UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2012
or
¨ | 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: 000-52421
ADVANCED BIOENERGY, LLC
(Exact name of Registrant as Specified in its Charter)
Delaware | 20-2281511 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
8000 Norman Center Drive, Suite 610
Bloomington, Minnesota 55437
(763) 226-2701
(Address, including zip code, and telephone number,
including area code, of Registrant’s Principal Executive Offices)
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. Yes þ 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.) Yes þ 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. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | þ (Do not check if a smaller reporting company) | 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 ¨ No þ
As of August 9, 2012, the number of outstanding units was 24,714,180.
ADVANCED BIOENERGY, LLC
FORM 10-Q
Index
Page | ||||
Part I. Financial Information | ||||
3 | ||||
3 | ||||
4 | ||||
5 | ||||
6 | ||||
7 | ||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 | |||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 33 | |||
34 | ||||
Part II. Other Information | ||||
35 | ||||
35 | ||||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 36 | |||
36 | ||||
36 | ||||
36 | ||||
36 | ||||
37 | ||||
38 |
2
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
ADVANCED BIOENERGY, LLC & SUBSIDIARIES
(Dollars in thousands)
June 30, 2012 | September 30, 2011 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 19,473 | $ | 18,725 | ||||
Accounts receivable: | ||||||||
Trade accounts receivable, net of allowance for doubtful accounts of $178 at June 30, 2012 and September 30, 2011 | 12,251 | 14,653 | ||||||
Other receivables | 1,389 | 838 | ||||||
Due from broker | 728 | 1,014 | ||||||
Inventories | 17,149 | 22,106 | ||||||
Prepaid expenses | 1,868 | 2,175 | ||||||
Current portion of restricted cash | 6,762 | 3,959 | ||||||
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Total current assets | 59,620 | 63,470 | ||||||
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Property and equipment, net | 154,074 | 164,821 | ||||||
Other assets: | ||||||||
Restricted cash | 1,146 | 1,508 | ||||||
Notes receivable-related party | 506 | 494 | ||||||
Other assets | 1,727 | 1,883 | ||||||
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Total assets | $ | 217,073 | $ | 232,176 | ||||
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LIABILITIES AND MEMBERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 8,968 | $ | 6,688 | ||||
Accrued expenses | 6,724 | 6,528 | ||||||
Derivative financial instruments | 295 | 832 | ||||||
Current portion of long-term debt (stated principal amount of $15,280 and $20,541 at June 30, 2012 and September 30, 2011, respectively) | 17,238 | 21,703 | ||||||
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Total current liabilities | 33,225 | 35,751 | ||||||
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Other liabilities | 332 | 318 | ||||||
Deferred income | 3,703 | 4,208 | ||||||
Long-term debt (stated principal amount of $107,277 and $117,962 at June 30, 2012 and September 30, 2011, respectively) | 114,086 | 126,253 | ||||||
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Total liabilities | 151,346 | 166,530 | ||||||
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Members’ equity: | ||||||||
Members’ capital, no par value, 24,714,180 units issued and outstanding | 171,249 | 171,246 | ||||||
Accumulated deficit | (105,522 | ) | (105,600 | ) | ||||
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Total members’ equity | 65,727 | 65,646 | ||||||
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Total liabilities and members’ equity | $ | 217,073 | $ | 232,176 | ||||
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See notes to consolidated financial statements.
3
ADVANCED BIOENERGY, LLC & SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per unit data)
(Unaudited)
Three months ended | Nine months ended | |||||||||||||||
June 30, 2012 | June 30, 2011 | June 30, 2012 | June 30, 2011 | |||||||||||||
Net sales | ||||||||||||||||
Ethanol and related products | $ | 137,655 | $ | 154,848 | $ | 440,474 | $ | 423,818 | ||||||||
Other | — | — | 366 | 358 | ||||||||||||
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Total net sales | 137,655 | 154,848 | 440,840 | 424,176 | ||||||||||||
Cost of goods sold | 144,080 | 153,370 | 433,029 | 411,783 | ||||||||||||
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Gross profit (loss) | (6,425 | ) | 1,478 | 7,811 | 12,393 | |||||||||||
Selling, general and administrative | 2,409 | 1,586 | 6,041 | 4,611 | ||||||||||||
Arbitration settlement expense | — | 1,083 | — | 3,789 | ||||||||||||
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Operating income (loss) | (8,834 | ) | (1,191 | ) | 1,770 | 3,993 | ||||||||||
Other income | 226 | 164 | 783 | 774 | ||||||||||||
Interest income | 26 | 27 | 61 | 64 | ||||||||||||
Interest expense | (630 | ) | (764 | ) | (2,536 | ) | (2,692 | ) | ||||||||
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Net income (loss) | $ | (9,212 | ) | $ | (1,764 | ) | $ | 78 | $ | 2,139 | ||||||
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Weighed average units outstanding—basic | 24,714,180 | 24,705,180 | 24,714,180 | 24,705,180 | ||||||||||||
Weighed average units outstanding—diluted | 24,755,155 | 24,705,180 | 24,714,180 | 24,705,180 | ||||||||||||
Income (loss) per unit—basic | $ | (0.37 | ) | $ | (0.07 | ) | $ | 0.00 | $ | 0.09 | ||||||
Income (loss) per unit—diluted | $ | (0.38 | ) | $ | (0.08 | ) | $ | 0.00 | $ | 0.08 |
See notes to consolidated financial statements.
4
ADVANCED BIOENERGY, LLC & SUBSIDIARIES
Consolidated Statements of Changes in Members’ Equity
For the Nine Months Ended June 30, 2012
(Dollars in thousands)
(Unaudited)
Member Units | Members’ Capital | Accumulated Deficit | Total | |||||||||||||
MEMBERS’ EQUITY—September 30, 2011 | 24,714,180 | $ | 171,246 | $ | (105,600 | ) | $ | 65,646 | ||||||||
Unit compensation expense | — | 3 | — | 3 | ||||||||||||
Net income | — | — | 78 | 78 | ||||||||||||
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MEMBERS’ EQUITY—June 30, 2012 | 24,714,180 | $ | 171,249 | $ | (105,522 | ) | $ | 65,727 | ||||||||
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See notes to consolidated financial statements
5
ADVANCED BIOENERGY, LLC & SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine Months Ended | ||||||||
June 30, 2012 | June 30, 2011 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 78 | $ | 2,139 | ||||
Adjustments to reconcile net income to operating activities cash flows: | ||||||||
Depreciation | 17,398 | 16,862 | ||||||
Amortization of deferred financing costs | 99 | 99 | ||||||
Amortization of deferred revenue and rent | (527 | ) | (517 | ) | ||||
Idle lease liability reduction | — | (154 | ) | |||||
Amortization of additional carrying value | (686 | ) | (645 | ) | ||||
Unit compensation expense | 3 | 34 | ||||||
Gain on disposal of assets | (9 | ) | (8 | ) | ||||
Unrealized loss (gain) on warrant derivative liability | 36 | (241 | ) | |||||
Change in risk management activities | (537 | ) | 314 | |||||
Change in working capital components: | ||||||||
Receivables | 2,125 | (2,639 | ) | |||||
Inventories | 4,957 | (5,844 | ) | |||||
Prepaid expenses | 307 | 668 | ||||||
Accounts payable | 2,280 | 3,741 | ||||||
Accrued expenses | 196 | 774 | ||||||
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Net cash provided by operating activities | 25,720 | 14,583 | ||||||
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Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (6,642 | ) | (3,951 | ) | ||||
Issuance of notes receivable | — | (490 | ) | |||||
Change in other assets | 57 | 154 | ||||||
Change in restricted cash | (2,441 | ) | 1,544 | |||||
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Net cash used in investing activities | (9,026 | ) | (2,743 | ) | ||||
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Cash flows from financing activities: | ||||||||
Payments on debt | (15,946 | ) | (14,549 | ) | ||||
Distribution to members | — | (27 | ) | |||||
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Net cash used in financing activities | (15,946 | ) | (14,576 | ) | ||||
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Net increase (decrease) in cash and cash equivalents | 748 | (2,736 | ) | |||||
Beginning cash and cash equivalents | 18,725 | 22,772 | ||||||
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Ending cash and cash equivalents | $ | 19,473 | $ | 20,036 | ||||
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Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 3,498 | $ | 3,401 |
See notes to consolidated financial statements.
6
ADVANCED BIOENERGY, LLC & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012 and 2011
(Unaudited)
1. Organization and Significant Accounting Policies
The consolidated financial statements include the accounts of Advanced BioEnergy, LLC (“ABE” or the “Company”) and its wholly owned subsidiaries, ABE Fairmont, LLC (“ABE Fairmont”) and ABE South Dakota, LLC (“ABE South Dakota”). All intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP, for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The interim financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011. The financial information as of June 30, 2012 and the results of operations for the three and nine months ended June 30, 2012 are not necessarily indicative of the results for the fiscal year ending September 30, 2012.
The Company currently operates three ethanol production facilities in the U.S. with a combined production capacity of 195 million gallons per year. The Company commenced operations at the 110 million gallon facility in Fairmont, Nebraska in November 2007. The Company acquired existing facilities in Aberdeen, South Dakota (9 million gallons) and Huron, South Dakota (32 million gallons) in November 2006 and commenced operations at the 44 million gallon Aberdeen expansion facility in January 2008.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s cash balances are maintained in bank depositories and periodically exceed federally insured limits. The Company has not experienced losses in these accounts. The Company’s restricted cash includes cash held for debt service under the terms of its debt agreements, and cash deposited to support letters of credit.
Fair Value of Financial Instruments
Financial instruments include cash, cash equivalents and restricted cash, derivative financial instruments, accounts receivable, accounts payable, accrued expenses, warrants, and long-term debt. The fair value of derivative financial instruments is based on quoted market prices, which are considered to be Level 1 inputs. The fair value of warrants is determined using the Black-Scholes valuation model. The fair value of the long-term debt is estimated based on Level 3 inputs which are 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 other market factors. The Company believes the carrying value of the debt instruments at ABE Fairmont approximate fair value. Based on the restructuring event in 2010, the fair value of the debt instruments at ABE South Dakota is not determinable (refer to Note 5 for terms). The fair value of all other financial instruments are estimated to approximate carrying value due to the short-term nature of these instruments, and are considered to be Level 2 inputs.
Fair Value Measurements
In determining fair value of its derivative financial instruments and warrant liabilities, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often uses certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three fair value hierarchy 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.
7
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 incorporating certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
Commodity futures and exchange-traded commodity options contracts are reported at fair value using Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade (“CBOT’) and New York Mercantile Exchange (“NYMEX”) markets.
The following table summarizes financial assets and financial liabilities measured at the approximate fair value used to measure fair value (amounts in thousands):
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
At June 30, 2012 | ||||||||||||||||
Liabilities—Derivative Financial Instruments | $ | 295 | $ | 295 | $ | — | $ | — | ||||||||
Other Liabilities—Warrant Derivative | 218 | — | — | 218 | ||||||||||||
At September 30, 2011 | ||||||||||||||||
Liabilities—Derivative Financial Instruments | $ | 832 | $ | 832 | $ | — | $ | — | ||||||||
Other Liabilities—Warrant Derivative | 182 | — | — | 182 |
The unit warrants issued contain a strike price adjustment feature. The Company calculated the fair value of the warrants using the Black-Scholes valuation model. During the nine months ended June 30, 2012 and 2011, the Company recognized an unrealized loss (gain) of $36,000 and ($243,000), respectively, related to the change in the fair value of the warrant derivative liability. The liability can fluctuate significantly if the market value of the unit changes.
The assumptions used in the Black-Scholes valuation model were as follows:
June 30, | September 30, | |||||||
2012 | 2011 | |||||||
Market value(1) | $ | 1.50 | $ | 1.50 | ||||
Exercise price | $ | 1.50 | $ | 1.50 | ||||
Expected volatility (2) | 45.93 | % | 46.92 | % | ||||
Expected life (years) | 2.25 | 1.50 | ||||||
Risk-free interest rate | 0.33 | % | 0.25 | % | ||||
Forfeiture rate | — | — | ||||||
Dividend rate | — | — |
(1) | Market value based on trading values of comparable competitors. |
(2) | Volatility based on trading volatility of a comparable competitor. |
8
The following table reflects the activity for the warrant derivative, the only liability measured at fair value using Level 3 inputs, for the nine months ended June 30, 2012 and 2011 (amounts in thousands):
2012 | 2011 | |||||||
Beginning balance | $ | 182 | $ | 474 | ||||
Unrealized loss (gain) related to the change in fair value | 36 | (243 | ) | |||||
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Ending balance | $ | 218 | $ | 231 | ||||
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Receivables
Credit sales are made to a few customers with no collateral required. Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual receivables and considering a customer’s financial condition, credit history and current economic conditions. Receivables are written off if deemed uncollectible. Recoveries of receivables previously written off are recorded when received.
Derivative Instruments/Due From Broker
On occasion, the Company has entered into derivative contracts to hedge the Company’s exposure to price risk related to forecasted corn purchases and forecasted ethanol sales. Accounting for derivative contracts requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction.
Although the Company believes its derivative positions are economic hedges, it has not designated any derivative position as a hedge for accounting purposes and it records derivative positions on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings.
In addition, certain derivative financial instruments that meet the criteria for derivative accounting treatment also qualify for a scope exception to derivative accounting, as they are considered normal purchases and sales. The availability of this exception is based on the assumption that the Company has the ability to deliver or take delivery of the underlying item, and it is probable that the Company will do so. Derivatives that are considered to be normal purchases and sales are exempt from derivative accounting treatment, and are accounted for under accrual accounting
Inventories
Corn, chemicals, supplies, work in process, ethanol and distillers grains inventories are stated at the lower of weighted average cost or market.
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation computed using the straight-line method over the estimated useful lives:
Office equipment | 3-7 Years | |
Process equipment | 10 Years | |
Buildings | 40 Years |
Maintenance and repairs are charged to expense as incurred; major improvements and betterments are capitalized. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount on the asset may not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows from operations are less than the carrying value of the asset group. An impairment loss is measured by the amount by which the carrying value of the asset exceeds the estimated fair value on that date.
Revenue Recognition
Ethanol revenue is recognized when product title and all risk of ownership is transferred to the customer as specified in the contractual agreements with the marketers. At all of the Company’s plants, revenue is recognized upon the release of the product for shipment. Revenue from the sale of co-products is recorded when title and all risk of ownership transfer to
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customers, which generally occurs at the time of shipment. Co-products and related products are generally shipped free on board (“FOB”) shipping point. Interest income is recognized as earned. In accordance with the Company’s agreements for the marketing and sale of ethanol and related products, commissions due to the marketers are deducted from the gross sale price at the time of payment.
Income (loss) Per Unit
Basic and diluted income (loss) per unit is computed using the weighted-average number of vested units outstanding during the period. Unit appreciation rights and the unit warrants are considered unit equivalents and are considered in the diluted income per unit computation, but have not been included in the computations of diluted income (loss) per unit for the nine months ended June 30, 2012, because their effect would be anti-dilutive. Basic earnings and diluted per unit data were computed as follows (in thousands except per unit data):
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Numerator: | ||||||||||||||||
Net income (loss) for basic earnings per unit | $ | (9,212 | ) | $ | (1,764 | ) | $ | 78 | $ | 2,139 | ||||||
Gain on fair value of warrant derivative liability | (123 | ) | (179 | ) | — | (243 | ) | |||||||||
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Net income (loss) for diluted earnings per unit | $ | (9,335 | ) | $ | (1,943 | ) | 78 | 1,896 | ||||||||
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Denominator: | ||||||||||||||||
Basic common units outstanding | 24,714 | 24,705 | 24,714 | 24,705 | ||||||||||||
Diluted common units outstanding | 24,755 | 24,705 | 24,714 | 24,705 | ||||||||||||
Income (loss) per unit basic | $ | (0.37 | ) | $ | (0.07 | ) | $ | 0.00 | $ | 0.09 | ||||||
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Income (loss) per unit diluted | $ | (0.38 | ) | $ | (0.08 | ) | $ | 0.00 | $ | 0.08 | ||||||
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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.
Risks and Uncertainties
The ethanol industry previously received an indirect benefit of the Volumetric Ethanol Excise Tax Credit (“VEETC”) provided to gasoline blenders, which expired on December 31, 2011. This credit provided for a 45-cent a gallon tax credit for gasoline blenders and a 54-cent a gallon tariff on ethanol imports. Although the Renewable Fuels Standard still exists to maintain the demand for ethanol in the United States, the Company is uncertain how the elimination of the VEETC credit and import tariffs will ultimately affect the Company and the overall ethanol industry. Any reduction in the Renewable Fuels Standard could have an adverse effect on the Company and the overall ethanol industry.
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2. Inventories
A summary of inventories is as follows (in thousands):
June 30, | September 30, | |||||||
2012 | 2011 | |||||||
Corn | $ | 4,526 | $ | 4,889 | ||||
Chemicals | 1,109 | 1,280 | ||||||
Work in process | 3,440 | 3,610 | ||||||
Ethanol | 4,885 | 9,280 | ||||||
Distillers grain | 497 | 713 | ||||||
Supplies and parts | 2,692 | 2,334 | ||||||
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Total | $ | 17,149 | $ | 22,106 | ||||
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3. Property and Equipment
A summary of property and equipment is as follows (in thousands):
June 30, | September 30, | |||||||
2012 | 2011 | |||||||
Land | $ | 3,999 | $ | 3,999 | ||||
Buildings | 21,351 | 21,341 | ||||||
Process equipment | 225,727 | 221,020 | ||||||
Office equipment | 2,119 | 1,813 | ||||||
Construction in process | 1,862 | 260 | ||||||
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255,058 | 248,433 | |||||||
Accumulated depreciation | (100,984 | ) | (83,612 | ) | ||||
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Property and equipment, net | $ | 154,074 | $ | 164,821 | ||||
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4. Notes Receivable-Related Party
On June 30, 2011, the Company received a $490,000 promissory note from Ethanol Capital Partners, LP-Series R, Ethanol Capital Partners LP-Series T, Ethanol Capital Partners LP-Series V, Ethanol Investment Partners, LLC and Tennessee Ethanol Partners, LP in connection with payments the Company made in connection with the settlement of arbitration brought by a former officer of the Company against the Company and related litigation brought against a director of the Company. The note is due on July 1, 2016 and accrues interest at the Prime Rate, adjusted annually. The note is secured by a pledge of 4.4 million units of membership in the Company owned by the entities listed above. Any proceeds from the disposition of these units as well as distributions from the Company to the owners of the units will first go to pay down the promissory note and accrued interest.
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5. Debt
A summary of debt is as follows (in thousands, except percentages):
June 30, | ||||||||||||
2012 | June 30, | September 30, | ||||||||||
Interest Rate | 2012 | 2011 | ||||||||||
ABE Fairmont: | ||||||||||||
Senior credit facility—variable | 3.65 | % | $ | 40,740 | $ | 32,266 | ||||||
Senior credit facility—fixed | 7.53 | % | — | 20,000 | ||||||||
Seasonal line | 3.30 | % | — | — | ||||||||
Subordinate exempt facilities bonds—fixed | 6.75 | % | 5,370 | 6,185 | ||||||||
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46,110 | 58,451 | |||||||||||
ABE South Dakota: | ||||||||||||
Senior debt principal—variable | 3.46 | % | 73,447 | 77,052 | ||||||||
Restructuring fee | N/A | 3,000 | 3,000 | |||||||||
Additional carrying value of restructured debt | N/A | 8,767 | 9,453 | |||||||||
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85,214 | 89,505 | |||||||||||
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Total outstanding | $ | 131,324 | $ | 147,956 | ||||||||
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Additional carrying value of restructured debt | N/A | (8,767 | ) | (9,453 | ) | |||||||
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Stated principal | $ | 122,557 | $ | 138,503 | ||||||||
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The estimated maturities of debt at June 30 are as follows (in thousands):
Amortization of | ||||||||||||
Additional Carrying | ||||||||||||
Stated | Value of | |||||||||||
Principal | Restructured Debt | Total | ||||||||||
2013 | $ | 15,280 | $ | 1,958 | $ | 17,238 | ||||||
2014 | 9,155 | 2,561 | 11,716 | |||||||||
2015 | 13,815 | 2,464 | 16,279 | |||||||||
2016 | 77,197 | 1,784 | 78,981 | |||||||||
2017 | 5,815 | — | 5,815 | |||||||||
Thereafter | 1,295 | — | 1,295 | |||||||||
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Total debt | $ | 122,557 | $ | 8,767 | $ | 131,324 | ||||||
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Senior Credit Facility for the Fairmont Plant
ABE Fairmont has a senior credit facility with Farm Credit consisting of a term loan (“term loan A”), and a revolving term loan (“term loan B”). At June 30, 2012, the Company also had a $4.0 million revolving credit facility through Farm Credit for financing eligible grain inventory and equity in Chicago Board of Trade (“CBOT”) futures positions, which expires on May 1, 2013. ABE Fairmont also has a revolving credit facility with Farm Credit for financing third-party letters of credit. ABE Fairmont has issued a letter of credit in connection with a rail car lease, thereby fully utilizing the financing available under the $911,000 revolving credit facility as of June 30, 2012. This revolving credit facility expires in February 2014.
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At June 30, 2012, ABE Fairmont had $15.7 million outstanding on term loan A. Under the term loan A agreement, ABE Fairmont is required to make quarterly principal installments of $2.6 million starting in August 2012, and continuing through November 2013, followed by a final installment in an amount equal to the remaining unpaid term loan A principal balance in February 2014. In April 2012, the term loan A agreement was amended to skip the May 2012 principal payment in order to fund a capital project. In addition, under the term loan A agreement, for each fiscal year ending through September 30, 2013, ABE Fairmont is required to pay an additional amount equal to the lesser of $8.0 million or 75% of its free cash flow as defined in the agreement, not to exceed $16 million in the aggregate. The Company made cash sweep payments of $6.3 million and $5.0 million to Farm Credit in December 2011 and 2010, respectively, pursuant to this provision of the agreement.
At June 30, 2012, ABE Fairmont had $25.0 million outstanding on the revolving term loan B. On the earlier of December 1, 2014 or six months following complete repayment of term loan A, ABE Fairmont is required to begin repayment of revolving term loan B in $5.0 million semi-annual principal payments.
ABE Fairmont pays interest monthly at a variable rate comprised of the 30-day LIBOR plus a fixed rate of 3.40% on the remaining outstanding term loan A and B senior credit facilities.
ABE Fairmont’s senior credit facility is secured by a first mortgage on all of ABE Fairmont’s real property and a lien on all of ABE Fairmont’s personal property. The agreement contains financial and restrictive covenants, including limitations on additional indebtedness, restricted payments, and the incurrence of liens and transactions with affiliates and sales of assets. In addition, the senior secured credit facility requires ABE Fairmont to comply with certain financial covenants, including maintaining monthly minimum working capital, monthly minimum net worth, annual debt service coverage ratios and capital expenditure limitations.
The Company believes ABE Fairmont has violated its minimum working capital covenant of $10.0 million subsequent to June 30, 2012. The Company has been in ongoing discussions with the senior lender regarding this matter, and believes it is probable that ABE Fairmont will receive appropriate waivers from the senior lenders in the fiscal fourth quarter, and continues to classify this liability in accordance with its scheduled repayment terms.
Fillmore County Subordinate Exempt Facilities Revenue Bonds for the Fairmont plant
ABE Fairmont has $5.4 million of subordinate exempt facilities revenue bonds outstanding under a subordinated loan and trust agreement with the County of Fillmore, Nebraska and Wells Fargo, N.A. The loan agreement is collateralized by the Fairmont plant assets. ABE Fairmont’s repayment of the loan and the security for the loan are subordinate to its senior credit facility. The loan requires semi-annual interest payments, with annual principal payments of $815,000 through December 2016, with the remainder due in December 2017.
Senior Credit Agreement for the South Dakota Plants
ABE South Dakota entered into an Amended and Restated Senior Credit Agreement (the “Senior Credit Agreement”) effective as of June 18, 2010, and further amended on December 28, 2011, which was accounted for under troubled debt restructuring rules. The Senior Credit Agreement was executed among ABE South Dakota, the lenders from time to time party thereto, and Portigon AG, New York Branch, (formerly known as WestLB AG), as Administrative Agent and Collateral Agent. The Senior Credit Agreement converted the outstanding principal amount of the loans and certain other amounts under interest rate protection agreements to a senior term loan in an aggregate principal amount equal to $84.4 million. The interest accrued on outstanding term and working capital loans under the existing credit agreement was reduced to zero. ABE South Dakota has agreed to pay a $3.0 million restructuring fee to the lenders due at the earlier of March 31, 2016 or the date on which the loans are repaid in full. ABE South Dakota recorded the restructuring fee as a long-term, non-interest bearing debt on its consolidated balance sheets.
Since the future maximum undiscounted cash payments on the Senior Credit Agreement (including principal, interest and the restructuring fee) exceeded the adjusted carrying value, no gain for the forgiven interest was recorded, the carrying value was not adjusted and the modification of terms are being accounted for on a prospective basis, via a new effective interest calculation, amortized over the life of the note, offsetting interest expense. Based on the treatment of the troubled debt restructuring which will result in the additional carrying value being amortized as a reduction in interest expense over the term of the loan, the Company’s effective interest rate over the term of the restructuring note agreement is currently approximately 0.13% over the Three-Month LIBOR (0.60% at June 30, 2012).
The principal amount of the term loan facility is payable by three quarterly payments of $1,105,000 from September 30, 2012, and quarterly payments of $750,000 beginning June 30, 2013, with the remaining principal amount fully due and payable on March 31, 2016. The credit agreement was amended in December 2011 to allow the Company to install corn oil extraction technology in its Aberdeen facility.
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ABE South Dakota has the option to select the interest rate on the senior term loan between base rate and euro-dollar rates for maturities of one to six months. Base rate loans bear interest at the administrative agent’s base rate plus an applicable margin of 2.0%, and increasing to 3.0% on June 16, 2013. Euro-dollar loans bear interest at LIBOR plus the applicable margin of 3.0%, and increasing to 4.0% on June 16, 2013. As of June 30, 2012, ABE South Dakota had selected the LIBOR plus 3.0% rate for a period of three months.
ABE South Dakota’s obligations under the Senior Credit Agreement are secured by a first-priority security interest in all of the equity of and assets of ABE South Dakota.
ABE South Dakota is allowed to make equity distributions (other than certain tax distributions) to ABE only upon ABE South Dakota meeting certain financial conditions and if there is no more than $25 million of principal outstanding on the senior term loan. Loans outstanding under the Senior Credit Agreement are subject to mandatory prepayment in certain circumstances, including, but not limited to, mandatory prepayments based upon receipt of certain proceeds of asset sales, casualty proceeds, termination payments, and cash flows.
The Senior Credit Agreement and the related loan documentation include, among other terms and conditions, limitations (subject to specified exclusions) on ABE South Dakota’s ability to make asset dispositions; merge or consolidate with or into another person or entity; create, incur, assume or be liable for indebtedness; create, incur or allow liens on any property or assets; make investments; declare or make specified restricted payments or dividends; enter into new material agreements; modify or terminate material agreements; enter into transactions with affiliates; change its line of business; and establish bank accounts. Substantially all cash of ABE South Dakota is required to be deposited into special, segregated project accounts subject to security interests to secure obligations in connection with the Senior Credit Agreement. The Senior Credit Agreement contains customary events of default and also includes an event of default for defaults on other indebtedness by ABE South Dakota and certain changes of control.
ABE South Dakota was in violation of certain covenants as of June 30, 2012 as a result of its entry into several new material agreements in May 2012. On July 31, 2012, ABE South Dakota, Portigon AG, New York Branch (f/k/a WestLB AG, New York Branch), as Lender to the Amended and Restated Senior Credit Agreement, along with six other Lenders, entered into a Letter Agreement, whereby the senior lenders consented to, along with certain other items, ABE South Dakota’s entry into the new agreements and waived the specified events of default.
ABE Letter of Credit
In connection with the execution of a rail car sublease, the Company, as parent of ABE South Dakota agreed to post an irrevocable and non-transferable standby letter of credit on May 4, 2012 for the benefit of Gavilon in the amount of $2,500,000 as security for the payment obligations of ABE South Dakota under the Gavilon agreements.
6. Major Customers and Subsequent Event
The two operating subsidiaries of the Company, ABE South Dakota and ABE Fairmont, entered into several agreements with Gavilon, LLC, a commodity marketing firm, and affiliated companies (collectively “Gavilon”), on May 4, 2012, and were amended on July 31, 2012. ABE South Dakota and ABE Fairmont entered into separate ethanol marketing agreements with Gavilon (“Ethanol Marketing Agreements”) dated May 4, 2012, and amended on July 31, 2012. The Ethanol Marketing Agreements provide that the subsidiaries will sell to Gavilon all of the denatured fuel-grade ethanol produced at the South Dakota and Fairmont plants. The term of the Ethanol Marketing Agreements began on August 1, 2012, and expire on December 31, 2015.
ABE South Dakota also entered into a Rail Car Sublease Agreement with Gavilon dated May 4, 2012, and amended on July 31, 2012, which became effective on August 1, 2012. Under the terms of the Rail Car Sublease, Gavilon agreed to sublease to ABE South Dakota all its interests in a master lease agreement covering certain rail cars. Under the terms of the Rail Car Sublease, ABE South Dakota is subleasing certain rail cars for varying terms expiring from June 30, 2014 to June 30, 2019.
ABE Fairmont and ABE South Dakota were parties to separate Ethanol Marketing Agreements with Hawkeye Gold, LLC to sell substantially all of the ethanol produced by the facilities through April 30, 2013. Effective July 31, 2012, the Company and Hawkeye Gold mutually agreed to terminate their ethanol marketing relationship for the sale of ethanol from the Company’s ethanol production facilities, in exchange for certain payments based on ethanol sold through April 30, 2013. In connection with the termination of these agreements, the Company will record a charge of approximately $1.7 million in the fiscal fourth quarter of 2012.
ABE Fairmont is currently self-marketing the distillers grains it produces. ABE South Dakota is party to a co-product marketing agreement with Dakotaland Feeds, LLC (“Dakotaland Feeds”), under which Dakotaland Feeds markets the local sale of distillers grains produced at the ABE South Dakota Huron plant to third parties for an agreed upon commission. The agreement is cancellable with a six month notice period. The Company currently has an agreement with Hawkeye Gold to market the distillers grains produced at the ABE South Dakota Aberdeen plants. The term of this agreement expires July 31, 2013. ABE South Dakota has signed an agreement with Gavilon to market the dry distillers grains from the Aberdeen plant effective, August 1, 2013 until July 31, 2016.
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Sales and receivables from the Company’s major customers were as follows (in thousands):
June 30, | June 30, | |||||||
2012 | 2011 | |||||||
Hawkeye Gold—Ethanol and Distiller Grains | ||||||||
Nine months revenues | $ | 367,983 | $ | 369,145 | ||||
Receivable balance at period end | 9,224 | 13,665 | ||||||
Dakotaland—ABE South Dakota Distillers Grains | ||||||||
Nine months revenues | $ | 12,629 | $ | 10,320 | ||||
Receivable balance at period end | 594 | 503 |
7. Risk Management
The Company is exposed to a variety of market risks, including the effects of changes in commodity prices and interest rates. 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 seeks to reduce the potentially adverse effects that the volatility of these markets may have on its current and future operating results. To reduce these effects, the Company generally attempts to fix corn purchase prices and related sale prices of ethanol and distillers grains with forward purchase and sales contracts to reduce volatility in future operating margins. In addition to entering into contracts to purchase 1.3 million bushels of corn and sell 41.8 million gallons of ethanol in which the futures price was not locked, the Company had entered into the following fixed price forward contracts at June 30, 2012 (in thousands):
Quantity (000s) | Amount | Period Covered | ||||||||||
Corn | Purchase Contracts | 1,234 bushels | $ | 7,767 | Jul 2012-Mar 2013 | |||||||
Ethanol | Sale Contracts | 290 gallons | 655 | Jul 2012 | ||||||||
Distillers grains | Sale Contracts | 35 tons | 7,353 | Jul 2012 | ||||||||
Corn Oil | Sale Contracts | 3,670 pounds | 1,600 | Jul-Aug 2012 |
Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed “normal purchases and normal sales,” and, therefore are not marked to market in the financial statements.
When forward contracts are not available at competitive rates, the Company may engage in hedging activities using exchange-traded futures contracts, OTC futures options or OTC swap agreements. Changes in market price of ethanol-related hedging activities are reflected in revenues while changes in market price of corn-related items are reflected in cost of goods sold. The following table represents the approximate amount of realized and unrealized gains (losses) and changes in fair value recognized in earnings on commodity contracts for the three and nine months ended June 30, 2012 and 2011, and the fair value of futures contracts as of June 30, 2012 and September 30, 2011 (in thousands):
Income Statement | Realized | Unrealized | Total | |||||||||||
Classification | Gain (Loss) | Gain (Loss) | Gain (Loss) | |||||||||||
Three months ending June 30, 2012 | Cost of Goods Sold | $ | (46 | ) | $ | (375 | ) | (421 | ) | |||||
Three months ending June 30, 2011 | Cost of Goods Sold | (2 | ) | (2 | ) | (4 | ) | |||||||
Nine months ending June 30, 2012 | Cost of Goods Sold | $ | (854 | ) | $ | 537 | (317 | ) | ||||||
Nine months ending June 30, 2011 | Cost of Goods Sold | 400 | (314 | ) | 86 |
Balance Sheet | June 30, | September 30, | ||||||||
Classification | 2012 | 2011 | ||||||||
Derivative financial instrument—futures contract | Current Liabilities | 295 | 832 |
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8. Commitments
Purchase Commitments
In May 2012, the Company signed a contract for the construction of corn storage bins with a capacity of approximately 1.5 million bushels in Fairmont. The project has a remaining commitment of approximately $4.0 million, with an expected completion date in the fall of 2012. The Company is financing the construction out of current cash flows.
Lease Commitments
Since the end of fiscal year 2011, the Company’s operating subsidiaries have entered into new lease commitments for rail cars. These lease commitments will increase annual lease expense in fiscal 2013 to approximately $5.9 million, compared to $5.2 million in fiscal 2011. The term of these lease commitments ranges from two to seven years.
9. Parent Financial Statements
The following financial information represents the unconsolidated financial statements of Advanced BioEnergy, LLC (“ABE”) as of June 30, 2012 and September 30, 2011, and the three and nine months ended June 30, 2012 and 2011. ABE’s ability to receive distributions from its consolidated subsidiaries is based on the terms and conditions in their respective credit agreements. ABE Fairmont is able to pay a distribution to ABE annually based on its financial results for that fiscal year, subject to maintaining compliance with all loan covenants and the terms and conditions of its senior secured credit agreement. ABE Fairmont paid a distribution to ABE in March 2012 of $3.8 million in accordance with these terms. ABE South Dakota is allowed to make equity distributions (other than certain tax distributions) to ABE only upon ABE South Dakota meeting certain financial conditions and if there is no more than $25 million of principal outstanding on the senior term loan.
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Advanced BioEnergy, LLC (Unconsolidated)
Balance Sheets
(unaudited) | ||||||||
June 30, | September 30, | |||||||
2012 | 2011 | |||||||
(Dollars in thousands) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 6,136 | $ | 3,457 | ||||
Restricted cash | 2,500 | — | ||||||
Other receivables | 351 | 524 | ||||||
Prepaid expenses | 32 | 42 | ||||||
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Total current assets | 9,019 | 4,023 | ||||||
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Property and equipment, net | 629 | 666 | ||||||
Other assets: | ||||||||
Investments in consolidated subsidiaries | 57,234 | 62,341 | ||||||
Notes receivable-related party | 506 | 494 | ||||||
Other assets | 32 | 32 | ||||||
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Total assets | $ | 67,420 | $ | 67,556 | ||||
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LIABILITIES AND MEMBERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 855 | $ | 1,083 | ||||
Accrued expenses | 506 | 509 | ||||||
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Total current liabilities | 1,361 | 1,592 | ||||||
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Other liabilities | 332 | 318 | ||||||
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Total liabilities | 1,693 | 1,910 | ||||||
Members’ equity: | ||||||||
Members’ capital, no par value, 24,714,180 units issued and outstanding | 171,249 | 171,246 | ||||||
Accumulated deficit | (105,522 | ) | (105,600 | ) | ||||
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Total members’ equity | 65,727 | 65,646 | ||||||
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Total liabilities and members’ equity | $ | 67,420 | $ | 67,556 | ||||
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Advanced BioEnergy, LLC (Unconsolidated)
Statements of Operations
(Unaudited)
Three months ended | Nine months ended | |||||||||||||||
June 30, 2012 | June 30, 2011 | June 30, 2012 | June 30, 2011 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Equity in earnings (losses) of consolidated subsidiaries | $ | (9,807 | ) | $ | (1,249 | ) | $ | (1,279 | ) | $ | 4,743 | |||||
Management fee income from subsidiaries | 1,157 | 1,024 | 3,506 | 3,004 | ||||||||||||
Selling, general and administrative expenses | (894 | ) | (804 | ) | (2,712 | ) | (2,457 | ) | ||||||||
Arbitration settlement expense | — | (1,083 | ) | — | (3,789 | ) | ||||||||||
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Operating income (loss) | (9,544 | ) | (2,112 | ) | (485 | ) | 1,501 | |||||||||
Other income | 209 | 169 | 600 | 394 | ||||||||||||
Interest income (expense) | 123 | 179 | (37 | ) | 244 | |||||||||||
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Net income (loss) | $ | (9,212 | ) | $ | (1,764 | ) | $ | 78 | $ | 2,139 | ||||||
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Advanced BioEnergy, LLC (Unconsolidated)
Statements of Cash Flows
(Unaudited)
Nine Months Ended | ||||||||
June 30, 2012 | June 30, 2011 | |||||||
(Dollars in thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 78 | $ | 2,139 | ||||
Adjustments to reconcile net income to operating activities cash flows: | ||||||||
Depreciation | 123 | 79 | ||||||
Equity in losses (earnings) of consolidated subsidiaries | 1,279 | (4,743 | ) | |||||
Distributions from subsidiaries | 3,828 | 4,672 | ||||||
Gain on disposal of fixed assets | (17 | ) | (3 | ) | ||||
Amortization of deferred revenue and rent | (22 | ) | (13 | ) | ||||
Unit compensation expense | 3 | 34 | ||||||
Unrealized (gain) loss on warrant derivative liability | 36 | (241 | ) | |||||
Change in working capital components: | — | |||||||
Accounts receivable | 161 | 540 | ||||||
Prepaid expenses | 10 | (20 | ) | |||||
Accounts payable and accrued expenses | (231 | ) | (83 | ) | ||||
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Net cash provided by operating activities | 5,248 | 2,361 | ||||||
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Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (129 | ) | (215 | ) | ||||
Proceeds from disposal of fixed assets | 60 | 16 | ||||||
Issuance of notes receivable | — | (490 | ) | |||||
Increase in restricted cash | (2,500 | ) | — | |||||
Change in other assets and liabilities | — | 129 | ||||||
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Net cash used in investing activities | (2,569 | ) | (560 | ) | ||||
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Cash flows from financing activities: | ||||||||
Distribution to members | — | (27 | ) | |||||
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Net cash used in financing activities | — | (27 | ) | |||||
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Net increase in cash and cash equivalents | 2,679 | 1,774 | ||||||
Beginning cash and cash equivalents | 3,457 | 1,065 | ||||||
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Ending cash and cash equivalents | $ | 6,136 | $ | 2,839 | ||||
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Information Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations, performance and prospects. All statements that are not historical or current facts are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors, many of which may be beyond our control, which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Certain of these risks and uncertainties are described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended September 30, 2011 and in this Form 10-Q. These risks and uncertainties include, but are not limited to, the following:
• | our operational results are subject to fluctuations in the prices of grain, utilities and ethanol, which are affected by various factors including weather, production levels, supply, demand, changes in technology and government support and regulations; |
• | margins can be volatile and can evaporate, which may affect our ability to meet current obligations and debt service requirements at our operating entities; |
• | our hedging transactions and mitigation strategies could materially harm our results; |
• | cash distributions depend upon our future financial and operational performance and will be affected by debt covenants, reserves and operating expenditures; |
• | current governmental- mandated tariffs, credits and standards may be reduced or eliminated, and legislative acts taken by state governments such as California related to low-carbon fuels that include the effects caused by indirect land use, may have an adverse effect on our business; |
• | alternative fuel additives may be developed that are superior to or cheaper than ethanol; |
• | transportation, storage and blending infrastructure may become impaired, preventing ethanol from reaching markets; |
• | our operating facilities may experience technical difficulties and not produce the gallons of ethanol we expect and insurance proceeds may not be adequate to cover these production disruptions; |
• | our units are subject to a number of transfer restrictions, no public market exists for our units, and we do not expect a public market to develop; |
• | the ability of ABE Fairmont and ABE South Dakota subsidiaries to make distributions to ABE in light of restrictions in these subsidiaries’ credit facilities; and |
• | the supply of ethanol rail cars in the market is extremely tight, which could affect our ability to obtain new tanker cars or negotiate new leases at a reasonable fee when our current leases expire. |
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You can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed from time to time with the Securities and Exchange Commission that advise interested parties of the risks and factors that may affect our business.
General
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements included herewith and notes to the consolidated financial statements thereto.
Overview
Advanced BioEnergy, LLC (“Company,” “we,” “our,” “Advanced BioEnergy” or “ABE”) was formed in 2005 as a Delaware limited liability company. Our business consists of producing ethanol and co-products, including wet, modified and dried distillers grains, as well as corn oil. Ethanol is a renewable, environmentally clean fuel source that is produced at numerous facilities in the United States, mostly in the Midwest. In the U.S., ethanol is produced primarily from corn and then blended with unleaded gasoline in varying percentages. Ethanol is most commonly sold as E10. Increasingly, ethanol is also available as E85, which is a higher percentage ethanol blend for use in flexible-fuel vehicles, and is available as E15 in some states.
To execute our business plan, we entered into financial arrangements to build and operate an ethanol production facility in Fairmont, Nebraska. Separately, in November 2006, we acquired ABE South Dakota, which owned existing ethanol production facilities in Aberdeen and Huron, South Dakota. Construction of our Fairmont, Nebraska plant began in June 2006, and operations commenced at the plant in November 2007. Construction of our new facility in Aberdeen, South Dakota began in April 2007, and operations commenced in January 2008. Our production operations are carried out primarily through our operating subsidiaries, ABE Fairmont, which owns and operates the Fairmont, Nebraska plant and ABE South Dakota, which owns and operates plants in Aberdeen and Huron, South Dakota.
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources in assessing performance. Based on the related business nature and expected financial results, the Company’s plants are aggregated into one operating segment.
DRY MILL PROCESS
Dry mill ethanol plants produce ethanol predominantly by processing corn. Other possible feeds are grain sorghum, or other cellulosic materials. The corn is received by truck, then weighed and unloaded in a receiving building. It is then conveyed to storage silos. Thereafter, it is transferred to a scalper to remove rocks, cobs, and other debris before it is fed to a hammer mill where it is ground into flour and conveyed into a slurry tank. Water, heat and enzymes are added to the flour in the slurry tank to start the process of converting starch from the corn into sugar. The slurry is pumped to a liquefaction tank where additional enzymes are added. These enzymes continue the starch-to-sugar conversion. The grain slurry is pumped into fermenters, where yeast is added, to begin the batch-fermentation process. Fermentation is the process of the yeast converting the sugar into alcohol and carbon dioxide. After the fermentation is complete, a vacuum distillation system removes the alcohol from the grain mash. The 95% (190-proof) alcohol from the distillation process is then transported to a molecular sieve system, where it is dehydrated to 100% alcohol (200 proof). The 200-proof alcohol is then pumped to storage tanks and blended with a denaturant, usually gasoline. The 200-proof alcohol and 2.0-2.5% denaturant constitute denatured fuel ethanol.
Corn mash left over from distillation is pumped into a centrifuge for dewatering. The liquid from the centrifuge, known as thin stillage, is then pumped from the centrifuges to an evaporator, where it is concentrated to a syrup. The solids that exit the centrifuge, known as the wet cake, are conveyed to the dryer system. Syrup is added to the wet cake as it enters the dryer, where
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moisture is removed. The process produces distillers grains with solubles, which is used as a high-protein/fat animal- feed supplement. Dry-mill ethanol processing creates three forms of distillers grains: wet distillers grains with solubles, known as wet distillers grains; modified wet distillers grains with solubles, known as modified distillers grains; and dry distillers grains with solubles, known as dry distillers grains. Wet and modified distillers grains have been dried to approximately 67% and 50% moisture levels, respectively, and are predominately sold to nearby markets. Dried distillers grains have been dried to 11% moisture, have an almost indefinite shelf life and may be sold and shipped to any market regardless of its proximity to an ethanol plant.
Corn oil is produced by processing evaporated thin stillage through a disk stack style centrifuge. Corn oil has a lower density than water or solids that make up the syrup. The centrifuges separate the relatively light oil from the heavier components of the syrup, eliminating the need for significant retention time. De-oiled syrup is returned to the process for blending into wet, modified, or dry distillers grains. The corn oil is then pumped into storage tanks before being loaded onto trucks for sale.
FACILITIES
The table below provides a summary of our ethanol plants in operation as of June 30, 2012:
Location | Estimated Annual Ethanol Production | Estimated Annual Distillers Grains Production(1) | Estimated Annual Corn Processed | Primary Energy Source | Builder | |||||||||||||||
(Million gallons) | (000’s Tons) | (Million bushels) | ||||||||||||||||||
Fairmont, NE | 110 | 334 | 39.3 | Natural Gas | Fagen | |||||||||||||||
Aberdeen, SD(2) | 9 | 27 | 3.2 | Natural Gas | Broin | |||||||||||||||
Aberdeen, SD(2) | 44 | 134 | 15.7 | Natural Gas | ICM | |||||||||||||||
Huron, SD | 32 | 97 | 11.4 | Natural Gas | ICM | |||||||||||||||
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Consolidated | 195 | 592 | 69.6 | |||||||||||||||||
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(1) | Our plants produce and sell wet, modified and dried distillers grains. The stated quantities are on a fully dried basis operating at full production capacity. |
(2) | Our plant at Aberdeen consists of two production facilities that operate on a separate basis. |
We believe that each of the operating facilities is in adequate condition to meet our current and future production goals. We also believe that these plants are adequately insured for replacement cost plus related disruption expenditures.
The senior credit facility of the ABE Fairmont plant is secured by a first mortgage on the plant’s real property and a security interest lien on the plant’s personal property. We also granted a subordinate lien and security interest to the trustee of the subordinated exempt facilities revenue bonds used to finance the ABE Fairmont plant. We pledged a first-priority security interest in and first lien on substantially all of the assets of the ABE South Dakota plants to the collateral agent for the senior creditor of these plants.
Sales of distillers grains represented 19.4% and 16.9% of our revenues for the quarters ended June 30, 2012 and 2011, respectively. When the plants are operating at capacity they produce approximately 592,000 tons of dried distillers grains equivalents per year, approximately 17 pounds per bushel of corn. Distillers grains are a high-protein, high-energy animal feed supplement marketed primarily to the dairy and beef industry, and to a lesser extent, the poultry and swine markets. Corn oil sales represented approximately 1.4% of our revenues for the quarter ended June 30, 2012. Our corn oil is currently sold primarily to biodiesel manufacturers.
Plan of Operations Through June 30, 2013
Over the next twelve months, we will continue our focus on operational improvements at each of our operating facilities. These operational improvements include exploring methods to improve ethanol yield per bushel and maximizing production output at each of our plants. We will also have a continued emphasis on safety and environmental regulation, reducing our operating costs, and optimizing our margin opportunities through prudent risk-management policies. We are adding 1.5 million additional bushels of corn storage at Fairmont in next twelve months, in order to increase the amount of corn we are able to purchase from individual growers. We feel that purchasing from individual farmers will enable us to obtain a more advantageous price for corn.
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RESULTS OF OPERATIONS
Quarter Ended June 30, 2012 Compared to Quarter Ended June 30, 2011
The following table reflects quantities of our products sold at average net prices as well as bushels of corn ground and therms of gas burned at average costs for the three months ended June 30, 2012 and 2011:
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, 2012 | June 30, 2011 | |||||||||||||||
Sold/Consumed | Average | Sold/Consumed | Average | |||||||||||||
(In thousands) | Net Price/Cost | (In thousands) | Net Price/Cost | |||||||||||||
Ethanol (gallons) | 51,430 | $ | 2.12 | 49,577 | $ | 2.59 | ||||||||||
Dried distillers grains (tons) | 99 | 199.41 | 114 | 184.66 | ||||||||||||
Wet/modified distillers grains (tons) | 85 | 81.94 | 69 | 74.03 | ||||||||||||
Corn Oil (pounds) | 5,276 | 0.36 | — | — | ||||||||||||
Corn (bushels) | 18,250 | 6.22 | 17,541 | 7.02 | ||||||||||||
Gas (mmbtus) | 1,260 | 3.16 | 1,369 | 4.37 |
Net Sales
Net sales for the quarter ended June 30, 2012 were $137.7 million compared to $154.8 million for the quarter ended June 30, 2011, a decrease of $17.1 million or 11.0%. The decrease in revenues was primarily due to a drop in ethanol prices of 18.1% during the quarter compared to the same period last year. The decrease in ethanol prices resulted from overcapacity in the industry in the quarter, as gasoline demand decreased approximately 4% from the same period in 2011. The average price of distillers grains increased 8.0% in 2012 based on market uncertainty about the corn crop, and a reduction of supplies after spring maintenance shutdowns and producers beginning to reduce output due to poor margins. During the fiscal quarters ending June 30, 2012 and 2011, 79.2% and 83.1%, respectively, of our net sales were derived from the sale of ethanol and our remaining net sales were derived from the sale of distillers grains and corn oil. We began selling corn oil in August 2011, added the technology to our Aberdeen plant in April 2012, and sold $1.9 million of oil in the third quarter of fiscal 2012.
Cost of Goods Sold
Costs of goods sold for the quarter ending June 30, 2012 was $144.1 million, compared to $153.4 million for the quarter ending June 30, 2011, a decrease of $9.3 million or 6.1%. Corn costs represented 78.8% and 80.2% of cost of goods sold for the fiscal quarters ending June 30, 2012 and 2011. Corn costs decreased 11.4% to $6.22 per bushel in the quarter ending June 30, 2012 from $7.02 per bushel for the quarter ending June 30, 2011. Cost of goods sold included a hedging loss of $0.4 million for the quarter ended June 30, 2012 compared to a negligible loss for the quarter ended June 30, 2011. The Company believes that corn prices will not decrease significantly for the remainder of our fiscal year 2012 and into fiscal year 2013 due to drought conditions. Natural gas costs represented 2.8% and 3.9% of cost of sales for the fiscal quarters ending June 30, 2012 and 2011. Our average gas prices decreased to $3.16 per mmbtu in the quarter ending June 30, 2012 from $4.37 per mmbtu in the quarter ending June 30, 2011.
Gross Profit(Loss)
Our gross loss for the quarter ending June 30, 2012 was $6.4 million, compared to gross profit of $1.5 million for the quarter ending June 30, 2011. The decrease in gross profit was a result of weak margins due to a drop in average ethanol prices. Margins in the fourth quarter will likely remain weak as gasoline demand is below last year and the continuing drought in the United States has pushed corn prices higher in the fiscal fourth quarter.
Selling, General, and Administrative Expenses
For the quarter ending June 30, 2012, selling, general and administrative expenses were $2.4 million compared to $1.6 million for the quarter ending June 30, 2011. As a percentage of sales, selling, general and administrative expenses increased to 1.7% for the quarter ended June 30, 2012 compared to 1.0% for the quarter ended June 30, 2011, as a result of an increase in employee headcount as we filled open positions at headquarters, as well as higher legal and professional fees, and new industry advocacy dues. Excluding non-recurring legal fees related to litigation matters, expenses were 1.2% of sales for the quarter ended June 30, 2012, compared to 1.0% for the quarter ended June 30, 2011. Selling, general, and administrative expenses are comprised of recurring administrative personnel compensation, legal, technology, consulting, insurance and accounting fees.
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Arbitration Settlement Expense
The Company incurred legal and accrued settlement costs of $1.1 million in the three months ended June 30, 2011 related to the arbitration matter that was settled in the third quarter of fiscal 2011.
Other Income
Other income for the quarter ended June 30, 2012 was $0.2 million, compared to $0.2 million for the quarter ended June 30, 2011. The change was due to Nebraska Advantage Act refunds, as described below under “Government Programs, Tax Credits and Tax Increment Financing.” The refunds will fluctuate based on eligible purchases during the quarter.
Interest Expense
Interest expense for the quarter ending June 30, 2012 was $0.6 million, compared to $0.8 million for the quarter ended June 30, 2011, a decrease of $0.2 million. The decrease was due to principal reductions on the Fairmont debt facility of $15 million since the third quarter of 2011.
Nine Months Ended June 30, 2012 Compared to Nine Months Ended June 30, 2011
The following table reflects quantities of our products sold at average net prices as well as bushels of corn ground and therms of gas burned at average costs for the nine months ended June 30, 2012 and 2011:
Nine Months Ended | Nine Months Ended | |||||||||||||||
June 30, 2012 | June 30, 2011 | |||||||||||||||
Sold/Consumed | Average | Sold/Consumed | Average | |||||||||||||
(In thousands) | Net Price/Cost | (In thousands) | Net Price/Cost | |||||||||||||
Ethanol (gallons) | 151,057 | $ | 2.33 | 153,322 | $ | 2.31 | ||||||||||
Dried distillers grains (tons) | 310 | 194.13 | 351 | 154.91 | ||||||||||||
Wet/modified distillers grains (tons) | 286 | 82.50 | 234 | 62.42 | ||||||||||||
Corn Oil (pounds) | 14,493 | 0.35 | — | — | ||||||||||||
Corn (bushels) | 53,485 | 6.30 | 54,588 | 5.87 | ||||||||||||
Gas (mmbtus) | 4,037 | 3.68 | 4,166 | 4.27 |
Net Sales
Net sales for nine months ended June 30, 2012 were $440.5 million compared to $423.8 million for the nine months ended June 30, 2011, an increase of $16.7 million or 3.9%. The increase in revenues was due to an increase in average prices of distillers grains of 25.3%. Ethanol prices rose approximately 1.0% due to increased demand in the first quarter, and commodity inflation, particularly higher corn prices. We believe demand increased in the last three months of calendar 2011, due to the expiration of the VEETC blending credit on December 31, 2011, as refiners added to their inventory prior to expiration of the blending credit. The Company sold 2.3 million fewer gallons in 2012 compared to 2011, mostly as a result of reduced production in the third fiscal quarter due to the challenging margin environment. The price of distillers grains generally follows the price of corn, which along with tight supplies, resulted in higher prices in 2012. During the fiscal nine months ending June 30, 2012 and 2011, 79.7% and 83.7%, respectively, of our net sales were derived from the sale of ethanol and our remaining net sales were derived from the sale of distillers grains and corn oil. We added corn oil technology to our Aberdeen plant in April 2012, and sold $5.1 million of oil in the first nine months of fiscal 2012 from the two facilities which produce corn oil.
Cost of Goods Sold
Cost of goods sold for the nine months ending June 30, 2012 was $433.0 million, compared to $411.8 million for the nine months ending June 30, 2011, an increase of $21.2 million or 5.1%. Corn costs represented 77.8% of cost of goods sold for the fiscal nine months ending June 30, 2012 and 2011. Corn costs increased 7.3% to $6.30 per bushel in the nine months ending June 30, 2012 from $5.87 per bushel for the nine months ending June 30, 2011. Cost of goods sold included a hedging loss of $0.3 million for the nine months ended June 30, 2012 compared to a gain of $0.1 million for the same period in 2011. The Company believes that corn prices will not decrease significantly for the remainder of fiscal 2012 and into fiscal 2013 as the
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continuing drought in the US has pushed prices higher. Natural gas costs represented 3.4% and 4.3% of cost of sales for the fiscal nine months ending June 30, 2012 and 2011. Our average gas prices decreased to $3.68 per mmbtu in the nine months ending June 30, 2012 from $4.27 per mmbtu in the nine months ending June 30, 2011.
Gross Profit
Our gross profit for the nine months ending June 30, 2012 was $7.8 million, compared to gross profit of $12.4 million for the nine months ending June 30, 2011. The decrease in gross profit was a result of overcapacity in the industry in the second and third fiscal quarters, and a decrease in gasoline demand of approximately 5% during this period, which decreased ethanol prices in the same period. As a result, we experienced negative margins in the third fiscal quarter. Margins in the fourth fiscal quarter are likely to remain weak as gasoline demand is below last year and the continuing drought in the US has pushed corn prices higher.
Selling, General, and Administrative Expenses
For the nine months ending June 30, 2012, selling, general and administrative expenses were $6.0 million compared to $4.6 million for the nine months ending June 30, 2011. As a percentage of sales, selling, general and administrative expenses increased to 1.4% for the nine months ended June 30, 2012 compared to 1.1% for the nine months ended June 30, 2011, as a result of higher legal and professional fees, new industry advocacy dues, and headcount increases for new or open positions at headquarters. Excluding non-recurring legal fees related to litigation matters, expenses were 1.1% of sales for the nine months ended June 30, 2012, compared to 1.1% for the nine months ended June 30, 2011 Selling, general, and administrative expenses are comprised of recurring administrative personnel compensation, legal, technology, consulting, insurance and accounting fees.
Arbitration Settlement Expense
The Company incurred legal and settlement costs of $3.8 million in the nine months ended June 30, 2011 related to the arbitration matter which was settled in the third quarter of fiscal 2011.
Other Income
Other income for the nine months ended June 30, 2012 was $0.8 million, compared to $0.8 million for the nine months ended June 30, 2011. Other income is comprised of Nebraska Advantage Act refunds, as described below under “Government Programs, Tax Credits and Tax Increment Financing,” as well as patronage refunds.
Interest Expense
Interest expense for the nine months ending June 30, 2012 was $2.5 million, compared to $2.7 million for the nine months ended June 30, 2011. The FY 2012 expense includes a mark-to-market loss of $0.03 million on the warrant derivative, compared to a $0.3 million gain in FY 2011. Excluding the mark-to-market loss, interest expense decreased by $0.4 million, due to reductions in outstanding principal in fiscal 2012.
TRENDS AND UNCERTAINTIES AFFECTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS
Overview
Ethanol is currently blended with gasoline to meet regulatory standards as a clean air additive, an octane enhancer, a fuel extender and a gasoline alternative. According to the Renewable Fuels Association, as of July 2012, the estimated ethanol production capacity in the United States was 14.7 billion gallons per year, with approximately 13.6 billion gallons currently in operation. The demand for ethanol is affected by what is commonly referred to as the “blending wall,” which is a regulatory cap on the amount of ethanol that can be blended into gasoline. The blend wall affects the demand for ethanol, and as industry production capacity reaches the blend wall, the supply of ethanol in the market may surpass the demand. Assuming current gasoline usage in the U.S. at 138 billion gallons per year and a blend rate of 10% ethanol and 90% gasoline, the current blend wall can be assumed at approximately 13.8 billion gallons of ethanol per year. Gasoline demand in the US declined 5% in the first nine months of 2012 compared to the same period in 2011 according to the Renewable Fuels Association. Ethanol margins could remain weak if gasoline demand does not increase in the remainder of 2012.
In an attempt to increase the blend wall, Growth Energy, an ethanol industry trade organization, requested a waiver from the U.S. Environmental Protection Agency (“EPA”) to allow blending of ethanol at a 15 percent blend rate. In October of 2010, the EPA made a decision to allow the use of E15 blends in 2007 and newer vehicles. On January 21, 2011, the EPA announced E15 blends to be safe for use in all cars and pickups built in 2001 and later. In April 2012, the ethanol industry
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agreed to fund a nationwide fuel survey to satisfy the final federal hurdle to E15 commercial availability. We do not yet know what the impact of this decision will be on ethanol demand, as there are still some regulatory issues at the state level that must be addressed prior to widespread market use of the E15 blend. E15 has recently become available in some states in limited locations.
Our operations are highly dependent on commodity prices, especially prices for corn, ethanol, distillers grains and natural gas. As a result of price volatility for these commodities, our operating results may fluctuate substantially. The price and availability of corn are subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, weather, federal policy and foreign trade. Because the market price of ethanol is not always directly related to corn prices, at times ethanol prices may lag movements in corn prices and compress the overall margin structure at the plants. As a result, operating margins may become negative and we may be forced to shut down the plants.
We focus on locking in margins based on a cash flows model that continually monitors market prices of corn, natural gas and other input costs against prices for ethanol and distillers grains at each of our production facilities. We create offsetting positions by using a combination of derivative instruments, fixed-price purchases and sales, or a combination of strategies in order to manage risk associated with commodity price fluctuations. Our primary focus is not to manage general price movements, for example, minimize the cost of corn consumed, but rather to lock in favorable margins whenever possible.
Federal policy has a significant impact on ethanol market demand. Ethanol blenders previously benefited from incentives that encouraged usage and a tariff on imported ethanol that supported the domestic industry, which have now expired. Additionally, the renewable fuels standard (“RFS”) mandates increased level of usage of both corn-based and cellulosic ethanol. Any adverse ruling on, or legislation affecting, RFS mandates in the future could have an adverse impact on short-term ethanol prices and our financial performance in the future.
The ethanol industry and our business depend upon continuation of the federal and state ethanol supports such as the RFS. We believe the ethanol industry expanded due to these federal mandates, policies, and incentives. These government mandates have supported a market for ethanol that might disappear without these programs. Alternatively, the government mandates may be continued at lower levels than those at which they currently exist. In addition, state regulatory activity may also negatively affect the consumption of corn-based ethanol in certain domestic markets such as California, due to low-carbon fuel standards that take into consideration the effects caused by indirect land use.
The Renewable Fuels Standard
The RFS is a national program that imposes minimum requirements with respect to the amount of renewable fuel produced and used. The RFS was revised by the EPA in July 2010 (“RFS2”) and applies to refineries, blenders, distributors and importers. The RFS2 requires that refiners and importers blend renewable fuels totaling at least 9.23% of total fuel volume in 2012, or approximately 15.2 billion gallons, of which 13.2 billion gallons can be derived from corn-based ethanol. The RFS2 requirement will increase incrementally over the next several years to a renewable fuel requirement of 36.0 billion gallons, or approximately 7% of the anticipated gasoline and diesel consumption, by 2022.The following chart illustrates the potential United States ethanol demand based on the schedule of minimum usage established by the program through the year 2022 (in billions of gallons).
Year | Total Renewable Fuel Requirement | Cellulosic Ethanol Minimum Requirement | Biodiesel Minimum Requirement | Advanced Biofuel | RFS Requirement That Can Be Met With Corn-Based Ethanol | |||||||||||||||
2012 | 15.20 | 0.50 | 1.00 | 2.00 | 13.20 | |||||||||||||||
2013 | 16.55 | 1.00 | — | 2.75 | 13.80 | |||||||||||||||
2014 | 18.15 | 1.75 | — | 3.75 | 14.40 | |||||||||||||||
2015 | 20.50 | 3.00 | — | 5.50 | 15.00 | |||||||||||||||
2016 | 22.25 | 4.25 | — | 7.25 | 15.00 | |||||||||||||||
2017 | 24.00 | 5.50 | — | 9.00 | 15.00 | |||||||||||||||
2018 | 26.00 | 7.00 | — | 11.00 | 15.00 | |||||||||||||||
2019 | 28.00 | 8.50 | — | 13.00 | 15.00 | |||||||||||||||
2020 | 30.00 | 10.50 | — | 15.00 | 15.00 | |||||||||||||||
2021 | 33.00 | 13.50 | — | 18.00 | �� | 15.00 | ||||||||||||||
2022 | 36.00 | 16.00 | — | 21.00 | 15.00 |
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The RFS2 went into effect on July 1, 2010 and requires certain gas emission reductions for the entire lifecycle, including production of fuels. The greenhouse gas reduction requirement generally does not apply to facilities that commenced construction prior to December 2007. If this changes, and our plants must meet the standard for emissions reduction, it may affect the way we procure feed stock and modify the way we market and transport our products.
There has been recent legislation introduced in the US House of Representatives to reduce the RFS requirements during times of low corn supply. It is too early to predict the outcome of these actions.
Blending Incentives
The VEETC, often commonly referred to as the “blender’s credit,” was created by the American Jobs Creation Act of 2004. This credit allowed gasoline distributors who blend ethanol with gasoline to receive a federal excise tax credit of $0.45 per gallon of pure ethanol used, or $0.045 per gallon for E10 and $0.3825 per gallon for E85. Federal policy also insulated the domestic ethanol industry from foreign competition by levying a $0.54 per gallon tariff on all imported ethanol. Both the VEETC and the tariff expired on December 31, 2011, and are not expected to be renewed in the future. We are uncertain how the expiration of these programs will affect the ethanol industry and our profitability over the long term.
California Low-Carbon Fuel Standard
In April 2009, the California air regulators approved the Low-Carbon Fuel Standard (LCFS) aimed at achieving a 10% reduction in motor vehicle emissions of greenhouse gases by 2020. Other states may adopt similar legislation, which may lead to a national standard. The regulation requires that providers, refiners, importers and blenders ensure that the fuels they provide in the California market meet a declining standard of carbon intensity. This rule calls for a reduction of greenhouse gas emissions associated with the production, transportation and consumption of a fuel. The emissions score also includes indirect land-use change created from converting a forest to cultivated land for row crops. The final regulation contains a provision to review the measurement of the indirect land-use effects and further analysis of the land use values and modeling inputs.
On December 29, 2011, a judge in Federal District Court in Fresno, California ruled that the LCFS is unconstitutional and violates the Commerce Clause of the U.S. Constitution, and issued an injunction. California’s air regulators then filed an appeal in the U.S. Court of Appeals for the 9th Circuit on January 5, 2012. In April 2012, the Court of Appeals stayed the injunction, expedited briefing of the appeal, and expects the briefing to be completed in the summer of 2012.
This standard and others to follow may affect the way ethanol producers procure feedstocks, produce dry distillers grains and market and transport ethanol and distillers grains. Ethanol produced through low-carbon methods, including imported ethanol made from sugarcane, may be redirected to certain markets and U.S. producers may be required to market their ethanol in other regions.
Imported Ethanol Tariffs
There was a $0.54 per gallon tariff on imported ethanol, which expired on December 31, 2011. Ethanol imported from other countries may be a less expensive alternative to domestically produced ethanol. The expiration of this tariff could lead to the importation of ethanol from other countries, which may be a less expensive alternative to ethanol produced domestically. This could affect our ability to sell our ethanol at the price we need to operate profitably.
Chinese Anti-Dumping Investigation
On December 28, 2010, the Chinese government announced a one-year investigation into the potential violation of anti-dumping laws regarding imported dried distillers grains (“DDGS”) originating in the United States. The allegation is that the 2010 surge in imports of U.S. dried distillers grains was undercutting sales of domestically produced dried distillers grains and that U.S. dried distillers grains were being sold at a price lower than the fair market value. In May 2012, the Chinese government terminated the investigation and no tariffs will be imposed.
European Union Anti-Dumping Investigation
On November 24, 2011, the European Union (“EU”) initiated anti-dumping and countervailing duty investigations regarding U.S. exports of ethanol to Europe and current U.S. policies surrounding ethanol production and use. Specifically at issue is federal and state incentives to producers and blenders of ethanol, which the EU alleges are allowing U.S. exports to be sold below fair market value in the EU. Preliminary findings are due by August 24, 2012. The EU could potentially impose
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anti-dumping and anti-subsidy tariffs for periods of six months to five years, should it find evidence of dumping. The Company does not export any ethanol to Europe at this time. Any imposition of tariffs could reduce U.S. exports to Europe, and possibly other export markets. A reduction of exports to Europe could have an adverse effect on domestic ethanol prices, as the available supply of ethanol for the domestic market would increase.
COMPETITION
Ethanol
The ethanol we produce is similar to ethanol produced by other plants. The RFA reports that as of July 2012, current U.S. ethanol production capacity is approximately 14.7 billion gallons per year, with approximately 1.1 billion gallons idle at the current time. On a national level there are numerous other production facilities with which we are in direct competition, many of whom have greater resources than we do. As of July 2012, Nebraska had 26 ethanol plants producing an aggregate of 2.0 billion gallons of ethanol per year, and South Dakota had 15 ethanol plants producing an aggregate of 1.0 billion gallons of ethanol per year, in each case including our plants.
The largest ethanol producers include: Abengoa Bioenergy Corp., Archer Daniels Midland Company, Cargill, Inc., Green Plains Renewable Energy, Inc., POET, LLC and Valero Renewable Fuels. Producers of this size may have an advantage over us from economies of scale and stronger negotiating positions with purchasers. We market our ethanol on a regional and national basis. We believe that we are able to reach the best available markets through the use of experienced ethanol marketers and by the rail delivery methods we use. Our plants compete with other ethanol producers on the basis of price, and, to a lesser extent, delivery service. We believe that we can compete favorably with other ethanol producers due to our proximity to ample grain, natural gas, electricity and water supplies at favorable prices.
Distillers Grains
In the sales of our distillers grains, we compete with other ethanol producers, as well as a number of large and smaller suppliers of competing animal feed. We believe the principal competitive factors are price, proximity to purchasers and product quality. Currently 72% of our distillers grain revenues are derived from the sale of dried distillers grains, which have an indefinite shelf life and can be transported by truck or rail, and 28% as modified and wet distillers grains, which have a shorter shelf life and are typically sold in local markets.
Corn Oil
In the sales of corn oil, we compete with other ethanol producers. A significant number of plants in the United States currently have oil extraction capabilities, with more being added.
LIQUIDITY AND CAPITAL RESOURCES
Financing and Existing Debt Obligations
We conduct our business activities and plant operations through Advanced BioEnergy, ABE Fairmont and ABE South Dakota. The liquidity and capital resources for each entity are based on the entity’s existing financing arrangements and capital structure. ABE Fairmont has traditional project financing in place, including senior secured financing, a working capital credit facility and subordinate exempt-facilities revenue bonds. There are provisions contained in the various financing agreements at each operating entity preventing cross-default or collateralization between operating entities. Advanced BioEnergy is highly restricted in its ability to use the cash and other financial resources of each subsidiary for the benefit of Advanced BioEnergy, with the exception of allowable distributions as defined in the separate financing agreements.
Advanced BioEnergy, LLC
ABE had cash and cash equivalents of $6.1 million at June 30, 2012. ABE has no outstanding debt as of June 30, 2012. ABE does not expect to make any distributions to its unit holders in the next 12 months. ABE’s primary source of operating cash comes from charging a monthly management fee to ABE Fairmont and ABE South Dakota for services provided in connection with operating the ethanol plants. The primary management services provided include risk management, accounting and finance, human resources and other general management-related responsibilities. From time to time ABE may also receive certain allowable distributions from ABE Fairmont and ABE South Dakota based on the terms and conditions in their respective senior credit agreements. In March 2012, ABE received a distribution from ABE Fairmont of $3.8 million based on the fiscal 2011 financial results of ABE Fairmont. Future distributions are subject to ABE Fairmont remaining in compliance with all loan covenants and terms and conditions of its senior secured credit agreement. ABE does not expect any distribution from ABE South Dakota in 2012.
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In connection with the execution of a rail car sublease, the Company, as parent of ABE South Dakota agreed to post an irrevocable and non-transferable standby letter of credit on May 4, 2012 for the benefit of Gavilon in the amount of $2,500,000 as security for the payment obligations of ABE South Dakota under certain agreements with Gavilon. The Company has deposited $2,500,000 in a restricted account as collateral for this letter of credit and has classified it as restricted cash.
We believe ABE has sufficient financial resources available to fund current operations and capital expenditure requirements for at least the next 12 months. As noted below, it is probable that ABE will pay a $0.6 million capital infusion into ABE Fairmont in the fiscal fourth quarter of 2012.
ABE Fairmont
ABE Fairmont had cash and cash equivalents of $6.9 million and restricted cash of $0.6 million at June 30, 2012. The restricted cash is held in escrow for future debt service payments. As of June 30, 2012, ABE Fairmont had total debt outstanding of $46.1 million consisting of $40.7 million in senior secured credit and $5.4 million of subordinate exempt-facilities revenue bonds. ABE Fairmont is required to make monthly interest payments on its senior secured credit and semi-annual interest payments on its outstanding subordinate exempt revenue bonds. ABE Fairmont is required to make quarterly principal payments of $2.6 million on its senior secured credit starting in August 2012, and annual payments of $815,000 on its subordinated debt.
ABE Fairmont is allowed to make cash distributions to ABE if ABE Fairmont meets all conditions required in its senior secured credit agreement at the end of a fiscal year. This annual distribution is limited to 40% of net income calculated in accordance with generally accepted accounting principles and other terms contained in its senior secured credit agreement. Additionally, if ABE Fairmont has made the required free cash flow payment (described below) it may make a distribution up to 75% of net income. The distribution is subject to the completion of ABE Fairmont’s annual financial statement audit and ABE Fairmont remaining in compliance with all loan covenants and terms and conditions of the senior secured credit agreement. In March 2012, ABE Fairmont paid an annual distribution of $3.8 million based on its fiscal 2011 financial results.
ABE Fairmont’s free cash flow calculation, as defined in its senior secured credit agreement, requires that, for each fiscal year through 2013, ABE Fairmont must make a payment equal to the lesser of $8.0 million or 75% of its free cash flow after distributions, not to exceed $16.0 million in the aggregate for all of the free cash flow payments. Based on fiscal year financial results, ABE Fairmont made cash sweep payments of $6.3 million and $5.0 million in December 2011 and 2010, respectively. Cash sweep payments are subject to compliance with all loan covenants and terms and conditions of the senior secured credit agreement. We are not forecasting a sweep payment for fiscal 2012.
In addition to the cash on hand, ABE Fairmont has a $4.0 million revolving credit facility for financing eligible grain inventory and equity in Chicago Board of Trade futures positions, which expires May 1, 2013. ABE Fairmont also has a revolving credit facility for financing third-party letters of credit, which expires in February 2014. ABE Fairmont issued a letter of credit in connection with a rail car lease, thereby fully utilizing the $911,000 financing available as of June 30, 2012. We expect ABE Fairmont to renew both of these credit facilities upon expiration for an additional one-year term.
ABE Fairmont’s senior secured credit facility agreement contains financial and restrictive covenants, including limitations on additional indebtedness, restricted payments, and the incurrence of liens and transactions with affiliates and sales of assets. In addition, the senior secured credit facility requires ABE Fairmont to comply with certain financial covenants, including maintaining monthly minimum working capital, monthly minimum net worth, annual debt service coverage ratios and capital expenditure limitations. ABE Fairmont was in compliance with all covenants at June 30, 2012.
ABE Fairmont is able to meet its current working capital obligations, but has proactively entered into discussions with its senior lender to remedy the covenant violation of its minimum working capital requirement of $10.0 million in the fiscal fourth quarter of 2012. ABE Fairmont experienced a decrease in working capital resulting from required cash sweep payments of $6.5 million to its senior lender in December of 2011, allowable cash distributions to its parent of $3.8 million in February of 2012, and a deterioration of the margin environment in the third quarter of 2012. Potential remedies under discussion include the following: waivers from the senior lender, a temporary reduction of the minimum working capital requirement, deferral of one to two principal payments, and a capital infusion of $0.6 million from the parent. The Company believes with the credit actions noted above, it is probable it will remedy the covenant violation prior to the end of its fiscal year. ABE Fairmont also intends to increase its available seasonal working capital facility to approximately $6.0 million. This will increase its ability to fund additional corn inventory which will be purchased once additional storage capacity is completed early in the first quarter of fiscal 2013.
ABE South Dakota
ABE South Dakota had cash and cash equivalents of $6.5 million and $3.6 million of restricted cash at June 30, 2012. The restricted cash consists of $3.5 million for a debt service payment reserve, and $0.1 million for maintenance capital expenditures, As of June 30, 2012, ABE South Dakota had interest-bearing term debt outstanding of $73.4 million.
ABE South Dakota entered into an Amended and Restated Senior Credit Agreement dated as of June 16, 2010 and amended on December 28, 2011 (the “Senior Credit Agreement”) among ABE South Dakota, the lenders from time to time
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party thereto, and Portigon AG, New York Branch, (f/k/a WestLB); as administrative agent and collateral agent. The principal amount of the term loan facility is payable with three quarterly payments of $1,105,000, followed by quarterly payments of $750,000 starting June 30, 2013, with the remaining principal amount fully due and payable on March 31, 2016. The credit agreement was amended in December 2011 to allow the Company to install corn oil extraction technology in its Aberdeen facility.
ABE South Dakota has agreed to pay a $3.0 million restructuring fee to the lender due at the earlier of March 31, 2016 and the date on which the loans are repaid in full. The Company recorded the restructuring fee as long-term, non-interest bearing debt.
ABE South Dakota’s obligations under the Senior Credit Agreement are secured by a first-priority security interest in all of the equity in and assets of ABE South Dakota.
ABE South Dakota is allowed to make equity distributions (other than certain tax distributions) to ABE only if (i) ABE South Dakota meets certain financial conditions and, (ii) there is no more than $25 million of principal outstanding on the senior term loan.
The Senior Credit Agreement and the related loan documentation include, among other terms and conditions, limitations (subject to specified exclusions) on ABE South Dakota’s ability to make asset dispositions; merge or consolidate with or into another person or entity; create, incur, assume or be liable for indebtedness; create, incur or allow liens on any property or assets; make investments; declare or make specified restricted payments or dividends; enter into new material agreements; modify or terminate material agreements; enter into transactions with affiliates; change its line of business; and establish bank accounts. Substantially all cash of ABE South Dakota is required to be deposited into special, segregated project accounts subject to security interests to secure obligations in connection with the Senior Credit Agreement. The Senior Credit Agreement contains customary events of default and also includes an event of default for defaults on other indebtedness by ABE South Dakota and certain changes of control.
ABE South Dakota was in violation of certain covenants as of June 30, 2012 as a result of its entry into new material agreements in May 2012. On July 31, 2012, ABE South Dakota, Portigon AG, New York Branch (f/k/a WestLB AG, New York Branch), as Lender to the Amended and Restated Senior Credit Agreement, along with six other Lenders, entered into a Letter Agreement, whereby the senior lenders consented to, along with certain other items, ABE South Dakota’s entry into the new agreements and waived the specified events of default.
We believe ABE South Dakota has sufficient financial resources available to fund current operations, make debt service payments and fund capital expenditure requirements over the next 12 months.
CASH FLOWS
The following table shows our cash flows for the nine months ended June 30, 2012 and 2011:
Nine Months Ended June 30 | ||||||||
2012 | 2011 | |||||||
(In thousands) | (In thousands) | |||||||
Net cash provided by operating activities | $ | 25,720 | $ | 14,583 | ||||
Net cash used in investing activities | (9,026 | ) | (2,743 | ) | ||||
Net cash used in financing activities | (15,946 | ) | (14,576 | ) |
Cash Flow from Operating Activities
Our cash flows from operations for the nine months ended June 30, 2012 were higher compared to the same period in 2011, primarily due to lower receivable and ethanol inventory balances at June 30, 2012, compared to June 30, 2011.
Cash Flow from Investing Activities
We used more cash in investing activities in the nine months ended June 30, 2012, compared to the same period in fiscal 2011 primarily due to capital expenditures for installation of additional fermentation equipment and corn storage facilities at our Fairmont plant, as well as installation of corn oil extraction equipment at our Aberdeen plant.
Cash Flow from Financing Activities
We used more cash for financing activities in the first nine months of fiscal 2012 due to higher principal payments compared to the same period in fiscal 2011. This was primarily as result of a higher cash sweep payment on our Fairmont debt package.
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CREDIT ARRANGEMENTS
Long-term debt consists of the following (in thousands, except percentages):
June 30, 2012 Interest Rate | June 30, 2012 | September 30, 2011 | ||||||||||
ABE Fairmont: | ||||||||||||
Senior credit facility—variable | 3.65 | % | $ | 40,740 | $ | 32,266 | ||||||
Senior credit facility—fixed | 7.53 | % | — | 20,000 | ||||||||
Seasonal line | 3.30 | % | — | — | ||||||||
Subordinate exempt facilities bonds—fixed | 6.75 | % | 5,370 | 6,185 | ||||||||
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46,110 | 58,451 | |||||||||||
ABE South Dakota: | ||||||||||||
Senior debt principal—variable | 3.46 | % | 73,447 | 77,052 | ||||||||
Restructuring fee | N/A | 3,000 | 3,000 | |||||||||
Additional carrying value of restructured debt | N/A | 8,767 | 9,453 | |||||||||
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85,214 | 89,505 | |||||||||||
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Total outstanding | $ | 131,324 | $ | 147,956 | ||||||||
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Additional carrying value of restructured debt | N/A | (8,767 | ) | (9,453 | ) | |||||||
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Stated principal | $ | 122,557 | $ | 138,503 | ||||||||
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The estimated maturities of debt at June 30, 2012, are as follows (in thousands):
Stated Principal | Amortization of Additional Carrying Value of Restructured Debt | Total | ||||||||||
2013 | $ | 15,280 | $ | 1,958 | $ | 17,238 | ||||||
2014 | 9,155 | 2,561 | 11,716 | |||||||||
2015 | 13,815 | 2,464 | 16,279 | |||||||||
2016 | 77,197 | 1,784 | 78,981 | |||||||||
2017 | 5,815 | — | 5,815 | |||||||||
Thereafter | 1,295 | — | 1,295 | |||||||||
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Total debt | $ | 122,557 | $ | 8,767 | $ | 131,324 | ||||||
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SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Note 1 to our consolidated financial statements contains a summary of our significant accounting policies, many of which require the use of estimates and assumptions. Accounting estimates are an integral part of the preparation of financial statements and are based upon management’s current judgment. We used our knowledge and experience about past events and certain future assumptions to make estimates and judgments involving matters that are inherently uncertain and that affect the carrying value of our assets and liabilities. We believe that of our significant accounting policies, the following are noteworthy because changes in these estimates or assumptions could materially affect our financial position and results of operations:
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Revenue Recognition
Ethanol revenue is recognized when product title and all risk of ownership is transferred to the customer as specified in the contractual agreements with the marketers. At all our plants, revenue is recognized upon the release of the product for shipment. Revenue from the sale of co-products is recorded when title and all risk of ownership transfers to customers, which generally occurs at the time of shipment. Co-products and related products are generally shipped free on board (FOB) shipping point. Interest income is recognized as earned. In accordance with the Company’s agreements for the marketing and sale of ethanol and related products, commissions due to the marketers are deducted from the gross sale price at the time of payment.
Fair Value Measurements
In determining fair value of its derivative financial instruments and warrant liabilities, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three fair-value hierarchy 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.
Commodity futures and exchange-traded commodity options contracts are reported at fair value using Level 1 inputs. For these contracts, the Company obtains fair-value measurements from an independent pricing service. The fair-value measurements consider observable data that may include dealer quotes and live-trading levels from the Chicago Board of Trade (“CBOT”) and New York Mercantile Exchange (“NYMEX”) markets.
Derivative Instruments/Due From Broker
On occasion, the Company has entered into derivative contracts to hedge its exposure to price risk related to forecasted corn purchases and forecasted ethanol sales. Accounting for derivative contracts requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction.
Although the Company believes its derivative positions are economic hedges, none have been designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings.
In addition, certain derivative financial instruments that meet the criteria for derivative accounting treatment also qualify for a scope exception to derivative accounting, as they are considered normal purchases and sales. The availability of this exception is based on the assumption that the Company has the ability and it is probable to deliver or take delivery of the underlying item. Derivatives that are considered to be normal purchases and sales are exempt from derivative accounting treatment, and are accounted for under accrual accounting.
Inventories
Corn, chemicals, supplies, work in process, ethanol and distillers grains inventories are stated at the lower of weighted average cost or market.
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Property and Equipment
Property and equipment is carried at cost less accumulated depreciation computed using the straight-line method over the estimated useful lives:
Office equipment | 3-7 Years | |||
Process equipment | 10 Years | |||
Buildings | 40 Years |
Maintenance and repairs are charged to expense as incurred; major improvements and betterments are capitalized. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount on the asset may not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows from operations are less than the carrying value of the asset group. An impairment loss is measured by the amount by which the carrying value of the asset exceeds the estimated fair value on that date.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
GOVERNMENT PROGRAMS, TAX CREDITS AND TAX INCREMENT FINANCING
We have applied for income and sales tax incentives available under a Nebraska Advantage Act Project Agreement. As of June 30, 2012, we have received approximately $4.9 million in refunds under the Nebraska Advantage Act. We anticipate earning investment credits for certain sales taxes paid on construction costs, up to 10% of the cost of the Fairmont plant construction, and up to 10% of new asset additions. These investment credits can be used to offset Nebraska sales, use, and income tax. Under the Nebraska Advantage Act, we also anticipate earning employment credits for 5% of the annual costs of the newly created employment positions, which can be used to offset future payroll taxes. We will continue to earn additional investment and employment credits under the Nebraska Advantage Act through the tax year ended December 31, 2013. These credits can be carried over until used, but will expire on December 31, 2019. Although we may apply under several programs simultaneously and may be awarded grants or other benefits from more than one program, some combinations of programs are mutually exclusive. Under some state and federal programs, awards are not made to applicants in cases where construction on the project has started prior to the award date. There is no guarantee that applications will result in awards of grants or credits or deductions.
In December 2006, we received net proceeds of $6.7 million from tax incremental financing from the Village of Fairmont, Nebraska. ABE Fairmont has guaranteed payment of the tax increment bonds. We anticipate paying off the outstanding obligation with future property tax payments assessed on the Fairmont plant.
The State of South Dakota pays an incentive to operators of ethanol plants to encourage the growth of the ethanol industry. The Huron plant is eligible to receive an aggregate of $9.7 million, payable up to $1 million per year. The amounts are dependent on annual allocations by the State of South Dakota and the number of eligible plants. ABE South Dakota has received $0.37 million in the nine months ended June 30, 2012, and received $0.36 million during the nine months ended June 30, 2011.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
COMMODITY PRICE RISK
We consider our principal market risk to be the potential changes in commodity prices and their effect on our results of operations. We are subject to significant market risk with respect to the price of ethanol and corn. For the quarter ended June 30, 2012, sales of ethanol represented 79.2% of our total revenues and corn costs represented 78.8% of total cost of goods sold. In general, ethanol prices are affected by the supply and demand for ethanol, the cost of ethanol production, the availability of other fuel oxygenates, the regulatory climate and the cost of alternative fuels such as gasoline. The price of corn is affected by weather conditions and other factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors. At June 30, 2012, the price per gallon of ethanol and the cost per bushel of corn on the Chicago Board of Trade, or CBOT, were $2.233 and $6.72, respectively.
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We are also subject to market risk on the selling prices of our distillers grains, which represent 19.4% of our total revenues. These prices fluctuate seasonally when the price of corn or other cattle feed alternatives fluctuate in price. The dried distiller grains spot price for Nebraska and South Dakota local customers were $230 and $220 per ton, respectively, at June 30, 2012.
We are also subject to market risk with respect to our supply of natural gas that is consumed in the ethanol production process. Natural gas costs represented 2.8% of total cost of goods sold for the quarter ended June 30, 2012. The price of natural gas is affected by weather conditions and general economic, market and regulatory factors. At June 30, 2012, the price of natural gas on the NYMEX was $2.824 per mmbtu.
To reduce price risk caused by market fluctuations in the cost and selling prices of related commodities, we have entered into forward purchase/sale contracts and derivative transactions. At June 30, 2012, we guaranteed prices representing 0.6% of our estimated ethanol production through September 2012 by entering into flat-priced contracts. At June 30, 2012, we had entered into forward sale contracts representing 25.2% of our expected distillers grains production through September 2012, and we had entered into forward purchase contracts representing 7.3% of our current corn requirements through September 2012. At June 30, 2012, none of our expected gas usage through September 2012 was fixed with our natural gas providers.
The following represents a sensitivity analysis that estimates our annual exposure to market risk with respect to our current corn and natural gas requirements and ethanol sales. Market risk is estimated as the potential impact on operating income resulting from a hypothetical 10% change in the current ethanol, distiller grains, corn, and natural gas prices. The results of this analysis, which may differ from actual results, are as follows:
Estimated at Risk Volume (1) | Units | Hypothetical Change in Price | Spot Price(2) | Change in Annual Operating Income | ||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||
Ethanol | 193.8 | gallons | 10.0 | % | $ | 2.23 | $ | 43.2 | ||||||||||||
Distillers grains | 0.45 | tons | 10.0 | % | 225.64 | 10.2 | ||||||||||||||
Corn | 64.7 | bushels | 10.0 | % | 6.72 | 43.5 | ||||||||||||||
Natural gas | 5.4 | btus | 10.0 | % | 2.82 | 1.5 |
(1) | The volume of ethanol at risk is based on the assumption that we will enter into forward contracts for 0.6% of our expected annual gallons capacity of 195 million gallons. The volume of distillers grains at risk is based on the assumption that we will enter into forward contracts for 24.0% of our expected annual distillers grains production of 592,000 tons. The volume of corn is based on the assumption that we will enter into forward contracts for 7.1% of our estimated current 69.6 million bushel annual requirement. The volume of natural gas at risk is based on the assumption that we will continue to lock in none of our gas usage. |
(2) | Current spot prices include the CBOT price per gallon of ethanol and the price per bushel of corn, the NYMEX price per mmbtu of natural gas and our listed local advertised dried distillers grains price per ton as of June 30, 2012. |
INTEREST RATE/FOREIGN EXCHANGE RISK
Our future earnings may be affected by changes in interest rates due to the impact those changes have on our interest expense on borrowings under our credit facilities. As of June 30, 2012, we had $114.2 million of outstanding borrowings with variable interest rates. With each 1% change in interest rates our annual interest expense would change by $1.1 million.
We have no direct international sales. Historically all of our purchases have been denominated in U.S. dollars. Therefore we do not consider future earnings subject to foreign exchange risk.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer, who is also our chief financial officer, of our disclosure controls and procedures (as
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defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our chief executive officer, who is also our chief financial officer, concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and to ensure that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officer, to allow timely decisions regarding required disclosures.
Changes in Internal Controls
There were no changes in our internal controls over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
ABE Fairmont, LLC. v. Renewable Products Marketing Group, LLC
As previously disclosed, on December 21, 2011, the Company’s subsidiary ABE Fairmount, LLC (“ABE Fairmont”) commenced a lawsuit against Renewable Products Marketing Group, LLC (“RPMG”) in Hennepin County District Court in Minneapolis seeking injunctive relief and damages. The ABE Fairmont complaint alleged that defendant RPMG breached its obligations under an Ethanol Fuel Marketing Agreement and a later oral agreement by refusing to assign to ABE Fairmont a lease for 200 rail cars. ABE Fairmont sought (i) injunctive relief to require RPMG to abide by its contractual obligations, (ii) damages caused by RPMG’s breach of the agreement, (iii) a declaratory judgment, and (iv) other necessary relief. Defendant RPMG answered the complaint denying the allegations and sought a declaration that RPMG was entitled to possession of the cars after September 30, 2012.
In an order dated June 28, 2012, the Court denied partial and full cross summary judgment motions respectively brought by ABE Fairmont and RPMG, finding that there were genuine factual disputes and that therefore summary judgment was inappropriate.
The Court subsequently issued an order dated July 31, 2012 granting ABE Fairmont’s request for a continuance in the trial, originally set for August 1, 2012, and directing ABE Fairmont to return the 200 rail cars to RPMG on or prior to September 30, 2012.
The parties held a scheduling conference with the Court on August 3, 2012. The Company expects the Court to issue an order dismissing the ABE Fairmont claims for injunctive relief and a declaratory judgment, and to set a new trial date concerning the Company’s claims for damages based on breach of contract and other causes of action.
Item 1A. | Risk Factors |
There are no material changes from risk factors as previously discussed in our September 30, 2011 Annual Report on Form 10-K, except the following:
The current supply of ethanol rail cars is very limited, which could affect our ability to obtain new tanker cars and adversely affect our operations.
We transport our ethanol to our customers primarily via tanker rail cars. As of June 30, 2012, we were leasing ethanol tank cars whose leases expire at varying times over the next sevenyears. We require tanker cars to ship our ethanol to customers, and would have to lower or cease production should we not have sufficient cars available.
There has been increased demand by the oil industry for the type of tankers used to transport ethanol, as a result of increased production in the Bakken shale oil fields in North Dakota and Montana, as well as the Eagle Ford shale oil fields in Texas. The light viscosity of the oil being produced out of these fields, and the lack of pipelines to transport oil from these fields to major collection points has caused the oil industry to utilize the same type of tanker cars used by the ethanol industry. This increased demand has severely constrained the available supply of tanker rail cars during the past twelve months, and caused tanker car lease rates to increase significantly above historical rates. We expect lease rates to remain high through at least fiscal 2013, as we expect demand for tanker cars to remain high due to the continued growth of shale oil production, the flexibility that rail car transport affords the oil producers, and the continued lack of pipelines to transport oil to collection points.
Our subsidiaries entered into several agreements dated May 4, 2012, and amended July 31, 2012, with Gavilon, LLC, and affiliated companies ( “Gavilon”). In order to ensure a continued source of rail cars for our South Dakota operations, these agreements include the renewed sublease of rail cars for periods expiring June 30, 2014 through June 30, 2019. These agreements became effective August 1, 2012.
Our ABE Fairmont facility currently leases 200 rail cars under a sublease with Renewable Products Marketing Group, LLC. As described in Item 1, Legal Proceedings, our ABE Fairmont subsidiary sued RPMG in Hennepin County District Court in Minneapolis seeking injunctive relief and damages. The Court denied each party’s summary judgment motions in the lawsuit, granted ABE Fairmont’s request for a continuance in the trial originally set for August 1, 2012, and directed ABE Fairmont to return the 200 rail cars to RPMG on or prior to September 30, 2012. We expect the Court to issue an order dismissing the ABE Fairmont claims for injunctive relief and a declaratory judgment, and to set a new trial date. As a result, ABE Fairmont will not be entitled to use these rail cars after September 30, 2012.
We have replaced a portion of the 200 tank cars that ABE Fairmont will be returning to RPMG by September 30, 2012, and are attempting to obtain replacements for the remaining cars needed at ABE Fairmont. If we are unable to replace all or some of the rail cars we need to ship ethanol from Fairmont, Nebraska beginning October 1, 2012, we may have to lower production at that plant, or market and sell our ethanol in a different manner, either of which could materially adversely affect our profitability. We cannot offer any assurance that we will be able to obtain the replacement cars required at a reasonable price or at all. Even if we are able to obtain replacement rail cars, if we are required to lease the cars at prices significantly in excess of our current lease rates, our future profitability could be adversely affected.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosures |
None.
Item 5. | Other Information |
None.
Item 6. | Exhibits |
The exhibits filed herewith are set forth on the Exhibit Index filed as a part of this report beginning immediately following the signatures.
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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.
ADVANCED BIOENERGY, LLC | ||||||
Date: August 14, 2012 | By: | /s/ Richard R. Peterson | ||||
Richard R. Peterson | ||||||
Chief Executive Officer and President, | ||||||
Chief Financial Officer | ||||||
(Duly authorized signatory and Principal Financial Officer) |
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Exhibit | Description | Method of Filing | ||
10.1 | **Ethanol Marketing Agreement dated May 4, 2012 between ABE South Dakota, LLC and Gavilon LLC. | Filed herewith. | ||
10.1.1 | **Amendment No. 1 dated July 31, 2012 to Ethanol Marketing Agreement between ABE South Dakota, LLC and Gavilon, LLC | Filed herewith. | ||
10.2 | **Distiller’s Grains Marketing Agreement dated May 4, 2012 between ABE South Dakota, LLC and Gavilon Ingredients, LLC. | Filed herewith. | ||
10.2.1 | Amendment No. 1 dated July 31, 2012 to Distiller’s Grains Marketing Agreement between ABE South Dakota, LLC and Gavilon Ingredients, LLC. | Filed herewith. | ||
10.3 | **Ethanol Marketing Agreement dated May 4, 2012 between ABE Fairmont, LLC and Gavilon, LLC. | Filed herewith. | ||
10.3.1 | Amendment No. 1 dated July 31, 2012 to Ethanol Marketing Agreement between ABE Fairmont, LLC and Gavilon, LLC. | Filed herewith. | ||
10.4 | **Rail Car Sublease Agreement dated May 4, 2012 by and among Gavilon, LLC, ABE South Dakota, LLC and ABE Fairmont. | Filed herewith. | ||
10.4.1 | Amendment No. 1 dated July 31, 2012 to Rail Car Sublease by and among Gavilon, LLC, ABE South Dakota, LLC , ABE Fairmont, LLC, and Gavilon, LLC. | Filed herewith. | ||
10.5 | Consent and Agreement dated as of July 31, 2012, among Gavilon, LLC, Gavilon Ingredients, LLC, ABE South Dakota, LLC, and Portigon AG, New York Branch (f/k/a WestLB AG, New York Branch). | Filed herewith. | ||
31 | Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer, Financial and Accounting Officer | Filed herewith. | ||
32 | Section 1350 Certifications. | Filed electronically. | ||
101 | The following materials from Advanced BioEnergy’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL: (i) Consolidated Balance Sheets at June 30, 2012 and September 30, 2011 ; (ii) Consolidated Statements of Operations for the three and nine months ended June 30, 2012 and June 30, 2011; (iii) Consolidated Statements of Changes in Member’s Equity for the nine months ended June 30, 2012; (iv) Consolidated Statements of Cash Flows for the nine months ended June 30, 2012 and 2011; and (v) Notes to the Consolidated Financial Statements. | Filed electronically. |
** | Pursuant to Rule 24b-2 adopted under the Securities Exchange Act of 1934, the Company has deleted certain information from these Agreements, as filed, on the basis that disclosure of this information would be detrimental to the Company and is not necessary for the protection of investors. The Company has filed a request for Confidential Treatment of this information. |
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