
| MMBTU |
| 10 | % | $ | 1,191,000 |
|
Ethanol |
| 98,992,000 |
| Gallons |
| 10 | % | $ | 14,086,000 |
|
Corn |
| 33,440,000 |
| Bushels |
| 10 | % | $ | 11,685,000 |
|
Liability Risk
We participate in a captive reinsurance company (the “Captive”). The Captive reinsures losses related to worker’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 cannot be assessed in excess of the amount in the collateral fund.
ITEM 4T. CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
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, 2010. Based on 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.
For the fiscal quarter ended April 30, 2010, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
The following risk factors is provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K. The risk factors set forth below should be read in conjunction with the risk factors section and the Management’s Discussion and Analysis section for the fiscal year ended October 31, 2009, included in our annual report on Form 10-K.
The California Low Carbon Fuel Standard may decrease demand for corn based ethanol which could negatively impact our profitability. Recently, California passed a Low Carbon Fuels Standard (LCFS). The California LCFS requires that renewable fuels used in California must accomplish certain reductions in greenhouse
gases which are measured using a lifecycle analysis. Management believes that these new regulations could preclude corn based ethanol produced in the Midwest from being used in California. California represents a significant ethanol demand market. If we are unable to supply ethanol to California, it could significantly reduce demand for the ethanol we produce. Any decrease in ethanol demand could negatively impact ethanol prices which could reduce our revenues and negatively impact our ability to profitably operate the ethanol plant.
If the Federal Volumetric Ethanol Excise Tax Credit (“VEETC”) expires on December 31, 2010, it could negatively impact our profitability. The ethanol industry is benefited by VEETC which is a federal excise tax credit of 4.5 cents per gallon of ethanol blended with gasoline at a rate of at least 10%. This excise tax credit is set to expire on December 31, 2010. We believe that VEETC positively impacts the price of ethanol. On December 31, 2009, the portion of VEETC that benefits the biodiesel industry was allowed to expire. This resulted in the biodiesel industry ceasing to produce biodiesel because the price of biodiesel without the tax credit was uncompetitive with the cost of petroleum based diesel. If the portion of VEETC that benefits ethanol is allowed to expire, it could negatively impact the price we receive for our ethanol and could negatively impact our profitability.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. (REMOVED AND RESERVED).
None.
(a) The following exhibits are filed as part of this report.
Exhibit |
| Exhibit |
| Filed |
| 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 |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| GOLDEN GRAIN ENERGY, LLC | |
|
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| |
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|
| |
Date: | June 9, 2010 |
| /s/ Walter Wendland |
|
| Walter Wendland | |
|
| President and Chief Executive Officer | |
|
| (Principal Executive Officer) | |
|
|
| |
|
|
| |
Date: | June 9, 2010 |
| /s/ Christine Marchand |
|
| Christine Marchand | |
|
| Chief Financial Officer | |
|
| (Principal Financial and Accounting Officer) |