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 | March 31, 2015 | ||
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.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ 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 þ | 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 þ 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 May 1, 2015.
LINCOLNWAY ENERGY, LLC
FORM 10-Q
For the Quarter Ended March 31, 2015
INDEX
| Page | |||
| Part I. | Financial Information | ||
| Item 1. | Unaudited Financial Statements | ||
| a) Balance Sheets | |||
| b) Statements of Operations | |||
| c) Statements of Cash Flows | |||
| d) Notes to Unaudited Financial Statements | |||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | ||
| Item 4. | Controls and Procedures | ||
| Part II. | Other Information | ||
| Item 1. | Legal Proceedings | ||
| Item 1A. | Risk Factors | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||
| Item 3. | Defaults Upon Senior Securities | ||
| Item 4. | Mine Safety Disclosures | ||
| Item 5. | Other Information | ||
| Item 6. | Exhibits | ||
| 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 Director of Finance | E-2 | ||
| Section 1350 Certification of President and Chief Executive Officer | E-3 | ||
| Section 1350 Certification of Director of Finance | E-4 | ||
| Interactive Data Files (filed electronically herewith) | |||
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements.
Lincolnway Energy, LLC
Balance Sheets
| March 31, 2015 | September 30, 2014 | ||||||
| (Unaudited) | |||||||
| ASSETS | |||||||
| CURRENT ASSETS | |||||||
| Cash and cash equivalents | $ | 250 | $ | 30,273 | |||
| Cash equivalents-repurchase account | 4,722,319 | 22,948,115 | |||||
| Derivative financial instruments (Note 8 and 9) | 626,754 | 487,078 | |||||
| Trade and other accounts receivable (Note 7) | 4,230,914 | 1,543,599 | |||||
| Inventories (Note 3) | 3,839,193 | 4,738,106 | |||||
| Prepaid expenses and other | 252,367 | 362,495 | |||||
| Total current assets | 13,671,797 | 30,109,666 | |||||
| PROPERTY AND EQUIPMENT | |||||||
| Land and land improvements | 6,944,305 | 6,944,305 | |||||
| Buildings and improvements | 1,625,531 | 1,625,531 | |||||
| Plant and process equipment | 88,147,815 | 81,268,966 | |||||
| Office furniture and equipment | 428,477 | 402,406 | |||||
| Construction in progress | 8,929,046 | 7,854,739 | |||||
| 106,075,174 | 98,095,947 | ||||||
| Accumulated depreciation | (70,135,112 | ) | (66,104,599 | ) | |||
| Total property and equipment | 35,940,062 | 31,991,348 | |||||
| OTHER ASSETS | |||||||
| Financing costs, net of amortization of $393,057 and $375,522 | 78,905 | 96,439 | |||||
| Other | 777,479 | 550,184 | |||||
| Total other assets | 856,384 | 646,623 | |||||
| Total assets | $ | 50,468,243 | $ | 62,747,637 | |||
See Notes to Unaudited Financial Statements.
2
Lincolnway Energy, LLC
Balance Sheets (continued)
| March 31, 2015 | September 30, 2014 | ||||||
| (Unaudited) | |||||||
| LIABILITIES AND MEMBERS' EQUITY | |||||||
| CURRENT LIABILITIES | |||||||
| Accounts payable | 2,734,500 | 2,111,296 | |||||
| Accounts payable, related party (Note 6) | 643,602 | 717,554 | |||||
| Current maturities of long-term debt (Note 5) | 53,714 | 53,153 | |||||
| Current settlement payable, related party (Note 6) | 425,000 | — | |||||
| Accrued expenses | 1,117,137 | 1,738,131 | |||||
| Total current liabilities | 4,973,953 | 4,620,134 | |||||
| NONCURRENT LIABILITIES | |||||||
| Long-term debt, less current maturities (Note 5) | 54,853 | 81,851 | |||||
| Settlement payable, net of current amount, related party (Note 6) | — | 425,000 | |||||
| Deferred revenue | 941,667 | 925,000 | |||||
| Other | 450,000 | 450,000 | |||||
| Total noncurrent liabilities | 1,446,520 | 1,881,851 | |||||
| COMMITMENTS AND CONTINGENCY (Notes 7 and 10) | |||||||
| MEMBERS' EQUITY | |||||||
| Member contributions, 42,049 units issued and outstanding | 38,990,105 | 38,990,105 | |||||
| Retained earnings | 5,057,665 | 17,255,547 | |||||
| Total members' equity | 44,047,770 | 56,245,652 | |||||
| Total liabilities and members' equity | $ | 50,468,243 | $ | 62,747,637 | |||
3
Lincolnway Energy, LLC
Statements of Operations
| Three Months Ended | Six Months Ended | ||||||||||||||
| March 31, 2015 | March 31, 2014 | March 31, 2015 | March 31, 2014 | ||||||||||||
| (Unaudited) | (Unaudited) | ||||||||||||||
| Revenues (Notes 2 and 7) | $ | 30,168,024 | $ | 36,494,001 | 60,188,987 | 71,249,137 | |||||||||
| Cost of goods sold (Note 7) | 29,667,066 | 31,443,627 | 57,099,539 | 65,575,629 | |||||||||||
| Gross profit | 500,958 | 5,050,374 | 3,089,448 | 5,673,508 | |||||||||||
| General and administrative expenses | 748,136 | 776,590 | 1,610,935 | 1,651,124 | |||||||||||
| Operating income (loss) | (247,178 | ) | 4,273,784 | 1,478,513 | 4,022,384 | ||||||||||
| Other income (expense): | |||||||||||||||
| Interest income | 4,065 | 2,660 | 15,234 | 5,451 | |||||||||||
| Interest expense | (12,743 | ) | (2,013 | ) | (25,704 | ) | (22,211 | ) | |||||||
| (8,678 | ) | 647 | (10,470 | ) | (16,760 | ) | |||||||||
| Net income (loss) | $ | (255,856 | ) | $ | 4,274,431 | $ | 1,468,043 | $ | 4,005,624 | ||||||
| Weighted average units outstanding | 42,049 | 42,049 | 42,049 | 42,049 | |||||||||||
| Net income (loss) per unit - basic and diluted | $ | (6.08 | ) | $ | 101.65 | $ | 34.91 | $ | 95.26 | ||||||
See Notes to Unaudited Financial Statements.
4
| Lincolnway Energy, LLC | Six Months Ended | Six Months Ended | |||||
| Statements of Cash Flows | March 31, 2015 | March 31, 2014 | |||||
| (Unaudited) | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
| Net income | $ | 1,468,043 | $ | 4,005,624 | |||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
| Depreciation and amortization | 4,049,490 | 3,688,396 | |||||
| (Gain) on sale or disposal of property and equipment | — | (70,367 | ) | ||||
| Changes in working capital components: | |||||||
| Derivative financial instruments | (139,676 | ) | 349,361 | ||||
| Trade and other accounts receivable | (2,687,315 | ) | (681,499 | ) | |||
| Inventories | 898,913 | 730,493 | |||||
| Prepaid expenses and other | (117,167 | ) | 19,660 | ||||
| Accounts payable | 335,773 | (1,068,228 | ) | ||||
| Accounts payable, related party | (73,952 | ) | (251,710 | ) | |||
| Settlement fee payable, related party | — | (425,000 | ) | ||||
| Accrued expenses | (602,544 | ) | 47,974 | ||||
| Net cash provided by operating activities | 3,131,565 | 6,344,704 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
| Purchase of property and equipment | (7,695,022 | ) | (2,349,254 | ) | |||
| Proceeds from sale of equipment | — | 80,000 | |||||
| Purchase of investments | — | (3,082 | ) | ||||
| Net cash (used in) investing activities | (7,695,022 | ) | (2,272,336 | ) | |||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
| Members distributions | (13,665,925 | ) | — | ||||
| Payments on long-term borrowings | (26,437 | ) | (25,888 | ) | |||
| Net cash (used in) financing activities | (13,692,362 | ) | (25,888 | ) | |||
| Net increase (decrease) in cash and cash equivalents | (18,255,819 | ) | 4,046,480 | ||||
| CASH AND CASH EQUIVALENTS | |||||||
| Beginning | 22,978,388 | 1,936,800 | |||||
| Ending | $ | 4,722,569 | $ | 5,983,280 | |||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW | |||||||
| INFORMATION, cash paid for interest | $ | 1,425 | $ | 33,056 | |||
| SUPPLEMENTAL DISCLOSURES OF NONCASH | |||||||
| INVESTING AND FINANCING ACTIVITIES | |||||||
| Construction in progress included in accounts payable | $ | 746,799 | $ | 1,752,195 | |||
| Construction in progress included in accrued expenses | 32,508 | — | |||||
See Notes to Unaudited Financial Statements.
5
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. The Company is directly influenced by commodity markets and the agricultural and energy industries and, accordingly, its results of operations and financial condition may be significantly affected by cyclical market trends and the regulatory, political and economic conditions in these industries.
Basis of presentation and other information: The balance sheet as of September 30, 2014 was derived from the Company's audited balance sheet as of that date. The accompanying financial statements as of March 31, 2015 and for the three months and six months ended March 31, 2015 and 2014 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, 2014 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.
Cash and cash equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Although the Company maintains its cash accounts in one bank, the Company believes it is not exposed to any significant credit risk on cash and cash equivalents. The Company periodically invests excess cash in a bank overnight reverse repurchase account, which totaled approximately $4.7 million and $22.9 million at March 31, 2015 and September 30, 2014, respectively. In accordance with the terms of the repurchase agreements, the Company does not take possession of the related securities. The agreements also contain provisions to ensure that the market value of the underlying assets remain sufficient to protect the Company in the event of default by the bank by requiring that the underlying securities have a total market value of at least 100% of the bank's total obligations under the agreements.
Trade accounts receivable: Trade accounts receivable are recorded at original invoice amounts 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 customer receivables and considering customers financial condition, credit history and current economic conditions. Receivables are written off when deemed uncollectible. Recoveries of receivables written off are recorded when received. A receivable is considered past due if any portion of the receivable is outstanding more than 90 days. There is no allowance for doubtful account balance as of March 31, 2015 and September 30, 2014.
Inventories: Inventories are stated at the lower of cost or market using the first-in, first-out method. In the valuation of inventories and purchase and sale commitments, market is based on current replacement values except that it does not exceed net realizable values and is not less than net realizable values reduced by allowances for approximate normal profit margin.
Deferred revenue: Deferred revenue represents fees received under a service agreement in advance of services being performed. The related revenue is deferred and recognized as the services are performed over the 10 year agreement.
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 net income (loss) per unit have been computed on the basis of the weighted average number of units outstanding during each period presented.
Fair value of financial instruments: The carrying amounts of cash and cash equivalents, derivative financial instruments, trade and other accounts receivable, accounts payable, accrued expenses and long-term debt approximate fair value.
6
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Note 2. Revenues
Components of revenues are as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||
| March 31, 2015 | March 31, 2014 | March 31, 2015 | March 31, 2014 | ||||||||||||
| Ethanol, net of hedging gain (loss) | $ | 22,767,894 | $ | 27,318,521 | $ | 48,134,120 | $ | 51,880,817 | |||||||
| Distillers Grains | 6,501,539 | 8,501,041 | 10,502,583 | 17,844,526 | |||||||||||
| Other | 898,591 | 674,439 | 1,552,284 | 1,523,794 | |||||||||||
| Total | $ | 30,168,024 | $ | 36,494,001 | $ | 60,188,987 | $ | 71,249,137 | |||||||
Note 3. Inventories
Inventories consist of the following as of:
| March 31, 2015 | September 30, 2014 | ||||||
| Raw materials, including corn, chemicals and supplies | $ | 2,575,658 | $ | 2,525,462 | |||
| Work in process | 689,567 | 770,759 | |||||
| Ethanol and distillers grains | 573,968 | 1,441,885 | |||||
| Total | $ | 3,839,193 | $ | 4,738,106 | |||
Note 4. Revolving Credit Loan
The Company has a monitored revolving credit loan, with a bank, for up to $8,500,000. The amount available and outstanding under the loan cannot exceed the borrowing base as calculated per the agreement (approximately $4.0 million as of March 31, 2015). The Company will pay interest monthly on the unpaid balance at a variable rate (adjusted on a weekly basis) based upon the one-month LIBOR index rate plus 3.20%. The Company will also pay a commitment fee on the average daily unused portion of the loan at the rate of .30% per annum, payable monthly. The term of the loan will expire, and the Company must pay all unpaid principal amounts outstanding under the loan on November 1, 2019. The loan is secured by substantially all assets of the Company and subject to certain financial and nonfinancial covenants as defined in the master loan agreement. There was no outstanding balance as of March 31, 2015 and September 30, 2014.
7
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Note 5. Long-Term Debt
The Company has a revolving term loan, with a bank, available for up to $11,000,000. The Company will pay interest on the unpaid balance at a variable interest rate (adjusted on a weekly basis) based upon the one-month LIBOR index rate plus 3.45%. The Company will also pay a commitment fee on the average daily unused portion of the loan at the rate of .50% per annum, payable monthly. The loan is secured by substantially all assets of the Company and subject to certain financial and nonfinancial covenants as defined in the master loan agreement. The term of the loan will expire, and the Company must pay all unpaid principal amounts outstanding under the revolving term loan, on November 1, 2019. There are no outstanding borrowings at March 31, 2015 and September 30, 2014.
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 January 2017. The loan is secured by all rail track material constructed as part of the plant construction. The debt is subordinate to the above financial institution revolving term loan and revolving credit loan (Note 4.) As of March 31, 2015, $108,567 is outstanding of which $53,714 has been classified as current.
Note 6. Related-Party Transactions
The Company has recorded a settlement payable of $425,000 at March 31, 2015 to Heart of Iowa Coop (HOIC), dba Key Cooperative, a member of the Company, related to the termination of an agreement related to corn origination. Payments of $425,000 are due annually with interest at 3.25% with the final payment due on October 10, 2015.
The Company had the following related-party activity with members during the three and six months ending March 31:
| Corn Commitment as of: | ||||||||
| March 31, 2015 | ||||||||
| Corn Forward Purchase Commitment | Basis Corn Commitment Bushels | Commitment Through | Amount Due | |||||
| Key | $ | 1,143,601 | 250,000 | May 2015 | $ | 47,359 | ||
| Heartland | $ | 258,559 | 425,000 | May 2015 | $ | 87,332 | ||
| Mid Iowa | $ | 860,263 | 1,050,000 | July 2015 | $ | 156,053 | ||
| Kaltenhauser | $ | 1,004,000 | 0 | February 2016 | $ | — | ||
| Other | $ | 1,130,657 | 0 | December 2015 | $ | 352,858 | ||
| Corn Purchased: | ||||||||||||
| Three Months Ended March 31, 2015 | Three Months Ended March 31, 2014 | Six Months Ended March 31, 2015 | Six Months Ended March 31, 2014 | |||||||||
| Key | $ | 3,011,156 | $ | 2,440,393 | $ | 7,189,807 | $ | 6,479,250 | ||||
| Heartland | $ | 2,814,716 | $ | 4,752,977 | $ | 5,852,593 | $ | 6,377,594 | ||||
| Mid Iowa | $ | 3,214,003 | $ | 3,916,795 | $ | 5,202,339 | $ | 10,986,808 | ||||
| Kaltenhauser | $ | 1,516,809 | $ | 20,703 | $ | 1,803,172 | $ | 52,966 | ||||
| Other | $ | 2,163,708 | $ | 2,515,237 | $ | 3,885,552 | $ | 5,050,837 | ||||
In addition to the above, the Company has made miscellaneous purchases from Key amounting to $19,837 and $53,020 for the three months and six months ended March 31, 2015, respectively. There were miscellaneous purchases of $24,751 and $52,095, respectively for the three months and six months ended March 31, 2014.
8
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Note 7. Commitments and Major Customers
On January 1, 2013 the Company entered into an agreement with an unrelated entity for marketing, selling and distributing all of the ethanol produced by the Company. Revenues with this customer were $22,029,408 and $47,789,489, respectively, for the three and six months ended March 31, 2015. Revenues with this customer were $27,524,006 and $52,614,191, respectively, for the three and six months ended March 31, 2014. Trade accounts receivable of $2,924,773 was due from the customer as of March 31, 2015. As of March 31, 2015, the Company has ethanol unpriced sales commitments with the unrelated entity of approximately 12.2 million gallons through June 30, 2015.
The Company entered into an agreement on January 1, 2014 with an unrelated entity for marketing, selling and distributing the distillers grains. Revenues with this customer were $6,501,539 and $10,502,583, respectively, for the three and six months ended March 31, 2015. Revenues with this customer were $2,265,063 for both the three and six months ended March 31, 2014. Trade accounts receivable of $860,405 was due from the customer as of March 31, 2015. The Company has distiller's grain sales commitments with an unrelated entity of approximately 18,500 tons for a total sales commitment of approximately $2.9 million.
As of March 31, 2015, the Company had purchase commitments for corn forward contracts with various unrelated parties, at a corn commitment total of approximately $2.5 million. These contracts mature at various dates through October 2014. The Company also had basis contract commitments to purchase 510,150 bushels of corn. These contracts mature at various dates through May 2016.
On February 27, 2015, the Company entered into an agreement with an unrelated entity for the purchase of enzymes. The agreement expires on February 29, 2016. The agreement is subject to a minimum purchase requirement. The estimated purchase commitment totals approximately $1.2 million.
On April 17, 2013, the Company entered into an agreement with an unrelated party for the transportation of natural gas to the Company's ethanol plant. Under the agreement, the Company is committed to future monthly usage fees totaling approximately $3.6 million over the 10 year term, commencing November 2014. The Company also assigned a $3.1 million irrevocable standby letter of credit to the party to stand as security for the Company's obligation under the Agreement. The letter of credit will be reduced over time as the Company makes payments under the Agreement.
On June 14, 2014, the Company entered into an agreement with an unrelated party for an oil separation process. The purchase price is approximately $2.4 million. The Company has paid approximately $1.3 million. The project is expected to be completed in April 2015.
On November 18, 2014, the Company entered into an agreement with an unrelated party for the installation of several process flow improvements. The commitment totals approximately $3.7 million. As of March 31. 2015, approximately $2 million has been paid. The remaining balance of $1.7 million will be paid as invoiced over the course of the project. The project is expected to be completed in July 2015.
Note 8. 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
9
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
sales contracts. 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. The Company treats all contracts with the same counterparty on a net basis on the balance sheet.
Derivatives not designated as hedging instruments are as follows:
| March 31, 2015 | September 30, 2014 | ||||||
| Derivative assets - corn contracts | 348,850 | $ | 878,463 | ||||
| Derivative assets - ethanol contracts | 50,400 | 420,709 | |||||
| Derivative liabilities - corn contracts | (34,394 | ) | (268,394 | ) | |||
| Derivative liabilities - ethanol contracts | (13,650 | ) | — | ||||
| Derivative liabilities - natural gas contracts | (18,000 | ) | — | ||||
| Cash held by broker | 293,548 | (543,700 | ) | ||||
| Total | $ | 626,754 | $ | 487,078 | |||
The effects on operating income from derivative activities is as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||
| March 31, 2015 | March 31, 2014 | March 31, 2015 | March 31, 2014 | ||||||||||||
| Gains (losses) in revenues due to derivatives related to ethanol sales: | |||||||||||||||
| Realized gain (loss) | $ | 1,193,850 | $ | (205,483 | ) | $ | 729,078 | $ | (733,373 | ) | |||||
| Unrealized gain (loss) | (455,364 | ) | — | (384,447 | ) | — | |||||||||
| Total effect on revenues | 738,486 | (205,483 | ) | 344,631 | (733,373 | ) | |||||||||
| Gains (losses) in cost of goods sold due to derivatives related to corn costs: | |||||||||||||||
| Realized gain (loss) | 216,587 | (544,625 | ) | 1,298,956 | (221,723 | ) | |||||||||
| Unrealized gain (loss) | 189,756 | 460,881 | (295,125 | ) | 3,038 | ||||||||||
| Total effect on corn cost | 406,343 | (83,744 | ) | 1,003,831 | (218,685 | ) | |||||||||
| Gains (losses) in cost of goods sold due to derivatives related to natural gas costs: | |||||||||||||||
| Realized gain (loss) | 56,810 | — | 56,810 | — | |||||||||||
| Unrealized gain (loss) | (20,920 | ) | — | (20,920 | ) | — | |||||||||
| Total effect on natural gas cost | 35,890 | — | 35,890 | — | |||||||||||
| Total effect on cost of good sold | $ | 442,233 | $ | (83,744 | ) | $ | 1,039,721 | $ | (218,685 | ) | |||||
| Total gain (loss) due to derivative activities | $ | 1,180,719 | $ | (289,227 | ) | $ | 1,384,352 | $ | (952,058 | ) | |||||
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 Company's financial statements but are subject to a lower of cost or market assessment.
10
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Note 9. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, 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/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
| Level 1 - | Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities. |
| Level 2 - | Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities. |
| Level 3 - | Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. |
A description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company's financial assets and financial liabilities carried at fair value.
Derivative financial instruments: Commodity futures and exchange-traded commodity options contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the CME and NYMEX markets. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the over-the-counter markets.
The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and September 30, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
| March 31, 2015 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets, derivative financial instruments | $ | 399,250 | $ | 399,250 | $ | — | $ | — | ||||||||
| Liabilities, derivative financial instruments | $ | 66,044 | $ | 66,044 | — | — | ||||||||||
| September 30, 2014 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets, derivative financial instruments | $ | 1,299,172 | $ | 1,299,172 | $ | — | $ | — | ||||||||
| Liabilities, derivative financial instruments | $ | 268,394 | $ | 268,394 | — | — | ||||||||||
Note 10. Contingency
In May 2010, a lawsuit was filed against the Company and approximately twenty other ethanol plants, design firms and equipment manufacturers by an unrelated party claiming the Company’s operation of the corn oil extraction system is infringing at least one
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Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
patent and that all parties have engaged in willful infringement. The plaintiff seeks injunctive relief, an award of damages with interest and any other remedies available under certain patent statutes or otherwise under law. The Company is currently defending the lawsuit with legal counsel and has asserted various defenses including that it does not infringe; that the patents are invalid; and/or that the patents are unenforceable. The court issued a ruling in November 2014 which was favorable to the Company, however various matters remain outstanding and the plaintiff has indicated its intent to appeal. The Company is unable at this time to estimate the ultimate outcome or determine if the lawsuit will have a material adverse affect on the Company.
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, forecasts, 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 trends in business, revenues, net income, net profits or net losses; projections concerning ethanol prices, corn prices, gas prices, operations, capital needs and cash flow; investment, business, growth, joint venture, expansion, acquisition and divestiture opportunities and strategies; management's plans or intentions for the future; competitive position or circumstances; and other forecasts, projections, predictions 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 material 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. Forecasts and projections are also in all events likely to be inaccurate, at least to some degree, and especially over long periods of time. Forecasts and projections are also currently difficult to make with any degree of reliability or certainty given the difficult and uncertain political, financial, market, economic and other circumstances and uncertainties in existence at the time of the preparation of this quarterly report, both generally and with respect to the ethanol industry, and both in the United States and internationally. 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 or undue 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 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 elsewhere in this quarterly report and in Items 1A, 7 and 7A of Lincolnway Energy's Annual Report on Form 10-K for the fiscal year ended September 30, 2014.
Lincolnway Energy may have obtained industry, market, competitive position and other data used in this quarterly report or Lincolnway Energy's general business plan from Lincolnway Energy's own research or surveys, studies conducted by other persons and/or trade or industry associations or general publications and other publicly available information. Lincolnway Energy attempts to utilize third party sources of information that Lincolnway Energy believes to be materially complete, accurate, balanced and reliable, but there is no assurance of the accuracy, completeness or reliability of any third party information. For example, 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. Industry publications and surveys and other publicly available information also generally state that they have obtained information from sources believed to be accurate and reliable, but do not guarantee the accuracy and completeness of any information.
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General Overview
Lincolnway Energy is an Iowa limited liability company that operates a dry mill, natural gas fired ethanol plant located in Nevada, Iowa. Lincolnway Energy has been processing corn into fuel grade ethanol and distillers grains at the ethanol plant since May 22, 2006. The ethanol plant has a nameplate production capacity of 50,000,000 gallons of ethanol per year.
Lincolnway Energy's ethanol is marketed by Eco-Energy, LLC. Lincolnway Energy's distillers grains are marketed by Gavilon Ingredients, LLC. Lincolnway Energy's revenues are derived primarily from the sale of its ethanol and distillers grains.
Lincolnway Energy extracts corn oil from the syrup that is generated in the production of ethanol. Lincolnway Energy's corn oil is marketed internally.
EPCO Carbon Dioxide Products, Inc. has a plant located on Lincolnway Energy's site that collects the carbon dioxide gas that is produced as part of the fermentation process and converts that raw carbon dioxide gas into liquid carbon dioxide. EPCO also markets and sells the liquid carbon dioxide.
Lincolnway Energy does not anticipate that sales of corn oil and carbon dioxide gas will be material sources of revenue for Lincolnway Energy, but Lincolnway Energy was able to implement the processes to collect corn oil and carbon dioxide gas on an economical basis. Lincolnway Energy does not have significant operating or other costs related to those processes.
Lincolnway Energy expects to fund its operations during the next 12 months using cash flow from continuing operations and the revolving line of credit that is available to Lincolnway Energy.
Executive Summary
Highlights for the six months ended March 31, 2015, are as follows:
•Total revenues decreased 15.5% or $11.1 million compared to the 2014 comparable period.
•Total cost of goods sold decreased 12.9% or $8.5 million, compared to the 2014 comparable period.
•Net income decreased by approximately $2.5 million to a net income of $1.5 million, compared to net income of $4.0 million for the 2014 comparable period.
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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 and six months ended March 31, 2015 and 2014 (dollars in thousands):
| Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||||||||||||||
| (Unaudited) | (Unaudited) | ||||||||||||||||||||||||||
| Income Statement Data | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||
| Revenue | $30,168 | 100.0 | % | $36,494 | 100.0 | % | $60,189 | 100.0 | % | $71,249 | 100.0 | % | |||||||||||||||
| Cost of goods sold | 29,667 | 98.3 | % | 31,444 | 86.2 | % | 57,100 | 94.9 | % | 65,576 | 92.0 | % | |||||||||||||||
| Gross profit | 501 | 1.7 | % | 5,050 | 13.8 | % | 3,089 | 5.1 | % | 5,674 | 8.0 | % | |||||||||||||||
| General and administrative expenses | 748 | 2.5 | % | 777 | 2.1 | % | 1,611 | 2.7 | % | 1,651 | 2.3 | % | |||||||||||||||
| Operating income (loss) | (247 | ) | (0.8 | )% | 4,273 | 11.7 | % | 1,479 | 2.4 | % | 4,022 | 5.7 | % | ||||||||||||||
| Other net income (expense) | (9 | ) | — | % | 1 | — | % | (10 | ) | — | % | (17 | ) | — | % | ||||||||||||
| Net income (loss) | $ | (256 | ) | (0.8 | )% | $ | 4,274 | 11.7 | % | $1,468 | 2.4 | % | $ | 4,006 | 5.7 | % | |||||||||||
Results of Operations for the Three Months Ended March 31, 2015 as Compared to the Three Months Ended March 31, 2014
Revenues. Total revenues decreased by 17.3% for the three months ended March 31, 2015 from the three months ended March 31, 2014. Ethanol sales decreased by 20.0% and sales from co-products decreased by 22.2% for the three months ended March 31, 2015 from the three months ended March 31, 2014. The change in ethanol revenue was a result of a 30.8% decrease in the price per gallon received which was partially offset by a 14.7% increase in volume for the three months ended March 31, 2015, when compared to the three months ended March 31, 2014. The three months ended March 31, 2015 also included a $.7 million net gain for derivatives related to ethanol sales, compared to a $.2 million loss in the same quarter for the prior year.
Sales from co-products decreased by 22.2% for the three months ended March 31, 2015 from the three months ended March 31, 2014. Co-products include dried distillers grains, wet distillers grains, corn oil, syrup and CO2. A decrease in dried distillers grains price generated the co-product decrease for the three months ended March 31, 2015 compared to the three months ended March 31, 2014. The average price per ton of dried distillers grain sold decreased by 35.8% for the three months ended March 31, 2015, compared to the three months ended March 31, 2014. The decrease in dried distillers grains price is attributable to lower corn prices and the lower demand for distillers grains in the China market.
Cost of goods sold. Cost of goods sold decreased by 5.6% for the three months ended March 31, 2015 from the three months ended March 31, 2014. Costs decreased primarily due to lower corn costs and decreased DDG freight expense when compared to the same quarter in the prior year. Cost of goods sold includes corn costs, process chemicals, denaturant, natural gas costs, electricity, production labor, repairs and maintenance, and depreciation.
Corn costs decreased by 4.4% for the three months ended March 31, 2015 from the three months ended March 31, 2014. The three months ended March 31, 2015 corn costs also included a $.4 million net gain for derivatives relating to corn costs, compared to a $.08 million loss in the same quarter for the prior year. Corn costs represented 72.2% of cost of goods sold for the three months ended March 31, 2015 compared to 71.1% for the three months ended March 31, 2014.
Distillers grains freight decreased $1.7 million or 100% for the three months ended March 31, 2015 from the three months ended March 31, 2014. The decrease is due to the change in distillers grains marketers in January 2014. The new DDG marketer prices all contracts freight on board from Lincolnway Energy. The shipping charges are the responsibility of the buyer and netted against the price received by Lincolnway Energy, which are recorded in DDG sales.
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Results of Operations for the Six Months Ended March 31, 2015 as Compared to the Six Months Ended March 31, 2014
Revenues. Revenues decreased by 15.5% for the six months ended March 31, 2015 from the six months ended March 31, 2014. There was a decrease in ethanol sales of 9.2% for the six months ended March 31, 2015 from the six months ended March 31, 2014. The average price per gallon of ethanol sold decreased 18.4% for the six months ended March 31, 2015 compared to the six months ended March 31, 2014. Ethanol sales volume increased approximately 10.9% for the six months ended March 31, 2015, when compared to the six months ended March 31, 2014 which offset the decrease in revenues. The increase in sales volume in 2015 is due to higher production rates gained from the installation of the SMT and other production efficiencies. The six months ended March 31, 2015 also included a $.3 million net gain for derivatives related to ethanol sales, compared to a $.7 million loss in the prior year.
Sales from co-products decreased by 39.4% for the six months ended March 31, 2015 from the six months ended March 31, 2014. Co-products include dried distillers grains, wet distillers grains, corn oil, syrup and CO2. A decrease in the price of dried distillers grains generated the co-product decrease for the six months ended March 31, 2015 compared to the six months ended March 31, 2014. The average price per ton of dried distillers grain sold decreased 43.9% for the six months ended March 31, 2015, compared to the six months ended March 31, 2014. The decrease in dried distillers grains price is attributable to lower corn prices. Dried distillers grain sales volume increased by 6.4% for the six months ended March 31, 2015, compared to the six months ended March 31, 2014. Dried distillers grain production increased for the six months ended March 31, 2015, due to increased ethanol production rates during the six months ended March 31, 2015.
Cost of goods sold. Cost of goods sold decreased by 12.9% for the six months ended March 31, 2015 from the six months ended March 31, 2014. Costs decreased primarily due to lower corn costs and reduced distillers grains freight compared to the prior year. Cost of goods sold includes corn costs, process chemicals, denaturant, natural gas, electricity, production labor, repairs and maintenance, and depreciation.
Corn costs decreased by 14.6% for the six months ended March 31, 2015 from the six months ended March 31, 2014. The average price of corn per bushel declined 17.7% for the six months ended March 31, 2015, compared to the six months ended March 31, 2014. For the six months ended March 31, 2015, corn costs also included a $1.0 million net gain for derivatives relating to future contracts, compared to a $.2 million loss in the same quarter for the prior year. Corn costs represented 69.4% of cost of goods sold for the six months ended March 31, 2015 compared to 70.7% for the six months ended March 31, 2014.
Distillers grains freight decreased $3.0 million or 100% for the six months ended March 31, 2015 from the six months ended March 31, 2014. The decrease is due to the change in distillers grains marketers in January 2014. The new DDG marketer prices all contracts freight on board to Lincolnway Energy. The shipping charges are the responsibility of the buyer and netted against the price to Lincolnway Energy, which are recorded in DDG sales.
Risks, Trends and Factors that May Affect Future Operating Results
During the six months ended March 31, 2015, the ethanol industry initially experienced weak margins which later improved as a result of a combination of factors.
| • | Corn prices decreased during the three months ended March 31, 2015 as a result of the record United States corn crop in 2014. For the three months ended March 31, 2015, as compared to the three months ended March 31, 2014, the price per bushel paid was $3.85 and $4.56, respectively. |
| • | The latest estimates of supply and demand provided by the U.S. Department of Agriculture (the “USDA”) forecast 2015 ending corn stocks of over 1.8 billion bushels, suggesting stable to lower corn prices. Somewhat higher than normal ethanol stocks continued to have a mixed effect on ethanol margins in the six months ended March 31, 2015 compared to the six months ended March 31, 2014. |
| • | Gasoline demand is currently higher than expected but ethanol inventories continue to be ample. |
| • | Continuing decreases in imports of ethanol from foreign producers, principally Brazil which, as of September 30, 2014, represented 98.9% of shipments received in U.S. ports, according to the Renewable Fuels Association. |
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Lincolnway Energy uses futures and option strategies on the Chicago Mercantile Exchange to hedge some of the risk involved with changing corn prices, as well as the purchase and physical delivery of corn contracts from area farmers and commercial suppliers. Lincolnway Energy incorporates risk management strategies to also cover some of the risk involved with changing ethanol, natural gas and distillers market prices. Lincolnway Energy continues to monitor and works to ensure adequate supply and protection against rapid price increases for corn and natural gas and price decreases for ethanol and distillers grains.
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Liquidity and Capital Resources
The following table summarizes Lincolnway Energy's sources and uses of cash and cash equivalents from the unaudited statement of cash flows for the periods presented:
| Six Months Ended March 31, | ||||||||
| (Unaudited) | ||||||||
| Cash Flow Data: | 2015 | 2014 | ||||||
| Net cash provided by operating activities | $ | 3,131,565 | $ | 6,344,704 | ||||
| Net cash used in investing activities | (7,695,022 | ) | (2,272,336 | ) | ||||
| Net cash used in financing activities | (13,692,362 | ) | (25,888 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | $ | (18,255,819 | ) | $ | 4,046,480 | |||
For the six months ended March 31, 2015, net cash provided by operating activities decreased by $3.2 million, when compared to cash provided by operating activities for the six months ended March 31, 2014. The decrease in cash provided by operating activities is primarily due to a $2.5 million decrease in net income and due to timing in working capital components.
Cash flows from investing activities reflect the impact of property and equipment sold and acquired for the ethanol plant. Net cash used in investing activities increased by $5.4 million for the six months ended March 31, 2015 compared to the six months ended March 31, 2014. The increase is due to payments for the front end oil separation project and process flow improvements.
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 increased by $13.7 million for the six months ended March 31, 2015 compared to the six months ended March 31, 2014. The increase is due to distributions paid to members during the six months ended March 31, 2015.
Lincolnway Energy's financial position and liquidity are, and will be, influenced by a variety of factors, including:
| • | Lincolnway Energy's ability to generate cash flows from operations; |
| • | the level of Lincolnway Energy's outstanding indebtedness and the interest Lincolnway Energy is obligated to pay; |
| • | Lincolnway Energy's capital expenditure requirements, which consists primarily of plant improvements to improve efficiencies; and |
| • | Lincolnway Energy's margin maintenance requirements on all commodity trading accounts. |
Based on the financial projections prepared by management, Lincolnway Energy anticipates that it will have sufficient cash from existing cash, the current credit facility, and cash from operations to continue to operate the ethanol plant for the next 12 months. Management believes that an abundant corn supply will cause corn prices to remain near current levels and a slightly higher supply of ethanol will cause ethanol prices to stay near current levels. Working capital exceeded $8.7 million as of March 31, 2015 and is projected to be sufficient with current cash balances and credit facilities available for the remaining of the fiscal year. Management continues to monitor the liquidity position on a weekly basis.
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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.
Revenue Recognition
Revenue from the sale of Lincolnway Energy's ethanol and distillers grains is recognized at the time title and all risks of ownership transfer to the marketing company. This generally occurs upon the loading of the product. For ethanol, title passes from Lincolnway Energy at the time the product crosses the loading flange into either a railcar or truck. For railcar shipments, this takes place when the railcar is filled and the marketer receives written notice that the railcars have been loaded and are available for billing. For distillers grains, title passes upon the loading of distillers grains into trucks. Shipping and handling costs incurred by Lincolnway Energy for the sale of ethanol and distillers grain are included in costs of goods sold.
Lincolnway Energy's ethanol production is sold to Eco-Energy, LLC. The purchase price payable to Lincolnway Energy under its agreement with Eco-Energy is the price for the ethanol, less various costs and a fee to Eco-Energy.
Lincolnway Energy has an agreement with Gavilon to purchase all of the distillers grains produced at Lincolnway Energy's ethanol plant. The purchase price will be the corresponding price being paid to Gavilon for the distillers grains in question, less certain logistics costs and a service fee.
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 sales. Lincolnway Energy does not typically enter into derivative instruments other than for hedging purposes. All future derivative contracts are recognized on the March 31, 2015 balance sheet at their fair 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 contracts and as a component of revenue for ethanol contracts.
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 Lincolnway Energy's financial statements but are subject to a lower of cost or market assessment.
Inventories and Lower of Cost or Market
Inventories are stated at the lower of cost or market using the first-in, first-out method. In the valuation of inventories and forward contracts, market is based on current replacement values except that it does not exceed net realizable values and is not less than net realizable values reduced by allowances for approximate normal profit margin.
Off-Balance Sheet Arrangements
Lincolnway Energy currently does not have any off-balance sheet arrangements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
In addition to the various risks inherent in the ethanol industry and Lincolnway Energy's operations, Lincolnway Energy is exposed to various market risks. The primary market risks arise as a result of possible changes in certain commodity prices and changes in interest rates.
Commodity Price Risk
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 natural gas, 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 natural gas are volatile, and Lincolnway Energy may 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, natural gas 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. If Lincolnway Energy's corn costs were to increase $.10 per bushel from one year to the next, the impact on cost of goods sold would be approximately $2.1 million for the year, assuming corn use of 21 million bushels during the year. The widespread drought in the United States during 2012 resulted in significantly higher corn prices but the near record corn harvest in the fall of 2014 significantly lowered corn prices.
Lincolnway Energy's average gross corn cost during the three months ended March 31, 2015 was approximately $3.85 per bushel, compared to $4.47 per bushel for the three months ended March 31, 2014.
During the quarter ended March 31, 2015, corn prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $3.66 per bushel for March 2015 delivery to a high of $4.08 per bushel for March 2015 delivery. The corn prices based on the Chicago Mercantile Exchange daily futures data during the quarter ended March 31, 2014 ranged from a low of $4.57 per bushel for March 2014 delivery to a high of $4.95 per bushel for March 2014 delivery.
The average price Lincolnway Energy received for its ethanol during the three months ended March 31, 2015 was $1.39 per gallon, as compared to $2.01 per gallon, during the three months ended March 31, 2014.
During the quarter ended March 31, 2015, ethanol prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $1.33 per gallon for March 2015 delivery to a high of $1.58 per gallon for March 2015 delivery. The ethanol prices based on the Chicago Mercantile Exchange daily futures data during the three months ended March 31, 2014 ranged from a low of $1.72 per gallon for March 2014 delivery to a high of $3.57 per gallon for March 2014 delivery.
Lincolnway Energy may from time to time take various cash, futures, options or other positions in an attempt to minimize or reduce Lincolnway Energy's price risks related to corn and ethanol. The extent to which Lincolnway Energy enters into such positions may vary substantially from time to time and based on various factors, including seasonal factors and Lincolnway Energy's views as to future market trends. Those activities are, however, also subject to various material risks, including that price movements in the cash and futures corn and ethanol markets are highly volatile and are influenced by many factors and occurrences that are beyond the control of Lincolnway Energy. Lincolnway Energy could incur substantial losses on its cash, futures options or other positions.
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Although Lincolnway Energy intends its futures and option positions to accomplish an economic hedge against Lincolnway Energy's future purchases of corn or futures sales of ethanol, 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 or unrealized gains and losses are immediately recognized in Lincolnway Energy's costs of goods sold in the statement of operations for corn positions or as a component of revenue in the statement of operations for ethanol positions. 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 three months ended March 31, 2015 was $.4 million, as opposed to the net loss of $.08 million for the three months ended March 31, 2014.
Lincolnway Energy attempts to offset or hedge some of the risk involved with changing corn prices through the trading of futures and options on the Chicago Mercantile Exchange, as well as through purchase and physical delivery contracts from suppliers. Lincolnway Energy continues to stay at a near neutral corn position due to a lack of ability to lock in profitable ethanol sales margins. Lincolnway Energy continues to monitor and attempt to ensure adequate corn supply and protection against rapid price increases. As noted above those activities are, however, subject to various material risks, including that price movements in the cash corn and corn futures markets are highly volatile and are influenced by many factors and occurrences which are beyond the control of Lincolnway Energy.
Another important raw material for the production of ethanol by Lincolnway Energy is natural gas. Lincolnway Energy's cost per ton for natural gas under its current natural gas supply agreement is subject to various fixed and periodic adjustments based on factors that are outside of the control of Lincolnway Energy's management. The factors include changes in certain inflation type indices and increases in transportation costs. Lincolnway Energy's natural gas costs will therefore vary, and the variations could be material. Lincolnway Energy's natural gas costs for the six months ended March 31, 2015 represented approximately 6.8% of Lincolnway Energy's total cost of goods sold for that period. Lincolnway Energy switched from coal to natural gas as its fuel source in November 2014.
Interest Rate Risk
Lincolnway Energy has various outstanding loan agreements that expose Lincolnway Energy to market risk related to changes in the interest rate imposed under the loan agreement and promissory notes.
Lincolnway Energy has loan agreements, including an irrevocable letter of credit, with the following entities, with the principal balance and interest rates indicated:
| Principal Balance | ||||
| Lender: | As of March 31, 2015 | |||
| Farm Credit - revolving credit loan | $ | — | ||
| Farm Credit - revolving term loan | — | |||
| Farm Credit - revolving credit - letter of credit* | — | |||
| Iowa Department of Transportation | 108,567 | |||
| $ | 108,567 | |||
| * Letter of credit issued is $3,100,000 | ||||
The interest rate under the Iowa Department of Transportation loan agreement is fixed at 2.11% The interest rate on the Farm Credit revolving credit loan is a variable interest rate loan based on the one-month LIBOR index rate plus 3.20%, adjusted weekly. The interest rate on the Farm Credit revolving term loan is a variable interest rate based on the one-month LIBOR index plus 3.45%, adjusted weekly.
Lincolnway Energy does not anticipate any material increase in interest rates during 2015.
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Item 4. 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 director of finance, 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 director of finance 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.
No 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Except as noted in the following paragraphs, 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. As of the date of this quarterly report, Lincolnway Energy was not aware that any governmental authority was contemplating any material proceeding against Lincolnway Energy or any of Lincolnway Energy's property.
On May 3, 2010, Lincolnway Energy was sued by GS CleanTech Corporation ("CleanTech"), a wholly owned subsidiary of GS (Green Shift) CleanTech Corporation. The lawsuit involves claims by CleanTech that it owns proprietary rights related to methods for the separation of corn oil from the by-product stream of the dry mill ethanol manufacturing process, and post-oil removal processing methods. The lawsuit was initially filed in United Stated District Court for the Northern District of Iowa as Case No. 5:10-cv-04036, and alleged infringement of United States Patent No. 7,601,858. Additional patents were subsequently asserted by CleanTech against Lincolnway Energy.
Shortly after the case was filed, CleanTech petitioned the Multi-District Litigation Panel of the Federal Judiciary (the "MDL Panel"), and was successful in having Lincolnway Energy's case as well as numerous other cases moved to the United States District Court for the Southern District of Indiana for all pretrial activity. The Multi-District Litigation ("MDL") proceeding is captioned: In re: Method of Processing Ethanol Byproducts and Related Subsystems Patent Litigation, and has been assigned the following case number by the Court: Master Case No.: 1:10-ml-2181-LJM-DML. The Order by the MDL Panel operated to join multiple defendants from differing actions into the consolidated MDL proceeding. Lincolnway Energy has joined with these defendants, consisting of a number of other ethanol manufacturers as well as ethanol process equipment manufacturers, in defending the claims asserted by CleanTech.
The MDL defendants collectively filed Motions for Summary Judgment asserting that each did not infringe the patents-at-issue and, further, that said patents are invalid. On November 13, 2014, the US District Court released its Ruling & Order on Summary Judgment. The Court held that Lincolnway Energy did not infringe the patents-at-issue and further ruled that said patents are invalid and, thus, unenforceable against Lincolnway Energy. The Court also denied CleanTech's Motion for Summary Judgment of Infringement and Enforceability against Lincolnway Energy.
There are remaining claims of inequitable conduct of CleanTech and its attorneys as well as counterclaims filed by various of the MDL defendants. Once these issues are determined, a final judgment against CleanTech will be entered, at which time CleanTech has announced that it will appeal the unfavorable determinations to the U.S. Court of Appeals for the Federal Circuit.
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Lincolnway Energy was successful on the Motion For Summary Judgment as noted above, but given CleanTech's stated intention to appeal, Lincolnway Energy is unable as of the date of this quarterly report to determine the ultimate likelihood of an unfavorable outcome or the amount or range of possible loss or whether the lawsuit will have a material adverse affect on Lincolnway Energy. The lawsuit has, however, increased Lincolnway Energy's legal costs.
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Item 1A. Risk Factors.
The following risk factors are provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K. The risk factors set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section for the fiscal year ended September 30, 2014, included in our annual report on Form 10-K.
Decreasing gasoline prices could negatively impact our ability to operate profitability. Discretionary blending is an important secondary market which is often determined by the price of ethanol versus the price of gasoline. In periods when discretionary blending if financially unattractive, the demand for ethanol may be reduced. In recent years, the price of ethanol has been less than the price of gasoline which incrased demand for ethanol from fuel blenders. However, recently, low oil prices have driven down the price of gasoline which has reduced the spread between the price of gasoline and the price of ethanol which could discourage discretionary blending, dampen the export market and result in a downwards market adjustment in the price of ethanol. If oil and gasoline prices remain lower for a significant period of time, it could hurt our ability to profitably operate the ethanol plant which could decrease the value of our units.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Lincolnway Energy did not sell any membership units during the period of January 1, 2015 through March 31, 2015.
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) during the period of January 1, 2015 through March 31, 2015.
Item 3. Defaults Upon Senior Securities.
No disclosures are required to be made by Lincolnway Energy under this Item.
Item 4. Mine Safety Disclosures.
This Item is not applicable to Lincolnway Energy.
Item 5. Other Information.
There was no information required to be disclosed in a report on Form 8-K during the period of January 1, 2015 through March 31, 2015 which was not reported on a Form 8-K.
There were no material changes during the period of January 1, 2015 through March 31, 2015 to the procedures by which the members of Lincolnway Energy may recommend nominees to Lincolnway Energy's board.
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Item 6. Exhibits.
The following exhibits are filed as part of this quarterly report. Exhibits previously filed are incorporated by reference, as noted.
| Incorporated by Reference | ||||||||||||
| Exhibit | Filed Herewith; | Period | Filing | |||||||||
| Number | Exhibit Description | Page Number | Form | Ending | Exhibit | Date | ||||||
| 3.1 | Restatement of the Certificate of Organization. | 10-K | 9/30/2010 | 3.1 | 12/21/2010 | |||||||
| 3.2 | Second Amended and Restated Operating Agreement and Unit Assignment Policy. See Exhibit 3.2.1 for an amendment to this Agreement. | 10-K | 9/30/2010 | 3.2 | 12/21/2010 | |||||||
| 3.2.1 | Amendment to Second Amended and Restated Operating Agreement. | 8-K | 3.2.1 | 3/6/2013 | ||||||||
| 10.7 | Distillers Grain Marketing Agreement Between Lincolnway Energy, LLC and Hawkeye Gold, LLC. See Exhibit 10.7.1 for an amendment to this agreement. | 10-K | 9/30/2007 | 10.7 | 12/21/2007 | |||||||
| 10.7.1 | Amendment to Distillers Grains Marketing Agreement Between Lincolnway Energy, LLC and Hawkeye Gold, LLC. | 10-K | 9/30/2012 | 10.7.1 | 12/21/2012 | |||||||
| 10.13 | Industry Track Contract Between Lincolnway Energy, LLC and Union Pacific Railroad. | 10-Q | 6/30/2006 | 10.13 | 8/14/2006 | |||||||
| 10.16 | Master Loan Agreement and Amendment Among Farm Credit Services of America, FLCA; Farm Credit Services of America, PCA; and Lincolnway Energy, LLC. See Exhibit 10.23 for an amendment to this Agreement. | 10-K | 9/30/2012 | 10.16 | 12/21/2012 | |||||||
| 10.17 | Revolving Term Loan Supplement and Amendment Between Farm Credit Services of America, FLCA and Lincolnway Energy, LLC. See Exhibit 10.24 for an amendment to this Agreement. | 10-K | 9/30/2012 | 10.17 | 12/21/2012 | |||||||
| 10.18 | Monitored Revolving Credit Supplement and Amendment Between Farm Credit Services of America, PCA and Lincolnway Energy, LLC. See Exhibits 10.25 and 10.26 for amendments to this Agreement. | 10-K | 9/30/2012 | 10.18 | 12/21/2012 | |||||||
| *10.19 | Ethanol Marketing Agreement Between Lincolnway Energy, LLC and Eco-Energy, LLC. | 10-Q | 12/30/2012 | 10.19 | 2/14/2013 | |||||||
| *10.20 | Coal Supply Agreement Between Lincolnway Energy, LLC and Williams Bulk Transfer, Inc. | 10-Q | 12/30/2012 | 10.20 | 2/14/2013 | |||||||
| 10.21 | Main Extension and Gas Transportation Agreement Between Lincolnway Energy, LLC and Interstate Power and Light Company. | 10-Q | 3/31/2013 | 10.21 | 5/15/2013 | |||||||
| **10.22 | Employment Agreement Between Lincolnway Energy, LLC and Eric Hakmiller. | 10-Q | 3/31/2013 | 10.22 | 5/15/2013 | |||||||
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| 10.23 | Amendment to the Master Loan Agreement Among Farm Credit Services of America, FLCA, Farm Credit Services of America, PCA and Lincolnway Energy, LLC. | 10-Q | 3/31/2013 | 10.23 | 5/15/2013 | |||||||
| 10.24 | Revolving Term Loan Supplement Between Farm Credit Services of America, FLCA and Lincolnway Energy, LLC. | 10-Q | 3/31/2013 | 10.24 | 5/15/2013 | |||||||
| 10.25 | Monitored Revolving Credit Supplement Between Farm Credit Services of America, PCA and Lincolnway Energy, LLC. | 10-Q | 3/31/2013 | 10.25 | 5/15/2013 | |||||||
| 10.26 | Revolving Credit Supplement Between Farm Credit Services of America, PCA and Lincolnway Energy, LLC. | 10-Q | 3/31/2013 | 10.26 | 5/15/2013 | |||||||
| *10.27 | Distillers Grain Off-Take Agreement Between Lincolnway Energy, LLC and Gavilon Ingredients, LLC. | 10-K/A | 9/30/2013 | 10.27 | 4/23/2014 | |||||||
| 10.28 | Amendment to the Master Loan Agreement Among Farm Credit Services of America, FLCA, Farm Credit Services of America, PCA and Lincolnway Energy, LLC. | 10-Q | 6/30/2014 | 10.28 | 8/13/2014 | |||||||
| 10.29 | Revolving Term Loan Supplement Between Farm Credit Services of America, FLCA and Lincolnway Energy, LLC. | 10-Q | 6/30/2014 | 10.29 | 8/13/2014 | |||||||
| 10.30 | Monitored Revolving Credit Supplement Between Farm Credit Services of America, PCA and Lincolnway Energy, LLC. | 10-Q | 6/30/2014 | 10.30 | 8/13/2014 | |||||||
| 10.31 | Revolving Credit Supplement Between Farm Credit Services of America, PCA and Lincolnway Energy, LLC. | 10-Q | 6/30/2014 | 10.31 | 8/13/2014 | |||||||
| 31.1 | Rule 13a-14(a) Certification of President and Chief Executive Officer. | E-1 | ||||||||||
| 31.2 | Rule 13a-14(a) Certification of Director of Finance. | E-2 | ||||||||||
| 32.1 | Section 1350 Certification of President and Chief Executive Officer. | E-3 | ||||||||||
| 32.2 | Section 1350 Certification of Director of Finance. | E-4 | ||||||||||
| 101 | Interactive Data Files (furnished electronically herewith pursuant to Rule 405 of Regulation S-T | |||||||||||
| * | Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the Securities and Exchange Commission. | |||||||||||
| ** | Management Contract or Compensatory Plan | |||||||||||
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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 | ||
| May 11, 2015 | By: | /s/ Eric Hakmiller |
| Name: Eric Hakmiller | ||
| Title: President and Chief Executive Officer | ||
| May 11, 2015 | By: | /s/ Kristine Strum |
| Name: Kristine Strum | ||
| Title: Director of Finance | ||
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EXHIBIT INDEX
Exhibits Filed With Form 10-Q
of Lincolnway Energy, LLC
For the Quarter Ended March 31, 2015
| 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 Director of Finance | 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 Director of Finance | E-4 | |||
| 101 | Interactive Data Files ( furnished electronically herewith pursuant to Rule 405 of Regulation S-T) | ||||
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