UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________________ to _______________________
Commission File Number: 000-51764
LINCOLNWAY ENERGY, LLC
(Exact name of registrant as specified in its charter)
Iowa | 20-1118105 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
59511 W. Lincoln Highway, Nevada, Iowa | 50201 | |
(Address of principal executive offices) | (Zip Code) |
515-232-1010
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer x | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 42,049 membership units outstanding at August 1, 2008.
LINCOLNWAY ENERGY, LLC
FORM 10-Q
For the Quarter Ended June 30, 2008
INDEX
Page | ||||||
Part I. Financial Information | ||||||
Item 1. | Unaudited Financial Statements | |||||
a) Balance Sheets | 2 | |||||
b) Statements of Operations | 4 | |||||
c) Statements of Cash Flows | 6 | |||||
d) Notes to Unaudited Financial Statements | 8 | |||||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 29 | ||||
Item 4T. | Controls and Procedures | 31 | ||||
Part II Other Information | ||||||
Item 1. | Legal Proceedings | 32 | ||||
Item 1A. | Risk Factors | 32 | ||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 33 | ||||
Item 3. | Defaults Upon Senior Securities | 33 | ||||
Item 4. | Submission of Matters to a Vote of Security Holders | 33 | ||||
Item 5. | Other Information | 33 | ||||
Item 6. | Exhibits | 34 | ||||
Signatures | ||||||
Exhibits Filed With This Report | ||||||
Rule 13a-14(a) Certification of President and Chief Executive Officer | E-1 | |||||
Rule 13a-14(a) Certification of Chief Financial Officer | E-2 | |||||
Section 1350 Certification of President and Chief Executive Officer | E-3 | |||||
Section 1350 Certification of Chief Financial Officer | E-4 |
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements.
Lincolnway Energy, LLC
Balance Sheets
June 30, 2008 | September 30, 2007 | ||||||
Unaudited | |||||||
ASSETS (Note 4) | |||||||
CURRENT ASSETS | |||||||
Cash and cash equivalents | $ | 9,735,513 | $ | 7,856,908 | |||
Certificate of deposit | — | 428,050 | |||||
Due from broker | 3,454,808 | 845,169 | |||||
Trade and other accounts receivable (Note 6) | 3,726,481 | 2,475,593 | |||||
Inventories (Note 3) | 4,707,319 | 3,671,529 | |||||
Prepaid expenses and other | 102,255 | 162,215 | |||||
Derivative financial instruments (Note 7) | — | 514,464 | |||||
Total current assets | 21,726,376 | 15,953,928 | |||||
PROPERTY AND EQUIPMENT | |||||||
Land and land improvements | 6,969,637 | 6,966,137 | |||||
Buildings and improvements | 1,604,305 | 1,587,836 | |||||
Plant and process equipment | 73,772,597 | 73,319,932 | |||||
Construction in progress | 47,630 | 92,513 | |||||
Office furniture and equipment | 348,922 | 332,986 | |||||
82,743,091 | 82,299,404 | ||||||
Accumulated depreciation | (16,734,990 | ) | (10,681,642 | ) | |||
66,008,101 | 71,617,762 | ||||||
OTHER ASSETS | |||||||
Restricted cash (Note 4) | 351,000 | 351,000 | |||||
Financing costs, net of amortization of $112,628 and $80,448 | 359,334 | 391,514 | |||||
Deposit | 463,994 | 504,753 | |||||
Investments | 2,000 | 2,000 | |||||
1,176,328 | 1,249,267 | ||||||
$ | 88,910,805 | $ | 88,820,957 |
See Notes to Unaudited Financial Statements.
2
June 30, 2008 | September 30, 2007 | ||||||
(Unaudited) | |||||||
LIABILITIES AND MEMBERS’ EQUITY | |||||||
CURRENT LIABILITIES | |||||||
Accounts payable | $ | 1,422,806 | $ | 1,772,703 | |||
Accounts payable, related party (Note 5) | 361,611 | 169,088 | |||||
Current maturities of long-term debt (Note 4) | 2,550,809 | 1,323,346 | |||||
Accrued expenses | 595,033 | 726,008 | |||||
Derivative financial instruments (Note 7) | 967,376 | 117,475 | |||||
Total current liabilities | 5,897,635 | 4,108,620 | |||||
LONG-TERM DEBT, less current maturities (Note 4) | 20,947,496 | 24,743,372 | |||||
COMMITMENTS AND CONTINGENCY (Notes 5, 6 and 8) | |||||||
MEMBERS’ EQUITY | |||||||
Member contributions, net of issuance costs, 42,049 | |||||||
units issued and outstanding | 38,990,105 | 38,990,105 | |||||
Retained earnings | 23,075,569 | 20,978,860 | |||||
62,065,674 | 59,968,965 | ||||||
$ | 88,910,805 | $ | 88,820,957 |
3
Lincolnway Energy, LLC
Statements of Operations
Three Months Ended June 30, 2008 | Three Months Ended June 30, 2007 | ||||||
(Unaudited) | |||||||
Revenues (Note 6) | $ | 45,605,750 | $ | 32,674,730 | |||
Cost of goods sold | 36,471,432 | 29,355,876 | |||||
Gross profit | 9,134,318 | 3,318,854 | |||||
General and administrative expenses | 557,455 | 798,041 | |||||
Operating income | 8,576,863 | 2,520,813 | |||||
Other income (expense): | |||||||
Interest income | 34,451 | 138,331 | |||||
Interest expense | (325,689 | ) | (557,600 | ) | |||
Other | — | 33,570 | |||||
(291,238 | ) | (385,699 | ) | ||||
Net income | $ | 8,285,625 | $ | 2,135,114 | |||
Weighted average units outstanding | 42,049 | 42,076 | |||||
Net income per unit - basic and diluted | $ | 197.05 | $ | 50.74 |
See Notes to Unaudited Financial Statements.
4
Lincolnway Energy, LLC
Statements of Operations
Nine Months Ended June 30, 2008 | Nine Months Ended June 30, 2007 | ||||||
(Unaudited) | |||||||
Revenues (Note 6) | $ | 106,268,868 | $ | 89,616,396 | |||
Cost of goods sold | 92,823,325 | 67,749,027 | |||||
Gross profit | 13,445,543 | 21,867,369 | |||||
General and administrative expenses | 1,972,956 | 2,283,580 | |||||
Operating income | 11,472,587 | 19,583,789 | |||||
Other income (expense): | |||||||
Interest income | 143,186 | 371,092 | |||||
Interest expense | (1,109,264 | ) | (1,714,028 | ) | |||
Other | — | 59,587 | |||||
(966,078 | ) | (1,283,349 | ) | ||||
Net income | $ | 10,506,509 | $ | 18,300,440 | |||
Weighted average units outstanding | 42,049 | 42,598 | |||||
Net income per unit - basic and diluted | $ | 249.86 | $ | 429.61 |
See Notes to Unaudited Financial Statements.
5
Lincolnway Energy, LLC
Statements of Cash Flows
Nine Months Ended June 30, 2008 | Nine Months Ended June 30, 2007 | ||||||
(Unaudited) | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net income | $ | 10,506,509 | $ | 18,300,440 | |||
Adjustments to reconcile net income to net cash provided by | |||||||
operating activities: | |||||||
Depreciation and amortization | 6,095,622 | 6,009,201 | |||||
Loss of disposal of property and equipment | 25,495 | 107,390 | |||||
Changes in working capital components: | |||||||
Decrease in prepaid expenses and other | 59,960 | 57,997 | |||||
(Increase) decrease in trade and other accounts receivable | (1,250,888 | ) | 2,211,952 | ||||
(Increase) in due from broker | (2,609,639 | ) | (1,748,288 | ) | |||
Decrease in derivative financial instruments | 1,364,365 | 3,153,960 | |||||
(Increase) in inventories | (1,035,790 | ) | (1,962,655 | ) | |||
(Increase) decrease in deposits | 40,759 | (449,250 | ) | ||||
(Decrease) in accounts payable | (369,555 | ) | (162,918 | ) | |||
Increase in accounts payable, related party | 192,523 | 521,741 | |||||
(Decrease) in accrued expenses | (130,975 | ) | (64,602 | ) | |||
Net cash provided by operating activities | 12,888,386 | 25,974,968 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Purchase of property and equipment | (461,407 | ) | (1,670,503 | ) | |||
Proceeds from redemption of certificate of deposit | 428,050 | — | |||||
Purchase of certificate of deposit | — | (779,050 | ) | ||||
Proceeds from sale of equipment | 1,789 | — | |||||
Net cash (used in) investing activities | (31,568 | ) | (2,449,553 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Member distributions | (8,409,800 | ) | (14,838,649 | ) | |||
Repurchase of membership units | — | (810,000 | ) | ||||
Proceeds from long-term borrowings | — | 153,707 | |||||
Payments on long-term borrowings | (2,568,413 | ) | (8,808,813 | ) | |||
Net cash (used in) financing activities | (10,978,213 | ) | (24,303,755 | ) | |||
Net increase (decrease) in cash and cash equivalents | 1,878,605 | (778,340 | ) | ||||
CASH AND CASH EQUIVALENTS | |||||||
Beginning | 7,856,908 | 4,731,873 | |||||
Ending | $ | 9,735,513 | $ | 3,953,533 |
(Continued)
6
Lincolnway Energy, LLC
Statements of Cash Flows (Continued)
Nine Months Ended June 30, 2008 | Nine Months Ended June 30, 2007 | ||||||
(Unaudited) | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW | |||||||
INFORMATION, cash paid for interest | $ | 1,230,592 | $ | 1,887,451 | |||
SUPPLEMENTAL DISCLOSURES OF NONCASH OPERATING, | |||||||
INVESTING AND FINANCING ACTIVITIES | |||||||
Construction in progress included in accounts payable | $ | 19,658 | — | ||||
Reclassification of accrued interest to long-term debt | — | $ | 116,781 |
See Notes to Unaudited Financial Statements.
7
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
Note 1. | Nature of Business and Significant Accounting Policies |
Principal business activity: Lincolnway Energy, LLC (the Company), located in Nevada, Iowa, was formed in May 2004 to pool investors to build a 50 million gallon annual production dry mill corn-based ethanol plant. The Company began making sales on May 30, 2006 and became operational during the quarter ended June 30, 2006.
Basis of presentation and other information:
The consolidated balance sheet as of September 30, 2007 was derived from the Company’s audited balance as of that date. The accompanying financial statements as of and for the three and nine months ended June 30, 2008 and 2007 are unaudited and reflect all adjustments(consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto, for the year ended September 30, 2007 contained in the Company’s Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.
Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Income taxes: The Company is organized as a partnership for federal and state income tax purposes and generally does not incur income taxes. Instead, the Company’s earnings and losses are included in the income tax returns of the members. Therefore, no provision or liability for federal or state income taxes has been included in these financial statements.
Earnings per unit: Basic and diluted earnings per unit have been computed on the basis of the weighted average number of units outstanding during each period presented.
8
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
Note 2. | Members’ Equity |
The Company was formed on May 19, 2004. It was initially capitalized by the issuance of 1,924 membership units totaling $962,000 to the founding members of the Company. The Company has one class of membership units. A majority of the Board of Directors owns a membership interest in the Company. The Company is authorized to issue up to 45,608 membership units without member approval.
Income and losses are allocated to all members based on their pro rata ownership interest. All unit transfers are effective the last day of the month. Units may be issued or transferred only to persons eligible to be members of the Company and only in compliance with the provisions of the operating agreement.
Note 3. | Inventories |
Inventories consist of the following as of:
June 30, 2008 | September 30, 2007 | ||||||
Raw materials, including corn, coal, chemicals and supplies | $ | 2,538,926 | $ | 1,277,700 | |||
Work in process | 1,011,976 | 1,151,023 | |||||
Ethanol and distillers grains | 1,156,417 | 1,242,806 | |||||
Total | $ | 4,707,319 | $ | 3,671,529 |
9
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
Note 4. | Long-Term Debt |
Long-term debt consists of the following as of:
June 30, 2008 | September 30, 2007 | ||||||
Construction term loan. (A) | $ | 20,250,000 | $ | 22,750,000 | |||
Construction/revolving term loan. (C) | — | — | |||||
Note payable to contractor, interest-only quarterly payments at 5% due through maturity date of November 2014, secured by real estate and subordinate to financial institution debt commitments. (B ) | 1,216,781 | 1,216,781 | |||||
Note payable to contractor, unsecured, interest-only quarterly payments at 4% due through maturity date of May 2021 | 1,250,000 | 1,250,000 | |||||
Note payable to Iowa Department of Economic Development. (D) | 250,000 | 272,500 | |||||
Note payable to Iowa Department of Economic Development. (D) | 100,000 | 100,000 | |||||
Note payable to Iowa Department of Transportation. (E) | 431,524 | 477,437 | |||||
23,498,305 | 26,066,718 | ||||||
Less current maturities | (2,550,809 | ) | (1,323,346 | ) | |||
$ | 20,947,496 | $ | 24,743,372 |
(A) | The Company has a construction and term loan with a financial institution. Borrowings under the term loan include a variable interest rate based on prime less .05%. The agreement requires 30 principal payments of $1,250,000 per quarter commencing in December 2006 through March 2014, with the final installment due May 2014. The agreement requires the maintenance of certain financial and nonfinancial covenants. Borrowings under this agreement are collateralized by substantially all of the Company’s assets. As of June 30, 2008 the Company has been allowed to make prepayments of $18,750,000 without any penalty. |
(B) | The Company has a $1,100,000 subordinate note payable dated November 17, 2004 to an unrelated third party. Quarterly interest payments began on March 31, 2007. The third party allowed the Company to include the accrued interest of $116,781 through December 2006 into the principal of the note. Principal is due in full at maturity on November 17, 2014. |
(C) | The Company has a $10,000,000 construction/revolving term credit facility with a financial institution which expires on March 1, 2015. Borrowings under the credit facility agreement include a variable interest rate based on prime less .05% for each advance under the agreement. Borrowings are subject to borrowing base restrictions as defined in the agreement. The credit facility and revolving credit agreement require the maintenance of certain financial and nonfinancial covenants. Borrowings under this agreement are collateralized by substantially all of the Company’s assets. There was no balance outstanding as of June 30, 2008. |
10
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
On July 3, 2007 the $351,000 revolving credit agreement was cancelled. This agreement was for the benefit of a letter of credit that was required by an unrelated third party to lease rail cars. An amendment was made to the lease agreement on June 19, 2007, that allowed the Company to purchase a certificate of deposit for $351,000 in lieu of the letter of credit that is pledged as collateral on the railcar lease. The Company has classified this certificate of deposit as restricted cash in other assets.
(D) | The Company also has a $300,000 loan agreement and a $100,000 forgivable loan agreement with the Iowa Department of Economic Development (IDED). The $300,000 loan is noninterest-bearing and due in monthly payments of $2,500 beginning December 2006 and a final payment of $152,500 due November 2012. Borrowings under this agreement are collateralized by substantially all of the Company’s assets and subordinate to the above $39,000,000 financial institution debt and construction and revolving loan/credit agreements included in (A) and (C). The $100,000 loan is forgivable upon the completion of the ethanol production facility and the production of at least 50 million gallons of ethanol before the project completion date of October 31, 2008. |
(E) | The Company entered into a $500,000 loan agreement with the Iowa Department of Transportation (IDOT) in February 2005. The proceeds were disbursed upon submission of paid invoices. Interest at 2.11% began accruing on January 1, 2007. Principal payments will be due semiannually through July 2016. The loan is secured by all rail track material constructed as part of the plan construction. The debt is subordinate to the above $39,000,000 financial institution debt and construction and revolving loan/credit agreements included in (A) and (C). |
11
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
Note 5. | Related-Party Transactions |
The Company has an agreement with the Heart of Iowa Coop (HOIC), a member of the Company, to provide 100% of the requirement of corn for use in the operation of the ethanol plant. The Company purchased corn totaling $27,090,309 and $68,016,015 for the three months and nine months ended June 30, 2008, respectively. There were corn purchases of $17,190,822 and $44,291,460 for the three months and nine months ended June 30, 2007, respectively. As of June 30, 2008, the Company has several corn cash contracts with HOIC amounting to approximately 2,650,000 bushels, for a commitment of approximately $17,645,000 and several basis contracts representing approximately 4,015,000 bushels of corn. The contracts mature on various dates through March 2009. The Company also has made some miscellaneous purchases from HOIC (storage fees, fuel, and propane costs) amounting to $17,873 and $155,515 for the three months and nine months ended June 30, 2008, respectively. There were miscellaneous purchases of $149,539 and $269,333 for the three months and nine months ended June 30, 2007, respectively. As of June 30, 2008 the amount due to HOIC is $283,153.
The Company is also purchasing anhydrous ammonia and propane from Prairie Land Cooperative, a member of the Company. Total purchases for the three months and nine months ended June 30, 2008 is $262,302 and $596,557, respectively. Purchases for the three months and nine months ended June 30, 2007 is $101,777 and $316,794, respectively. As of June 30, 2008 the amount due to Prairie Land Cooperative is $78,458. As of June 30, 2008, there was a purchase commitment of $286,728.
Note 6. | Commitments and Major Customer |
The Company has an agreement with an unrelated entity and major customer for marketing, selling, and distributing all of the ethanol produced by the Company. Under such pooling arrangements, the Company will pay the entity $.01 (one cent) per gallon for each gallon of ethanol sold. This agreement shall be effective until terminated by 45 days’ written notice. The agreement had an initial 12-month term through June 2007. The parties are currently negotiating a new agreement and are still operating under the terms of the existing agreement. For the three months and nine months ended June 30, 2008 the Company has expensed $156,946 and $406,736, respectively, under this agreement. Marketing expense for the three months and nine months ended June 30, 2007 is $131,865 and $374,751, respectively. Revenues with this customer were $38,720,002 and $90,058,385 for the three months and nine months ended June 30, 2008, respectively. For the three months and nine months ended June 30, 2007 revenue with this customer is $28,307,050 and $77,956,818, respectively. Trade accounts receivable of $2,685,517 was due from the customer as of June 30, 2008.
The Company had an agreement with an unrelated entity for marketing, selling and distributing all of the distiller’s grains with solubles which are by-products of the ethanol plant. For the three months and nine months ended June 30, 2008, the Company has expensed marketing fees of $ 0 and $10,672, respectively, under this agreement. For the three months and nine months ended June 30, 2007 is $68,632 and $186,598, respectively. Revenues with this customer were $ 0 and $154,758 for the three months and nine months ended June 30, 2008, respectively. For the three months and nine months ended June 30, 2007 revenue with this customer is $4,351,438 and $11,643,337, respectively. There was no trade accounts receivable due from the customer as of June 30, 2008.
The Company has entered into a new agreement with an unrelated entity for marketing, selling and distributing the distiller’s grains as of October 1, 2007. For the three months and nine months ended June 30, 2008, the Company has expensed marketing fees of $126,412 and $315,495, respectively, under this agreement. There were no expenses reported for the three months and nine months ended June 30, 2007. Revenues with this customer were $6,795,869 and $18,113,241 for the three months and nine months ended June 30, 2008, respectively. There were no revenues reported for the three months and nine months ended June 30, 2007. Trade accounts receivable of $827,265 was due from the customer as of June 30, 2008.
12
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
The Company has an agreement with an unrelated party to provide the coal supply for the ethanol plant. For the three months and nine months ended June 30, 2008 the Company has purchased $1,397,762 and $4,127,764, respectively, of coal under this contract. For the three months and nine months ended June 30, 2007 is $1,041,568 and $3,161,402, respectively.
The Company has entered into a variable contract with a supplier of denaturant. The variable contract is for a minimum purchase of 126,000 gallons at the national gasoline daily average plus $.23/usg. The term of the contract is from July 1, 2008 through September 30, 2008. The estimated future purchase commitment is $390,600. For the three months and nine months ended June 30, 2008, the Company purchased $742,008 and $2,145,177 respectively, of denaturant. For the three months and nine months ended June 30, 2007 is $904,604 and $2,678,613, respectively.
Revenue by product is as follows:
(In thousands) | Three Months Ended June 30, 2008 | Three Months Ended June 30, 2007 | Nine Months Ended June 30, 2008 | Nine Months Ended June 30, 2007 | |||||||||
Ethanol | $ | 38,720 | $ | 28,307 | $ | 90,058 | $ | 77,957 | |||||
Distiller's Grains | $ | 6,796 | $ | 4,351 | $ | 18,268 | $ | 11,643 | |||||
Other | $ | 461 | $ | — | $ | 586 | $ | — |
Note 7. | Risk Management |
The Company’s activities expose it to a variety of market risks, including the effects of changes in commodity prices. These financial exposures are monitored and managed by the Company as an integral part of its overall risk management program. The Company’s risk management program focuses on the unpredictability of commodity markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.
The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market fluctuations. The Company’s specific goal is to protect the Company from large moves in the commodity costs.
To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange-traded futures and options contracts to minimize its net position of merchandisable agricultural commodity inventories and forward purchases and sales contracts. In April 2007, the Company started entering into derivative contracts to hedge the exposure to price risk as it relates to ethanol sales. Exchange traded futures and options contracts are designated as non-hedge derivatives and are valued at market price with changes in market price recorded in operating income through cost of goods sold for corn derivatives and through revenue for ethanol derivatives.
13
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
The effects on operating income from derivative activities is as follows:
Three Months Ended June 30, 2008 | Three Months Ended June 30, 2007 | Nine Months Ended June 30, 2008 | Nine Months Ended June 30, 2007 | ||||||||||
Increase (decrease) in revenue due to derivatives related to ethanol sales: | |||||||||||||
Realized | $ | (576,460 | ) | $ | — | $ | (2,196,977 | ) | $ | — | |||
Unrealized | 205,586 | 16,240 | (446,453 | ) | 16,240 | ||||||||
Total effect on revenue | (370,874 | ) | 16,240 | (2,643,430 | ) | 16,240 | |||||||
(Increase) decrease in cost of goods sold due to derivates related to corn costs: | |||||||||||||
Realized | 3,436,900 | (4,001,404 | ) | 3,592,106 | 5,155,371 | ||||||||
Unrealized | 2,729,188 | 2,402,375 | 2,049,082 | (2,323,450 | ) | ||||||||
Total effect on cost of goods sold | 6,166,088 | (1,599,029 | ) | 5,641,188 | 2,831,921 | ||||||||
Total increase (decrease) to operating income due to derivative activities | $ | 5,795,214 | $ | (1,582,789 | ) | $ | 2,997,758 | $ | 2,848,161 |
Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed “normal purchases and normal sales” under FASB No 133, as amended, and therefore are not marked to market in the Company’s financial statements.
Note 8. | Contingency |
The Company needs to maintain various permits to be able to maintain and continue its operations. The permits include water and air permits from the Iowa Department of Natural Resources. The Company has obtained these permits, but on December 4, 2007, the Iowa Environmental Protection Commission referred alleged environmental law violations by the Company to the Iowa Attorney General's office for enforcement action. The referred allegations concern wastewater releases relating to construction activities and exceedences of iron and total suspended solid limits in the Company’s NPDES wastewater discharge permit, and concern air permitting, emission limit exceedences, stack testing, monitoring and reporting. Lincolnway Energy will attempt to reach a negotiated settlement of all allegations. The Company cannot predict the outcome, however it is likely that settlement will include a monetary penalty, although an amount cannot be predicted at this time. Such monetary penalty could have a material adverse effect on the Company’s operations and financial condition.
14
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
Cautionary Statement on Forward Looking Statements and Industry and Market Data
Various discussions and statements in this Item and other sections of this quarterly report are or contain forward looking statements that express Lincolnway Energy's current beliefs, projections and predictions about future events. All statements other than statements of historical fact are forward looking statements, and include statements with respect to financial results and condition; anticipated future trends in business, revenues or net income; projections concerning operations, capital needs and cash flow; investment, business, growth, expansion and acquisition opportunities and strategies; management's plans and intentions for the future; competitive position; and other forecasts, projections and statements of expectation. Words such as "expects," "anticipates," "estimates," "plans," "may," "will," "contemplates," "forecasts," "future," "strategy," "potential," "predicts," "projects," "prospects," "possible," "continue," "hopes," "intends," "believes," "seeks," "should," "could," "thinks," "objectives" and other similar expressions or variations of those words or those types of words help identify forward looking statements. Forward looking statements involve and are subject to various risks, uncertainties and assumptions. Forward looking statements are necessarily subjective and are made based on numerous and varied estimates, projections, views, beliefs, strategies and assumptions made or existing at the time of such statements and are not guarantees of future results or performance. Lincolnway Energy disclaims any obligation to update or revise any forward looking statements based on the occurrence of future events, the receipt of new information, or otherwise. Lincolnway Energy cannot guarantee Lincolnway Energy's future results, performance or business conditions, and strong reliance must not be placed on any forward looking statements.
Actual future performance, outcomes and results may differ materially from those suggested by or expressed in forward looking statements as a result of numerous and varied factors, risks and uncertainties, some that are known and some that are not, and many of which are beyond the control of Lincolnway Energy and Lincolnway Energy's management. It is not possible to predict or identify all of those factors, risks and uncertainties, but they include inaccurate assumptions or predictions by management, the accuracy and completeness of the publicly available information upon which part of Lincolnway Energy's business strategy is based and all of the various factors, risks and uncertainties discussed in this Item and in Item 1A of Part II of this quarterly report and the following:
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· | Overcapacity within the ethanol industry; |
· | Actual ethanol, distillers grains and corn oil production varying from expectations; |
· | Availability and costs of products and raw materials, particularly corn and coal; |
· | Changes in the price and market for ethanol and distillers grains; |
· | Lincolnway Energy's ability to market, and Lincolnway Energy's reliance on third parties to market, Lincolnway Energy's ethanol and distillers grains; |
· | Railroad and highway access for receipt of corn and coal and outgoing distillers grains and ethanol; |
· | Changes in or elimination of governmental laws, tariffs, trade or other controls or enforcement practices, such as national, state or local energy policy; federal or state ethanol tax incentives; or environmental laws and regulations that apply to Lincolnway Energy's plant operations and their enforcement; |
· | Changes in the weather or general economic conditions impacting the availability and price of corn and coal; |
· | Total U.S. consumption of gasoline; |
· | Weather changes, strikes, transportation or production problems causing supply interruptions or shortages affecting the availability and price of coal; |
· | Fluctuations in oil and gasoline prices; |
· | Changes in plant production capacity or technical difficulties in operating Lincolnway Energy's plant; |
· | Changes in Lincolnway Energy's business strategy, capital improvements or development plans; |
· | Results of Lincolnway Energy's hedging strategies; |
· | Changes in interest rates or the availability of credit; |
· | Lincolnway Energy's ability to generate free cash flow to invest in Lincolnway Energy's business and service Lincolnway Energy's debt; |
· | Lincolnway Energy's liability resulting from any litigation or governmental proceedings; |
· | Plant reliability; |
· | Lincolnway Energy's ability to retain key employees and maintain labor relations; |
· | Changes and advances in ethanol production technology; and |
· | Competition from other ethanol suppliers and from alternative fuels and alternative fuel additives. |
Lincolnway Energy may have obtained industry, market and competitive position data used in this quarterly report or its general business plan from Lincolnway Energy's own research, internal surveys and from studies conducted by other persons, trade or industry associations or general publications and other publicly available information. A trade or industry association for the ethanol industry may present information in a manner that is more favorable to the ethanol industry than would be presented by an independent source. Independent industry publications and surveys also generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of any information. Forecasts are in all events likely to be inaccurate, especially over long periods of time, and in particular in a still relatively new and developing and expanding industry such as the ethanol industry.
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Overview
Lincolnway Energy is an Iowa limited liability company that was organized on May 19, 2004 for the purpose of constructing and operating a corn based fuel grade ethanol plant in Nevada, Iowa. Lincolnway Energy began producing ethanol and distillers grains on May 22, 2006. Lincolnway Energy's ethanol plant passed performance testing and became fully operational on June 22, 2006. Lincolnway Energy anticipates producing approximately 55 million gallons of denatured ethanol for the fiscal year ended September 30, 2008.
Lincolnway Energy's revenues are derived from the sale and distribution of its ethanol and distillers grains throughout the United States and Mexico. Lincolnway Energy's ethanol is marketed by Renewable Products Marketing Group. Lincolnway Energy's distillers grain is marketed by Hawkeye Gold, LLC. Lincolnway Energy is also selling corn syrup and corn oil to two companies.
Lincolnway Energy expects to fund its operations during the next 12 months using cash flow from continuing operations. Lincolnway Energy also has revolving lines of credit which are available to Lincolnway Energy.
Executive Summary
Highlights for the nine months ended June 30, 2008, are as follows:
· | Total revenues increased 18.6%, or $16.7 million, compared to the 2007 comparable period. |
· | Total cost of goods sold increased 37.1%, or $25.1 million, compared to the 2007 comparable period. |
· | Interest expense decreased 35.3%, or .6 million, compared to the 2007 comparable period. |
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· | Net income decreased 42.6%, or $7.8 million, compared to the 2007 comparable period. |
· | Ethanol sold was 41 million gallons, an increase of 8.5% or 3.2 million gallons, compared to the 2007 comparable period. |
Plan of Operations
One ongoing goal of Lincolnway Energy is to operate its ethanol plant in as cost effective manner as possible. Over the past several quarters Lincolnway Energy has worked with various technology and equipment providers to explore opportunities to reduce Lincolnway Energy’s production and operating costs. Most of the opportunities have no operating history and present potential risk advantages.
The process of analyzing the various available technologies can be difficult and takes a great deal of effort, as there are often multiple suppliers each touting increased efficiency, but none actually having an operating history. In the coming months Lincolnway Energy intends to identify three to four opportunities that present the most potential benefit to Lincolnway Energy.
Lincolnway Energy feels that with current market conditions, the best current course of action is to invest in efficiency improvements to its plant in order to help increase efficiency, lower operating costs, and make Lincolnway Energy more self sufficient. The types of opportunities that Lincolnway Energy might pursue may depend on obtaining a new air permit.
Obtaining a new air permit and operating in compliance with that permit are top priorities for Lincolnway Energy over the next quarter.
Air Permit Testing
During the past quarter, Lincolnway Energy received emissions test results from the March 2008 stack testing. Lincolnway Energy believes the test results provide support for a new air permit application under the 250 ton rule adopted in 2007. Lincolnway Energy is currently scheduled to meet with the Iowa Department of Natural Resources staff on August 28, 2008 to hold a pre permit application discussion. Lincolnway Energy believes it will be prepared to submit an air permit application prior to fiscal year end barring any unforeseen circumstances.
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Water Permit Testing
Lincolnway Energy’s water test results during the nine months ended June 30, 2008 on iron content show full compliance with Lincolnway Energy’s NPDES permit.
Corn Oil Extraction
Over the past several months Lincolnway Energy has initiated extracting corn oil from evaporated syrup. Lincolnway Energy recently concluded that it would be economical to extract corn oil on an ongoing basis.
Lincolnway Energy intends to enter into an agreement with a third party to market and sell Lincolnway Energy’s corn oil, and hopes to enter into a marketing agreement during the fourth quarter of this fiscal year.
Results of Operations
The following table shows the results of operations and the percentages of revenues, cost of goods sold, operating expenses and other items to total revenues in Lincolnway Energy's statement of operations for the three months and nine months ended June 30, 2008 and 2007 ( dollars in thousands):
Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||||||||||||
Income Statement Data | 2008 | 2007 | 2008 | 2007 | |||||||||||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||||||||||||||
Revenue | $ | 45,605 | 100.0 | % | $ | 32,675 | 100.0 | % | $ | 106,269 | 100.0 | % | $ | 89,616 | 100.0 | % | |||||||||
Cost of goods sold | 36,471 | 80.0 | % | 29,356 | 89.8 | % | 92,823 | 87.3 | % | 67,749 | 75.6 | % | |||||||||||||
Gross Profit | 9,134 | 20.0 | % | 3,319 | 10.2 | % | 13,446 | 12.7 | % | 21,867 | 24.4 | % | |||||||||||||
General and administrative expenses | 557 | 1.2 | % | 798 | 2.4 | % | 1,973 | 1.9 | % | 2,284 | 2.5 | % | |||||||||||||
Operating income | 8,577 | 18.8 | % | 2,521 | 7.7 | % | 11,473 | 10.8 | % | 19,583 | 21.9 | % | |||||||||||||
Other (expense) | (291 | ) | (.64 | %) | (386 | ) | (1.2 | %) | (966 | ) | (.9 | %) | (1,283 | ) | (1.4 | %) | |||||||||
Net income | $ | 8,286 | 18.2 | % | $ | 2,135 | 6.5 | % | $ | 10,507 | 9.9 | % | $ | 18,300 | 20.4 | % |
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The following table shows other key data for the periods presented:
Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||
Operating Data: | 2008 | 2007 | 2008 | 2007 | |||||||||
(Unaudited) | (Unaudited) | ||||||||||||
Ethanol sold (gallons in thousands) | 15,695 | 13,187 | 40,674 | 37,475 | |||||||||
Average gross price of ethanol sold | |||||||||||||
(dollars per gallon) | $ | 2.50 | $ | 2.15 | $ | 2.21 | $ | 2.08 | |||||
Dry distillers grain sold (tons) | 31,829 | 35,642 | 96,610 | 106,140 | |||||||||
Average dry distillers grain sales price per ton | $ | 201.69 | $ | 118.61 | $ | 177.15 | $ | 106.95 | |||||
Average corn cost per bushel | $ | 5.61 | $ | 3.77 | $ | 4.62 | $ | 3.30 |
Results of Operations for the Three Months Ended June 30, 2008 as Compared to the Three Months Ended June 30, 2007
Revenues. Revenues increased by $12.9 million, or 39.4%, to $45.6 million for the three months ended June 30, 2008, from $32.7 million for the three months ended June 30, 2007. The increase in revenue was the result of a 16.3% increase in average gross ethanol price, a 19.0% increase in ethanol sales and a 70.0% increase in average dried distillers grain gross price, compared to the three months ended June 30, 2007.
Sales from ethanol increased $10.4 million, or 36.7%, to $38.7 million for the three months ended June 30, 2008, from $28.3 million for the three months ended June 30, 2007. The average price of ethanol sold was $2.50 per gallon for the three months ended June 30, 2008 compared to $2.15 per gallon for the three months ended June 30, 2007. Ethanol sales increased 2.5 million gallons, or 19.0%, for the three months ended June 30, 2008 when compared to the three months ended June 30, 2007.
Sales from co-products increased by $2.9 million, or 65.9%, to $7.3 million for the three months ended June 30, 2008, from $4.4 million for the three months ended June 30, 2007. The average price of dried distillers grain sold was $201.69 per ton for the three months ended June 30, 2008, compared to $118.61 for the corresponding period in 2007. Dried distillers grain sales decreased by 3,813 tons, or 10.7%, for the three months ended June 30, 2008 when compared to the three months ended June 30, 2007. The decrease in sales is due an increased amount of oil extraction from the distillers grain that Lincolnway Energy is selling as a co-product and the increase in wet distillers grain sold. Wet distillers grain sales increased by 3,388 tons, or 78.6%, for the three months ended June 30, 2008 when compared to the three months ended June 30, 2007. Lincolnway Energy had sales for excess syrup and corn oil of approximately $461,000 during the three months ended June 30, 2008. There were no sales for these co-products for the three months ended June 30, 2007.
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Revenues included a combined unrealized and realized loss of $.4 million related to ethanol derivative instruments for the three months ended June 30, 2008, compared to a $16,240 gain for the three months ended June 30, 2007. As ethanol prices fluctuate, the value of Lincolnway Energy's ethanol-related derivative instruments are impacted, which effects Lincolnway Energy's financial performance. Lincolnway Energy expects the volatility in these derivative instruments to continue to have an impact on revenues due to the timing of changes in value of derivative instruments relative to sales. These instruments are the primary tools of Lincolnway Energy’s risk management program for ethanol revenues.
Cost of goods sold. Cost of goods sold increased by $7.1 million, or 24.1%, to $36.5 million for the three months ended June 30, 2008, from $29.4 million for the three months ended June 30, 2007. The increase was due to higher corn, chemical, electricity, repairs and maintenance, coal costs and additional gallons sold in the 2008 period compared to the same period in 2007. Cost of goods sold major components are: corn, process chemicals, denaturant, coal, electricity, production labor, repairs and maintenance, and depreciation.
Corn costs, which include hedging gains and losses, increased $5.0 million, or 25.8%, to $24.4 million for the three months ended June 30, 2008, from $19.4 million for the three months ended June 30, 2007. Corn costs represented 67% of Lincolnway Energy's cost of goods sold for the three months ended June 30, 2008 compared to 66% for the three months ended June 30, 2007.
The increase in corn costs is primarily driven by an increase in gallons sold and an increase cash corn prices compared to the prior period, offset by a mark to market gain of $6.2 million in the three months ended June 30, 2008 compared to a $1.6 million loss in the same period in 2007. Lincolnway Energy's derivative contracts are marked to market each quarter, which can cause corn costs to be volatile from quarter to quarter due to the timing of the change in value of the positions relative to the cost and use of the corn commodity being hedged. Corn prices have increased significantly from $3.525 per bushel in January 2007 for March 2007 delivery to $ 7.625 per bushel in June for July 2008 delivery.
Ethanol freight costs increased $.4 million, or 21.1%, to $2.3 million for the three months ended June 30, 2008, from $1.9 million for the three months ended June 30, 2007. The increase is due to a 4% increase in the average freight rate per gallon and also the additional volume of ethanol shipped during the 2008 period.
General and administrative expenses. General and administrative expenses decreased $.2 million, or 25%, to $.6 million for the three months ended June 30, 2008, from $.8 million for the three months ended June 30, 2007. The decrease is primarily due to lower cost for professional fees for the 2008 period compared to the 2007 period.
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Other income and (expense). Interest expense decreased $.3 million, or 50%, to $.3 million for the three months ended June 30, 2008, from $.6 million for the three months ended June 30, 2007. Lincolnway Energy's variable interest rate on its construction and term loan with Co-Bank decreased to 4.95% as of June 30, 2008 from 8.2% as of June 30, 2007. Lincolnway Energy has also reduced long term debt by $2.5 million since June 30, 2007.
Results of Operations for the Nine Months Ended June 30, 2008 as Compared to the Nine Months Ended June 30, 2007
Revenues. Revenues increased by $16.7 million, or 18.6%, to $106.3 million for the nine months ended June 30, 2008, from $89.6 million for the nine months ended June 30, 2007. The increase in revenue was the result of an increase in ethanol volume sold as well as an increase in gross ethanol price and an increase in average dried distillers grain gross price, compared to the nine months ended June 30, 2007.
Sales from ethanol increased $12.1 million, or 15.5%, to $90.1 million for the nine months ended June 30, 2008, from $78.0 million for the nine months ended June 30, 2007. The average price of ethanol sold was $2.21 per gallon for the nine months ended June 30, 2008 compared to $2.08 per gallon for the nine months ended June 30, 2007. Ethanol sales increased 3.2 million gallons, or 8.5%, for the nine months ended June 30, 2008 when compared to the nine months ended June 30, 2007.
Sales from co-products increased by $7.3 million, or 63.0%, to $18.9 million for the nine months ended June 30, 2008, from $11.6 million for the nine months ended June 30, 2007. The average price of dried distillers grain sold was $177.15 per ton for the nine months ended June 30, 2008, compared to $106.95 for the prior comparable period. Wet distillers grain sales increased by 15,189 tons, or 156%, for the nine months ended June 30, 2008 when compared to the nine months ended June 30, 2007. Lincolnway Energy had sales for excess syrup and corn oil of $585,913 during the nine months ended June 30, 2008. There were no sales for these co-products for the nine months ended June 30, 2007.
Revenues included a combined unrealized and realized loss of $2.6 million related to ethanol derivative instruments for the nine months ended June 30, 2008, compared to a $16,240 gain for the nine months ended June 30, 2007. As ethanol prices fluctuate, the value of Lincolnway Energy's ethanol-related derivative instruments are impacted, which effects Lincolnway Energy's financial performance. Lincolnway Energy expects the volatility in these derivative instruments to continue to have an impact on revenues due to the timing of changes in value of derivative instruments relative to sales. These instruments are the primary tools of Lincolnway Energy’s risk management program for ethanol revenues.
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Cost of goods sold. Cost of goods sold increased by $25.1 million, or 37.1%, to $92.8 million for the nine months ended June 30 2008, from $67.7 million for the nine months ended June 30, 2007. The increase was primarily due to higher corn cost in the 2008 period compared to the 2007 period. Cost of goods sold major components are: corn, process chemicals, denaturant, coal, electricity, production labor, repairs and maintenance, and depreciation.
Corn costs, which include hedging gains and losses, increased $21.8 million, or 54.1%, to $62.1 million for the nine months ended June 30, 2008, from $40.3 million for the nine months ended June 30, 2007. Corn costs represented 67% of Lincolnway Energy's cost of goods sold for the nine months ended June 30, 2008 compared to 60% for the nine months ended June 30, 2007.
The increase in corn costs is primarily driven by an increase in the cash corn prices during the nine months ended June 30, 2008 when compared to the same period in 2007. The corn costs for the nine months ended June 30, 2008 is offset by a marked to market gain of $5.6 million for derivatives relating to future deliveries of corn, compared to a $2.8 million marked to market gain in the same period in 2007.
Ethanol freight costs increased $1.0 million, or 19.6%, to $6.1 million for the nine months ended June 30, 2008, from $5.1 million for the nine months ended June 30, 2007. The increase is due to a 7% increase in the average freight rate per gallon due to an increase in rail rates and also the additional volume of ethanol shipped during the 2008 period.
General and administrative expenses. General and administrative expenses decreased $.3 million to $2.0 million for the nine months ended June 30, 2008, from $2.3 million for the nine months ended June 30, 2007. The decrease is primarily due to lower cost for professional fees for the 2008 period compared to the 2007 period.
Other income and (expense). Interest expense decreased $.6 million to $1.1 million for the nine months ended June 30, 2008, from $1.7 million for the nine months ended June 30, 2007. Lincolnway Energy's variable interest rate on its construction and term loan with Co-Bank decreased to 4.95% as of June 30, 2008 from 8.2% as of June 30, 2007. Lincolnway Energy has also reduced long term debt by $2.5 million since June 30, 2007.
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Risks, Trends and Factors that May Affect Future Operating Results
Corn
Corn prices had an extremely volatile quarter as weather and planting conditions caused an extreme price rise during the month of June, 2008. Flooding in the central corn belt raised serious concerns about the condition of the crop. Lincolnway Energy was hedged against this price rise, which helped to lower the effect the increased corn prices would have otherwise had on profitability during this period. Lincolnway Energy anticipates that corn prices will continue to be volatile as the crop fills out to harvest, but the recent weather has been more favorable and crop size still appears as though it will be adequate to meet the demands of the various users. Current expectations are for the 2008 corn crop to range from 12.0 to 12.3 billion bushels. The ethanol industry is projected to use approximately 3.5 billion bushels of the 2008 crop.
Current prices are at historical highs near the $5.75-$6.00 per bushel levels, but have come down somewhat quickly from the June flood-related highs of over $7.60 per bushel.
Lincolnway Energy attempts to offset or hedge some of the risk involved with the changing corn price through the trading of futures and options on the Chicago Board of Trade, as well as the purchase of physical delivery contracts from suppliers. Lincolnway Energy continues to monitor and attempt to manage risks involved with corn production in order to attempt to ensure adequate supply and protection against rapid price increases. Lincolnway Energy believes that option strategies currently offer the greatest flexibility for Lincolnway Energy’s purposes.
Ethanol
Ethanol prices moved toward the $3.00 per gallon price in June, amidst not only increasing corn prices, but also increasing prices for crude oil and commodities in general. Ethanol continues to shadow the corn market to a strong degree, offering a profitable crush margin in the spot months most of the time. Ethanol continues to trade at a .60 cents to .75 cents discount to gasoline, which tends to bolster the demand base for the product. Blenders are able to capture this spread to gasoline in addition to the blender’s tax credit. Lincolnway Energy believes the latter factors should help to ensure that ethanol continues to be blended into the nation’s fuel supply. Any changes in the Renewable Fuels Standard or unsteady government policy are one of the biggest current threats to ethanol prices. A spirited political campaign has been launched attempting to question and discredit the use of ethanol, and some politicians appear to be beginning to waiver on their support of the ethanol industry.
Ethanol prices have dropped aggressively from summer highs, along with corn and crude oil, perhaps due at least in part to the money managers that helped to fuel the aggressive rise in prices beginning to take profits through liquidation of their futures positions. The fundamental situation regarding world demand for energy does, however, currently appear to remain strong.
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Crush Margin
The gross crush margin represents the biggest factor affecting the future results of Lincolnway Energy. This margin figure represents the gross profit or loss of buying a bushel of corn and converting it into gallons of marketable denatured ethanol. All of the fundamental factors that influence the corn or ethanol markets are ultimately expressed in the crush margin. The values of corn and ethanol have been strongly correlated in 2008, which is the main contributing factor in the stability of the gross crush margin. Major factors that could change the crush margin, thereby affecting future profitability results of Lincolnway Energy, include weather affecting corn production, changes in governmental policy, and international economic changes.
ETHANOL AND CORN PRICE COMPARISON- CRUSH MARGIN HISTORY
Source: Chicago Board of Trade
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Liquidity and Capital Resources
The following table summarizes Lincolnway Energy's sources and uses of cash and cash equivalents from Lincolnway Energy's unaudited statement of cash flows for the periods presented (in thousands):
Cash Flow Data: ( Unaudited) | Nine Months Ended June 30, | ||||||
Cash Flow Data: | 2008 | 2007 | |||||
(in thousands) | |||||||
Net cash provided by operating activities | $ | 12,888 | $ | 25,975 | |||
Net cash (used in) investing activities | (32 | ) | (2,449 | ) | |||
Net cash (used in ) financing activities | (10,978 | ) | (24,304 | ) | |||
Net increase (decrease) in cash and cash equivalents | $ | 1,878 | $ | (778 | ) |
As of June 30 | As of June 30 | Financial | ||||||||
Additional Data: | 2008 | 2007 | Covenants | |||||||
Cash and cash equivalents | $ | 9,736 | $ | 3,954 | ||||||
Working capital | $ | 15,828 | $ | 10,014 | $ | 5,000 | ||||
Long term debt | $ | 20,947 | $ | 26,024 | ||||||
Net worth | $ | 62,066 | $ | 58,314 | $ | 42,000 |
For the nine months ended June 30, 2008, net cash provided by operating activities decreased by $13.1 million, when compared to cash provided by operating activities for the nine months ended June 30, 2007. The decrease is due to a decrease in net income for the nine months ended June 30, 2008 of $7.8 million, a $1.8 million decrease in derivative financial instruments and a $3.5 million decrease in receivables, all when compared to the nine months ended June 30, 2007. The decrease in net income for the nine months ended June 30, 2008 is primarily due to the increase in corn costs which has lowered the profit margins. The change in derivative broker accounts and financial instruments is due to the volatility of the commodities market and increased margin requirements.
Cash flows used in investing activities reflect the impact of property and equipment acquired for the ethanol plant and proceeds from investments. Net cash used by investing activities decreased by $2.4 million for the nine months ended June 30, 2008 when compared to cash used in investing activities for the nine months ended June 30, 2007. The decrease is due to proceeds received from redemption of a certificate of deposit, offset by a reduction of property and equipment purchases for the plant.
Cash flows from financing activities include transactions and events whereby cash is obtained from, or paid to, depositors, creditors or investors. Net cash used in financing activities decreased by $13.3 million for the nine months ended June 30, 2008 when compared to cash used in investing activities for the nine months ended June 30, 2007. The decrease is due to a decrease in member distribution payments and payments on long-term borrowings for the nine months ended June 30, 2008.
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As of June 30, 2008, Lincolnway Energy had total debt of $23.5 million, of which $2.6 million is due within one year and is classified as current maturities of long-term debt on the balance sheet. Lincolnway Energy has a $10.0 million revolving term credit agreement available from Co-Bank that had no outstanding balance as of June 30, 2008.
Lincolnway Energy's financial position and liquidity are, and will be, influenced by a variety of factors, including:
· | our ability to generate cash flows from operations; |
· | the level of our outstanding indebtedness and the interest we are obligated to pay; and |
· | our capital expenditure requirements, which consists primarily of plant improvements to improve efficiencies. |
Lincolnway Energy expects to have available cash to meet its currently anticipated liquidity needs.
Critical Accounting Estimates and Accounting Policies
Lincolnway Energy's financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which Lincolnway Energy operates. This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Management believes the following policies are both important to the portrayal of Lincolnway Energy's financial condition and results of operations and require subjective or complex judgments; therefore, management considers the following to be critical accounting policies.
Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements.
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Revenue Recognition
Revenue from the sale of Lincolnway Energy’s ethanol and distiller’s grain is recognized at the time title and all risk of ownership transfers to the customer, which generally occurs upon shipment to the customer or when the customer picks up the product. For railcar shipments, title passes when the product is released to the common carrier and a bill of lading is produced. For truck shipments, title passes once the truck is filled and leaves the premises of Lincolnway Energy. Shipping costs, handling costs and marketing fees incurred by Lincolnway Energy for the sale of ethanol and distiller’s grain are included in cost of goods sold.
Lincolnway Energy’s ethanol production is sold to Renewable Products Marketing Group (RPMG). Lincolnway Energy’s ethanol is pooled with the ethanol of other ethanol producers whose ethanol is marketed by RPMG. Lincolnway Energy pays RPMG a pooling fee of $.01 per gallon of ethanol, and RPMG pays Lincolnway Energy a netback price per gallon that is based upon the difference between the pooled average delivered ethanol selling price and the pooled average distribution expense. The averages are calculated based upon each pool participant’s selling price and expense averaged in direct proportion to the volume of ethanol supplied by each pool participant.
Lincolnway Energy’s distiller’s grain production is sold to Hawkeye Gold, LLC. Lincolnway Energy pays Hawkeye Gold, LLC a marketing fee for dried distiller’s grains equal to the greater of 2% of the FOB plant price for the dried distiller’s grain or a per-ton fee of $1.30 for the dried distiller’s grain. The marketing fee for wet distiller’s grains is the greater of 3% of the FOB plant price for the wet distiller’s grains or a per-ton fee of $1.00 for the wet distiller’s grains.
Derivative Instruments
Lincolnway Energy enters into derivative contracts to hedge its exposure to price risk related to forecasted corn needs, forward corn purchase contracts and ethanol contracts. Lincolnway Energy does not typically enter into derivative instruments other than for hedging purposes. All the derivative contracts are recognized on the June 30, 2008 balance sheet at their fair market value. Although Lincolnway Energy believes its derivative positions are economic hedges, none has been designated as a hedge for accounting purposes. Accordingly, any realized or unrealized gain or loss related to these derivative instruments is recorded in the statement of operations as a component of cost of goods sold for corn derivatives and through revenue for ethanol derivatives.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
In addition to the various risks inherent in Lincolnway Energy's operation, Lincolnway Energy is exposed to various market risks. The primary market risks arise as a result of possible changes in certain commodity prices.
Lincolnway Energy is exposed to market risk with respect to the price of ethanol, which is Lincolnway Energy's principal product, and the price and availability of corn and coal, which are the principal commodities used by Lincolnway Energy to produce ethanol. The other primary product of Lincolnway Energy is distillers grains, and Lincolnway Energy is also subject to market risk with respect to the price for distillers grains. The prices for ethanol, distillers grains, corn and coal are volatile, and Lincolnway Energy will experience market conditions where the prices Lincolnway Energy receives for its ethanol and distillers grains are declining, but the price Lincolnway Energy pays for its corn, coal and other inputs is increasing. Lincolnway Energy's results will therefore vary substantially over time, and include the possibility of losses, which could be substantial. |
In general, rising ethanol and distillers grains prices result in higher profit margins, and therefore represent favorable market conditions. Lincolnway Energy is, however, subject to various material risks related to its production of ethanol and distillers grains and the price for ethanol and distillers grains. For example, ethanol and distillers grains prices are influenced by various factors beyond the control of Lincolnway Energy's management, including the supply and demand for gasoline, the availability of substitutes and the effects of laws and regulations. |
In general, rising corn prices result in lower profit margins and, accordingly, represent unfavorable market conditions. Lincolnway Energy will generally not be able to pass along increased corn costs to its ethanol customers. Lincolnway Energy is subject to various material risks related to the availability and price of corn, many of which are beyond the control of Lincolnway Energy. For example, the availability and price of corn is subject to wide fluctuations due to various unpredictable factors, including weather conditions, crop yields, farmer planting decisions, governmental policies with respect to agriculture and local, regional, national and international trade, demand and supply. |
Lincolnway Energy's average gross corn costs during the three and nine months ended June 30, 2008 was, respectively, approximately $5.61 and $4.62 per bushel, compared to, respectively, $3.77 and $3.30 per bushel for the three and nine months ended June 30, 2007. |
During the quarter ended June 30, 2008, corn prices (based on the Chicago Board of Trade daily futures data) ranged from a low of $5.73 per bushel to a high of $7.625 per bushel for July 2008 delivery. |
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During the quarter ended June 30, 2008, ethanol prices (based on the Chicago Board of Trade daily futures data) ranged from a low of $2.25 per gallon to a high of $2.955 per gallon for May 2008 delivery. |
Lincolnway Energy has some price protection in place for July to December 2008 through short swaps and long calls that net zero gallons. Due to the increasing ethanol prices of late, Lincolnway Energy is primarily in the spot market for ethanol prices. |
Lincolnway Energy may from time to time take various cash, futures, options or other positions with respect to its corn needs in an attempt to minimize or reduce Lincolnway Energy's price risks related to corn. Those activities are, however, also subject to various material risks, including that price movements in the cash and futures corn markets are highly volatile and are influenced by many factors and occurrences which are beyond the control of Lincolnway Energy. |
Although Lincolnway Energy intends its futures and option positions to accomplish an economic hedge against Lincolnway Energy's future purchases of corn, Lincolnway Energy has chosen not to use hedge accounting for those positions, which would match the gain or loss on the positions to the specific commodity purchase being hedged. Lincolnway Energy is instead using fair value accounting for the positions, which generally means that as the current market price of the positions changes, the realized and unrealized gains and losses are immediately recognized in Lincolnway Energy's costs of goods sold in the statement of operations. The immediate recognition of gains and losses on those positions can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the positions relative to the cost and use of the commodity being hedged. For example, Lincolnway Energy's net gain on corn derivative financial instruments that was included in its cost of goods sold for the nine months ended June 30, 2008 was $5,641,188, as opposed to the net gain of $2,831,921 for the nine months ended June 30, 2007. |
The extent to which Lincolnway Energy may enter into arrangements with respect to its ethanol or corn during the year may vary substantially from time to time based on a number of factors, including supply and demand factors affecting the needs of customers to purchase ethanol or suppliers to sell Lincolnway Energy raw materials on a fixed basis, Lincolnway Energy's views as to future market trends, seasonable factors and the cost of future contracts.
Lincolnway Energy's cost per ton for coal under its current coal supply agreement is subject to various fixed and periodic adjustments based on factors which are outside of the control of Lincolnway Energy's management. The factors include changes in certain inflation type indices, increases in transportation costs and the quality of coal. Lincolnway Energy's coal costs will therefore vary, and the variations could be material. Coal costs represented approximately 5% of Lincolnway Energy's cost of goods sold for both the three and nine months ended June 30, 2008.
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Interest Rate Risk |
Lincolnway Energy has various loan agreements and promissory notes which expose Lincolnway Energy to market risk related to changes in the interest rate imposed under those loan agreements and promissory notes. |
The interest rate under all the loan agreements and promissory notes, other than with CoBank, are fixed at rates ranging from 0% to 5% per annum. The interest rate under the variable portion of the CoBank loan agreements is 5/100 of 1% below Co-Bank’s prime rate, adjusted .50%, and was at 4.95% per annum as of June 30, 2008. In order to alleviate some of the interest rate risk, Lincolnway Energy on July 25, 2008, fixed a portion of the loan or $7,750,000 of the $20,250,000 loan outstanding at an interest rate of 6.62% for three years. $12,500,000 remains on a variable rate. The same payment amortization schedule will apply. |
Item 4T. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures |
Lincolnway Energy's management, under the supervision and with the participation of Lincolnway Energy's president and chief executive officer and Lincolnway Energy's chief financial officer, have evaluated the effectiveness of Lincolnway Energy's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report. Based on that evaluation, Lincolnway Energy's president and chief executive officer and Lincolnway Energy's chief financial officer have concluded that, as of the end of the period covered by this quarterly report, Lincolnway Energy's disclosure controls and procedures have been effective to provide reasonable assurance that the information required to be disclosed in the reports Lincolnway Energy files or submits under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and (ii) accumulated and communicated to management, including Lincolnway Energy's principal executive and principal financial officers or persons performing such functions, as appropriate, to allow timely decisions regarding disclosure. Lincolnway Energy believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Changes in Internal Control Over Financial Reporting
No change in Lincolnway Energy's internal control over financial reporting occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, Lincolnway Energy's internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. | Legal Proceedings. |
Except as noted in the following paragraph, as of the date of this quarterly report, Lincolnway Energy was not aware of any material pending legal proceeding to which Lincolnway Energy was a party or of which any of Lincolnway Energy's property was the subject, other than ordinary routine litigation, if any, that was incidental to Lincolnway Energy's business. Except as noted in the following paragraph, as of the date of this quarterly report, Lincolnway Energy was not aware that any governmental authority was contemplating any proceeding against Lincolnway Energy or any of Lincolnway Energy's property. |
As discussed in Lincolnway Energy's Form 10-K for the fiscal year ended September 30, 2007, the Iowa Environmental Protection Commission referred alleged environmental law violations by Lincolnway Energy to the Iowa Attorney General's office for enforcement action on December 4, 2007. The referred allegations concern wastewater releases relating to construction activities and exceedences of iron and total suspended solid limits in Lincolnway Energy's NPDES wastewater discharge permit and concern air permitting, emissions limit exceedences, stack testing, monitoring and reporting. There have been no material developments regarding that matter since Lincolnway Energy's filing of its Form 10-K for the fiscal year ended September 30, 2007 with the Securities and Exchange Commission on December 21, 2007. |
Item 1A. | Risk Factors. |
There has been no material change from the risk factors as previously disclosed in Lincolnway Energy's Form 10-K for the fiscal year ended September 30, 2007 and filed with the Securities and Exchange Commission on December 21, 2007. One matter that has changed is that the Energy Independence and Security Act of 2007 was signed into law by President Bush on December 19, 2007, with the Act taking effect on January 1, 2008. The Act does provide support for the ethanol industry, but Lincolnway Energy does not believe that it will have any material effect on Lincolnway Energy's business or financial results or condition in the near term, with the adverse counterveiling factors currently including the high cost of corn. |
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The various risk factors related to increased corn and input costs have been particularly relevant during the quarter covered by this quarterly report. |
An investment in any membership units of Lincolnway Energy involves a high degree of risk and is a speculative and volatile investment. An investor could lose all or part of his or her investment in any membership units. |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Lincolnway Energy did not sell any membership units during the period of April 1, 2008 through June 30, 2008.
None of Lincolnway Energy's membership units were purchased by or on behalf of Lincolnway Energy or any affiliated purchaser (as defined in Rule 10b-18(a)(3) of the Exchange Act) of Lincolnway Energy during the period of April 1, 2008 through June 30, 2008. |
Item 3. | Defaults Upon Senior Securities. |
There has been no material default in the payment of principal, interest, a sinking or purchase fund installment, or any other material default not cured within thirty days, with respect to any indebtedness of Lincolnway Energy exceeding 5% of the total assets of Lincolnway Energy. |
No material arrearage in the payment of dividends or any other material delinquency has occurred with respect to any class of preferred membership units of Lincolnway Energy which is registered or which ranks prior to any class of registered membership units of Lincolnway Energy. |
Item 4. | Submission of Matters to a Vote of Security Holders. |
No matter was submitted to a vote of the members of Lincolnway Energy, through the solicitation of proxies or otherwise, during the period of April 1, 2008 through June 30, 2008. |
Item 5. | Other Information. |
There was no information required to be disclosed in a report on Form 8-K during the period covered by this quarterly report which was not reported on a Form 8-K.
There were no material changes during the period of April 1, 2008 through June 30, 2008 to the procedures by which the members of Lincolnway Energy may recommend nominees to Lincolnway Energy's board.
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The board of Lincolnway Energy declared a distribution to members on May 28, 2008. The distribution was in the amount of $75.00 per unit, and was payable to members of record on May 28, 2008. Lincolnway Energy had 42,049 outstanding units on May 28, 2008. The distribution was paid during the week of June 9, 2008. |
Item 6. | Exhibits. |
The following exhibits are filed as part of this quarterly report. Exhibits previously filed are incorporated by reference, as noted.
Filed | Incorporated by Reference | |||||||||||
Exhibit | Herewith; | Period | Filing | |||||||||
Number | Exhibit Description | Page Number | Form | Ending | Exhibit | Date | ||||||
3.1 | Articles of Restatement | 10-Q | 6/30/07 | 3.1 | 8/13/07 | |||||||
3.2 | Amended and Restated Operating Agreement and Unit Assignment Policy | 10-Q | 6/30/07 | 3.2 | 8/13/07 | |||||||
*10.1 | Design/Build Contract Between Lincolnway Energy, LLC and Fagen, Inc. | 10 | 10.1 | 1/27/06 | ||||||||
10.2 | Master Loan Agreement Between Lincolnway Energy, LLC and Farm Credit Services of America | 10 | 10.2 | 1/27/06 | ||||||||
10.3 | Construction and Term Loan Supplement Between Lincolnway Energy, LLC and Farm Credit Services of America | 10 | 10.3 | 1/27/06 | ||||||||
10.4 | Construction and Revolving Term Loan Supplement Between Lincolnway Energy, LLC and Farm Credit Services of America | 10 | 10.4 | 1/27/06 | ||||||||
10.5 | Loan Agreement Between Lincolnway Energy, LLC and Iowa Department of Transportation | 10 | 10.5 | 1/27/06 |
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10.6 | Ethanol Fuel Marketing Agreement Between Lincolnway Energy, LLC and Renewable Products Marketing Group | 10 | 10.6 | 1/27/06 | ||||||||
10.7 | Distiller's Grain Marketing Agreement Between Lincolnway Energy, LLC and Hawkeye Gold, LLC | 10-K | 9/30/07 | 10.7 | 12/21/07 | |||||||
10.8 | Coal/Energy Consulting Agreement Between Lincolnway Energy, LLC And U.S. Energy | 10 | 10.8 | 1/27/06 | ||||||||
*10.9 | Coal Supply Agreement Between Lincolnway Energy, LLC and Williams Bulk Transfer, Inc. See Exhibit 10.9.1 for an amendment to this agreement. | 10 | 10.9 | 1/27/06 | ||||||||
*10.9.1 | Amendment Number One to Coal Supply Agreement Between Lincolnway Energy, LLC and Williams Bulk Transfer, Inc. | 10-K | 9/30/07 | 10.9.1 | 12/21/07 | |||||||
10.10 | Loan Agreement Between Lincolnway Energy, LLC and Iowa Department of Economic Development | 10 | 10.10 | 1/27/06 | ||||||||
10.11 | Amended and Restated Grain Handling Agreement Between Lincolnway Energy, LLC and Heart of Iowa Cooperative | 10 | 10.11 | 1/27/06 | ||||||||
10.13 | Industry Track Contract Between Lincolnway Energy, LLC and Union Pacific Railroad | 10-Q | 6/30/06 | 10.13 | 8/14/06 | |||||||
10.14 | Denaturant Purchase Agreement Between Lincolnway Energy, LLC and Quadra Energy Trading Inc. | 10-K | 9/30/06 | 10.14 | 12/21/06 | |||||||
31.1 | Rule 13a-14(a) Certification of President and Chief Executive Officer | E-1 |
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31.2 | Rule 13a-14(a) Certification of Chief Financial Officer | E-2 | ||||||||||
32.1 | Section 1350 Certification of President and Chief Executive Officer | E-3 | ||||||||||
32.2 | Section 1350 Certification of Chief Financial Officer | E-4 |
* Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the Securities and Exchange Commission.
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SIGNATURES
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.
LINCOLNWAY ENERGY, LLC | ||
| | |
August 13, 2008 | By: | /s/ Richard Brehm |
Name: Richard Brehm | ||
Title: President and Chief Executive Officer |
| | |
August 13, 2008 | By: | /s/ Kim Supercynski |
Name: Kim Supercynski | ||
Title: Chief Financial Officer |
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EXHIBIT INDEX
Exhibits Filed With Form 10-Q
of Lincolnway Energy, LLC
For the Quarter Ended June 30, 2008
Description of Exhibit. | Page | |||||
31. | Rule 13a-14(a)/15d-14(a) Certifications | |||||
31.1 | Rule 13a-14(a) Certification of President and Chief Executive Officer | E-1 | ||||
31.2 | Rule 13a-14(a) Certification of Chief Financial Officer | E-2 | ||||
32. | Section 1350 Certifications | |||||
32.1 | Section 1350 Certification of President and Chief Executive Officer | E-3 | ||||
32.2 | Section 1350 Certification of Chief Financial Officer | E-4 |
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