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 | December 31, 2018 |
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, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer þ | Smaller reporting company o | |
Emerging growth company o | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 February 1, 2019.
LINCOLNWAY ENERGY, LLC
FORM 10-Q
For the Quarter Ended December 31, 2018
INDEX
Page | |||
Part I. | Financial Information | ||
Item 1. | Unaudited Financial Statements | ||
a) Balance Sheets | |||
b) Statements of Operations | |||
c) Statement of Members' Equity | |||
d) Statements of Cash Flows | |||
e) 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
December 31, 2018 | September 30, 2018 | ||||||
(Unaudited) | |||||||
ASSETS | |||||||
CURRENT ASSETS | |||||||
Cash and cash equivalents | $ | 563,734 | $ | 668,456 | |||
Derivative financial instruments (Note 7 and 8) | 486,586 | 555,127 | |||||
Trade and other accounts receivable (Note 6) | 2,095,710 | 2,786,498 | |||||
Inventories (Note 3) | 7,261,638 | 4,556,703 | |||||
Prepaid expenses and other | 319,993 | 291,036 | |||||
Total current assets | 10,727,661 | 8,857,820 | |||||
PROPERTY AND EQUIPMENT | |||||||
Land and land improvements | 7,156,465 | 7,148,360 | |||||
Buildings and improvements | 6,125,414 | 6,019,001 | |||||
Plant and process equipment | 87,321,344 | 85,732,218 | |||||
Office furniture and equipment | 478,173 | 478,173 | |||||
Construction in progress | 10,586,387 | 11,610,970 | |||||
111,667,783 | 110,988,722 | ||||||
Accumulated depreciation | (62,435,794 | ) | (62,272,902 | ) | |||
Total property and equipment | 49,231,989 | 48,715,820 | |||||
OTHER ASSETS | 831,115 | 829,832 | |||||
Total assets | $ | 60,790,765 | $ | 58,403,472 |
See Notes to Unaudited Financial Statements.
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Lincolnway Energy, LLC
Balance Sheets (continued)
December 31, 2018 | September 30, 2018 | ||||||
(Unaudited) | |||||||
LIABILITIES AND MEMBERS' EQUITY | |||||||
CURRENT LIABILITIES | |||||||
Accounts payable | $4,061,463 | $2,378,921 | |||||
Accounts payable, related party (Note 5) | 2,442,406 | 657,133 | |||||
Accrued loss on firm purchase commitments | 491,969 | 366,168 | |||||
Accrued expenses | 1,696,340 | 972,167 | |||||
Total current liabilities | 8,692,178 | 4,374,389 | |||||
NONCURRENT LIABILITIES | |||||||
Long-term debt (Note 4) | 15,400,000 | 15,200,000 | |||||
Deferred revenue | — | 296,296 | |||||
Other | 535,515 | 533,589 | |||||
Total noncurrent liabilities | 15,935,515 | 16,029,885 | |||||
COMMITMENTS AND CONTINGENCIES (Note 6) | — | — | |||||
MEMBERS' EQUITY | |||||||
Member contributions, 42,049 units issued and outstanding | 38,990,105 | 38,990,105 | |||||
Retained (deficit) | (2,827,033 | ) | (990,907 | ) | |||
Total members' equity | 36,163,072 | 37,999,198 | |||||
Total liabilities and members' equity | $ | 60,790,765 | $ | 58,403,472 |
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Lincolnway Energy, LLC
Statements of Operations
Three Months Ended | |||||||
December 31, 2018 | December 31, 2017 | ||||||
(Unaudited) | |||||||
Revenues (Notes 2 and 6) | $ | 20,371,692 | $ | 22,470,128 | |||
Cost of goods sold (Note 6) | 24,295,117 | 22,777,323 | |||||
Gross (loss) | (3,923,425 | ) | (307,195 | ) | |||
General and administrative expenses | 860,983 | 945,759 | |||||
Operating (loss) | (4,784,408 | ) | (1,252,954 | ) | |||
Other income (expense): | |||||||
Interest income | 2,089 | — | |||||
Interest expense | (86,310 | ) | — | ||||
Other income | 3,032,503 | 305,933 | |||||
2,948,282 | 305,933 | ||||||
Net (loss) | $ | (1,836,126 | ) | $ | (947,021 | ) | |
Weighted average units outstanding | 42,049 | 42,049 | |||||
Net (loss) per unit - basic and diluted | $ | (43.67 | ) | $ | (22.52 | ) | |
Distributions per unit - basic and diluted | $ | — | $ | 25.00 |
See Notes to Unaudited Financial Statements.
4
Lincolnway Energy, LLC
Statements of Members' Equity
Member Contributions | Retained (Deficit) | Total | |||||||||
Balance, September 30, 2018 | $ | 38,990,105 | $ | (990,907 | ) | $ | 37,999,198 | ||||
Net (loss) | — | (1,836,126 | ) | (1,836,126 | ) | ||||||
Balance, December 31, 2018 | $ | 38,990,105 | $ | (2,827,033 | ) | $ | 36,163,072 |
Member Contributions | Retained (Deficit) | Total | |||||||||
Balance, September 30, 2017 | $ | 38,990,105 | $ | 3,007,533 | $ | 41,997,638 | |||||
Net (loss) | — | (947,021 | ) | (947,021 | ) | ||||||
Distributions ($25 per unit) | — | (1,051,225 | ) | (1,051,225 | ) | ||||||
Balance, December 31, 2017 | $ | 38,990,105 | $ | 1,009,287 | $ | 39,999,392 |
See Notes to Financial Statements.
5
Lincolnway Energy, LLC | Three Months Ended | Three Months Ended | |||||
Statements of Cash Flows | December 31, 2018 | December 31, 2017 | |||||
(Unaudited) | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net (loss) | $ | (1,836,126 | ) | $ | (947,021 | ) | |
Adjustments to reconcile net (loss) to net cash provided by operating activities: | |||||||
Depreciation and amortization | 1,732,892 | 1,038,154 | |||||
Loss on disposal of property and equipment | — | 22,352 | |||||
Accrued loss on firm purchase commitments | 125,801 | 282,061 | |||||
Changes in working capital components: | |||||||
Trade and other accounts receivable | 690,788 | 1,623,996 | |||||
Inventories | (2,704,935 | ) | (576,284 | ) | |||
Prepaid expenses and other | (28,314 | ) | 62,044 | ||||
Accounts payable | 1,647,880 | (1,147,319 | ) | ||||
Accounts payable, related party | 1,785,273 | (88,777 | ) | ||||
Accrued expenses and deferred revenue | (460,752 | ) | 769,077 | ||||
Derivative financial instruments | 68,541 | (298,118 | ) | ||||
Net cash provided by operating activities | 1,021,048 | 740,165 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Purchase of property and equipment | (1,325,770 | ) | (3,786,981 | ) | |||
Net cash (used in) investing activities | (1,325,770 | ) | (3,786,981 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Proceeds from long-term borrowings | 14,250,000 | 3,750,000 | |||||
Payments on long-term borrowings | (14,050,000 | ) | — | ||||
Member distributions | — | (1,051,225 | ) | ||||
Net cash provided by financing activities | 200,000 | 2,698,775 | |||||
Net (decrease) in cash and cash equivalents | (104,722 | ) | (348,041 | ) | |||
CASH AND CASH EQUIVALENTS | |||||||
Beginning | 668,456 | 690,513 | |||||
Ending | $ | 563,734 | $ | 342,472 | |||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW | |||||||
INFORMATION, cash paid for interest, including capitalized interest for 2018 of $161,199 and 2017 of $53,738 | $ | 230,007 | $ | 42,987 | |||
SUPPLEMENTAL DISCLOSURES OF NONCASH | |||||||
INVESTING AND FINANCING ACTIVITIES | |||||||
Construction in progress included in accounts payable | $ | 121,590 | $ | 1,097,706 | |||
Construction in progress included in accrued expenses | 888,629 | 195,046 |
See Notes to Unaudited Financial Statements.
6
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 build and operate 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, 2018 was derived from the Company's audited balance sheet as of that date. The accompanying financial statements as of December 31, 2018 and for the three months ended December 31, 2018 and 2017 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, 2018 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.
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 was no allowance for doubtful accounts balance as of December 31, 2018 and September 30, 2018.
Inventories: Inventories are stated at the lower of net realizable value or actual cost using the first-in, first-out method. In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonable predictable costs of completion, disposal and transportation. As of December 31, 2018 and September 30, 2018, the Company recognized a reserve and resulting loss of approximately $1,100,000 and $280,000 respectively, for a lower of net realizable value or cost inventory adjustment due to low market prices for ethanol.
Derivative financial instruments: The Company periodically enters into derivative contracts to hedge the Company’s exposure to price risk related to forecasted corn needs, forward corn purchase contracts and ethanol sales. The Company does not typically enter into derivative instruments other than for hedging purposes. All the derivative contracts are recognized on the balance sheet at their fair market value. Although the Company believes its derivative positions are economic hedges, none have been designated as a hedge for accounting purposes. Accordingly, any realized or unrealized gain or loss related to corn and natural gas derivatives is recorded in the statement of operations as a component of cost of goods sold. Any realized or unrealized gain or loss related to ethanol derivative instruments is recorded in the statement of operations as a component of revenue. The Company reports all contracts with the same counter party on a net basis on the balance sheet. 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. Forward contracts with delivery dates with 30 days that can be reasonably estimated are subject to a lower of cost or net realizable value assessment. The Company recognized a reserve and resulting accrued loss on purchase commitments of approximately $492,000 and $366,000 as of December 31, 2018 and September 30, 2018, respectively.
Revenue recognition: The Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), in the first quarter of fiscal year 2019, using the modified retrospective method. Topic 606 requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company generally recognizes revenue at a point and time. The implementation of the new standard did not result in any changes to the measurement or reco
7
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
gnition of revenue for prior periods, however additional disclosures have been added in accordance with the ASU.
The following is a description of principal activities from which we generate revenue. Revenues from contracts with customers are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.
• | sales of ethanol |
• | sales of distillers grains |
• | sales of corn oil |
Shipping costs incurred by the Company in the sale of ethanol, distiller grains and corn oil are not specifically identifiable and as a result, are recorded based on the net selling price. Railcar lease costs incurred by the Company in the sale of its products are included in the cost of goods sold.
Deferred revenue: Deferred revenue represents fees received under a service agreement in advance of services being performed. The related revenue was deferred and recognized as the services are performed over the 10 year agreement. On December 17, 2018, the Company entered into a settlement agreement in connection with the early termination of the contract. The settlement totaled approximately $3,000,000 and is included in other income and the remaining deferred revenue of approximately $420,000 was recognized during the three months ended December 31, 2018.
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.
Recently Issued Accounting Pronouncements: In February 2016, FASB issued ASU No. 2016-2 "Leases" ("ASU 2016-02"). ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for all leases greater than one year in duration and classified as operating leases under previous GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and for interim periods within that fiscal year. Under the new guidance, lesses will be required to recognize the following for all leases (with the exception of short-term leases): (1) a lease liability, which is a lessee's obligation to make lease payments arising from the lease, measured on a discounted cash flow basis; and (2) a "right of use" asset, which is an asset that represents the lessee's right to use the specified asset for the lease term. The Company will not implement ASU 2016-02 until October 2019, when fiscal year 2020 starts. The Company is evaluating the impact of the new standard on the financial statements but expects that upon adoption of this accounting standard, right of use assets and lease obligations recognized on the balance sheet will be material.
8
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Note 2. Revenues
Components of revenues are as follows:
Three Months Ended | |||||||
December 31, 2018 | December 31, 2017 | ||||||
Ethanol, net of hedging gain (loss) | $ | 14,651,402 | $ | 16,874,321 | |||
Distillers Grains | 3,773,540 | 3,675,476 | |||||
Other | 1,946,750 | 1,920,331 | |||||
Total | $ | 20,371,692 | $ | 22,470,128 |
Note 3. Inventories
Inventories consist of the following:
December 31, 2018 | September 30, 2018 | ||||||
Raw materials, including corn, chemicals, parts and supplies | $ | 5,303,979 | $ | 3,297,104 | |||
Work in process | 873,312 | 794,844 | |||||
Ethanol and distillers grains | 1,084,347 | 464,755 | |||||
Total | $ | 7,261,638 | $ | 4,556,703 |
Note 4. Long-Term Debt
The Company has a revolving term loan, with a bank, available for up to $25,000,000. Borrowing capacity will be reduced by $5,000,000 every year starting October 20, 2020 until October 1, 2024 when the loan expires. 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 (2.51% as of December 31, 2018) plus 3.75%. The Company also pays a commitment fee on the average daily unused portion of the loan at the rate of .50% 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 agreement. There were outstanding borrowings of $15,400,000 and $15,200,000, respectively, on the revolving term loan at December 31, 2018 and September 30, 2018. Aggregate maturies of long term debt as of December 31, 2018 are as follows:
9
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Fiscal Year | Amount Due |
2019 | $0 |
2020 | $0 |
2021 | $0 |
2022 | $400,000 |
2023 | $5,000,000 |
Thereafter | $10,000,000 |
Total | $15,400,000 |
Note 5. Related-Party Transactions
The Company had the following related-party activity with members during the three months ended December 31, 2018 and 2017:
Corn Commitment: | |||||||||
December 31, 2018 | |||||||||
Corn Forward Purchase Commitment | Basis Corn Commitment (Bushels) | Commitment Through | Amount Due | ||||||
Related Parties | $ | 1,666,610 | 50,000 | January 2020 | $ | 2,442,406 |
Corn Purchased: | ||||
Three Months Ended December 31, 2018 | Three Months Ended December 31, 2017 | |||
Related Parties | $10,901,338 | $ | 7,929,157 |
Note 6. Commitments and Major Customers
The Company has an agreement with an unrelated entity for marketing, selling and distributing all of the ethanol produced by the Company. Revenues from this entity were $14,652,977 and $16,825,496, respectively, for the three months ended December 31, 2018 and 2017. Trade accounts receivable of $1,138,936 were due from this entity as of December 31, 2018. As of December 31, 2018, the Company had ethanol unpriced sales commitments with this entity of approximately 13.5 million gallons through June 2019.
The Company has an agreement with an unrelated entity for marketing, selling and distributing all of the distillers grains produced by the Company. Revenues from this entity including both distillers grains and corn oil were $3,773,540 and $3,732,164, respectively, for the three months ended December 31, 2018 and 2017. The Company sells corn oil to this entity as a third party broker independent of its agreement with the entity relating to distillers grain sales. Trade accounts receivable of $497,494 were due from this entity as of December 31, 2018. The Company had distillers grain sales commitments with this entity of approximately 3,025 tons, for a total sales commitment of approximately $477,014.
10
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
_____________________________________________________________________________________________________
As of December 31, 2018, the Company had purchase commitments for corn forward contracts with various unrelated parties, totaling approximately $2.8 million. These contracts mature at various dates through January 2020. The Company also had basis contract commitments with unrelated parties to purchase 25,400 bushels of corn. These contracts mature at various dates through July 2019.
The Company has 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 which commenced in November 2014. The Company assigned an irrevocable standby letter of credit to the counter-party to stand as security for the Company's obligation under the agreement maturing May 2021. The letter of credit is reduced over time as the Company makes payments under the agreement. At December 31, 2018, the remaining commitment was approximately $1.7 million.
As of December 31, 2018, the Company had purchase commitments for natural gas basis contracts with an unrelated party totaling 1.2 million MMBtu's maturing at various dates through December 2019.
The Company signed contracts with unrelated parties for the installation of a grain drying and cooling system. The total commitments are for $11.5 million. The Company made progress payments of $10.7 million under this contract through December 31, 2018. The remaining payments will be made as invoiced throughout the life of the project. The Company has assets in construction in progress from this project that are guaranteed with a promissory note due to the Company totaling approximately $4 million, if the assets fail to meet required specification. The project is estimated to be completed in the second quarter of fiscal year 2019.
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 purchase and sale 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:
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Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
December 31, 2018 | September 30, 2018 | ||||||
Derivative assets - corn contracts | $ | 504,275 | $ | 819,613 | |||
Derivative assets - ethanol contracts | — | 2,640 | |||||
Derivative liabilities - corn contracts | (9,875 | ) | (813 | ) | |||
Derivative liabilities - natural gas contracts | (38,420 | ) | — | ||||
Cash from (due to) broker | 30,606 | (266,313 | ) | ||||
Total | $ | 486,586 | $ | 555,127 |
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Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
The effects on operating income from derivative activities are as follows:
Three Months Ended | |||||||
December 31, 2018 | December 31, 2017 | ||||||
Gains (losses) in revenues due to derivatives related to ethanol sales: | |||||||
Realized gain (loss) | $ | (1,575 | ) | $ | 32,550 | ||
Unrealized gain | — | 16,275 | |||||
Total effect on revenues | (1,575 | ) | 48,825 | ||||
Gains (losses) in cost of goods sold due to derivatives related to corn costs: | |||||||
Realized gain | 260,938 | 375,200 | |||||
Unrealized gain (loss) | (324,400 | ) | 35,350 | ||||
Total effect on corn cost | (63,462 | ) | 410,550 | ||||
Gains (losses) in cost of goods sold due to derivatives related to natural gas costs: | |||||||
Realized gain | 80,680 | 42,779 | |||||
Unrealized gain (loss) | (41,060 | ) | 21,300 | ||||
Total effect on natural gas cost | 39,620 | 64,079 | |||||
Total effect on cost of goods sold | (23,842 | ) | 474,629 | ||||
Total gain (loss) due to derivative activities | $ | (25,417 | ) | $ | 523,454 |
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 net realizable value assessment.
Note 8. 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:
13
Lincolnway Energy, LLC
Notes to Unaudited Financial Statements
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
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 December 31, 2018 and September 30, 2018, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
December 31, 2018 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets, derivative financial instruments | $ | 504,275 | $ | 504,275 | $ | — | $ | — | ||||||||
Liabilities, derivative financial instruments | $ | 48,295 | $ | 48,295 | $ | — | $ | — | ||||||||
September 30, 2018 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets, derivative financial instruments | $ | 822,253 | $ | 822,253 | $ | — | $ | — | ||||||||
Liabilities, derivative financial instruments | $ | 813 | $ | 813 | $ | — | $ | — |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
General
The following discussion and analysis provides information which management of Lincolnway Energy, LLC (the “Company”, “we,” “us,” and “our”) believes is relevant to an assessment and understanding of our financial condition and results of operations. This discussion should be read in conjunction with the financial statements included herewith and notes to the financial statements and our Annual Report on Form 10-K for the year ended September 30, 2018 ("Fiscal 2018") including the financial statements, accompanying notes and the risk factors contained herein.
Cautionary Statement on Forward-Looking Statements
Various discussions and statements in this quarterly report are or contain forward-looking statements that express our current beliefs, forecasts, projections and predictions about future events. All statements other than statements of historical fact are
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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, distillers grain 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," "strategy," "future," "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.
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 the Company and its management. We cannot guarantee our future results, performance or business conditions, and strong or undue reliance must not be placed on any forward-looking statements, which speak only as of the date of this report. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by the Company include:
• | Changes in the availability and price of corn and natural gas; |
• | Negative impacts resulting from the reduction in the renewable fuel volume requirements under the Renewable Fuel Standard issued by the Environmental Protection Agency; |
• | Changes in federal mandates relating to the blending of ethanol with gasoline, including, without limitation reductions to, or the elimination of, the Renewable Fuel Standard volume obligations; |
• | The inability to comply with the covenants and other requirements of Lincolnway Energy's various loan agreements; |
• | Negative impacts that hedging activities may have on Lincolnway Energy's operations or financial condition; |
• | Decreases in the market prices of ethanol and distiller's grains; |
• | Ethanol supply exceeding demand and corresponding ethanol price reductions; |
• | Changes in the environmental regulations that apply to the Lincolnway Energy plant operations; |
• | Changes in plant production capacity or technical difficulties in operating the plant; |
• | Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries; |
• | Changes in other federal or state laws and regulations relating to the production and use of ethanol; |
• | Changes and advances in ethanol production technology; |
• | Competition from larger producers as well as competition from alternative fuel additives; |
• | Changes in interest rates and lending conditions of the loan covenants in the Company loan agreements; |
• | Volatile commodity and financial markets; |
• | Decreases in export demand due to the imposition of duties and tariffs by foreign governments on ethanol and distiller's grains produced in the United States; |
• | Disruptions, failures; security breaches or other cybersecurity threats relating to or impacting our information technology infrastructure; and |
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• | Trade actions by the Trump Administration, particularly those affecting the agriculture sector and related industries. |
These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in this report. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in this report and in the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018 and in our other prior Securities and Exchange Commission filings. These and many other factors could affect our future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf. We undertake no obligation to revise or update any forward-looking statements. The forward-looking statements contained in this report are included in the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
General Overview
Lincolnway Energy is an Iowa limited liability company that operates a dry mill, natural gas fired ethanol plant located in Nevada, Iowa. We have been processing corn into fuel grade ethanol and distillers grains at the ethanol plant since May 22, 2006. Our ethanol plant has a nameplate production capacity of 50,000,000 gallons of ethanol per year.
All of the ethanol we produce is marketed by Eco-Energy, LLC (“Eco-Energy”) and all of our distillers grains are marketed by Gavilon Ingredients, LLC (“Gavilon”). Our revenues are derived primarily from the sale of our ethanol and distillers grains.
We also extract corn oil from the syrup generated in the production of ethanol. We market and distribute all of our corn oil directly to end users and third party brokers within the domestic market.
Air Products and Chemicals, Inc., formerly known as EPCO Carbon Dioxide Products, Inc. (“Air Products”), has a plant located on the Company’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. Air Products also markets and sells the liquid carbon dioxide.
We expect to fund our operations during the next 12 months using cash flow from continuing operations and the revolving term loan that is available to us.
Recent Events
Effective December 28, 2018, the Company entered into an amendment (the “Amendment”) to its Credit Agreement with Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA (collectively, the “Lender”) dated July 3, 2017, as amended February 23, 2018 and September 24, 2018 (the “Credit Agreement”). CoBank, ACB (“CoBank”) continues to have a participation interest in the underlying loans issued under the Credit Agreement and continues to serve as administrative agent for the Credit Agreement. The Amendment modifies the working capital and net worth financial covenants in the Credit Agreement as follows:
•Working Capital. The working capital financial covenant is modified to reduce the working capital amount the Company is required to have at the end of each period for which financial statements are required to be furnished pursuant to the terms of the Credit Agreement (each “Financial Statement Period”). Pursuant to the Amendment, the Company must have an excess of current assets over current liabilities of not less than $7,500,000 (the “Working Capital Amount”) at the end of each Financial Statement Period, except that in determining current assets, any amount available under any revolving term promissory note under the amended Credit Agreement (less the amount that would be considered a current liability if fully advanced) may be included (all as determined in accordance with the Accounting Standards (as defined in the Credit Agreement)). The Working Capital Amount was previously $10,000,000.
•Net Worth. The net worth financial covenant is modified to reduce the net worth amount the Company is required to have at the end of each Financial Statement Period. Pursuant to the Amendment, the Company must have an excess of total assets
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over total liabilities of not less than $32,000,000 (all as determined in accordance with the Accounting Standards) (the “Net Worth Amount”). The Net Worth Amount was previously $35,000,000.
In connection with the execution of the Amendment, the Company and the Lender entered into an Amended and Restated Revolving Term Promissory Note dated December 28, 2018 (the “Restated Revolving Term Note”) which amended, restated and superseded the Amended and Restated Revolving Term Promissory Note dated September 24, 2018 (the “Prior Revolving Term Note”). The Restated Revolving Term Note amends the Prior Revolving Term Note to increase the aggregate principal amount that the Lender may loan to the Company under the Restated Revolving Term Note from $21,000,000 to $25,000,000 and to modify the maximum commitment amount reduction schedule as follows:
Maximum Commitment Amount | From | Up to and Including |
$20,000,000 | October 20, 2020 | October 19, 2021 |
$15,000,000 | October 20, 2021 | October 19, 2022 |
$10,000,000 | October 20, 2022 | October 19, 2023 |
$5,000,000 | October 20, 2023 | October 1, 2024 |
The Restated Revolving Term Note also (A) extended the term of the loan so that the Restated Revolving Term Note expires on October 1, 2024 rather than July 1, 2024 and (B) increased the interest rate to provide that interest will accrue at a variable interest rate (adjusting on a weekly basis) based upon the one-month LIBOR index rate plus 3.75% instead of 3.40%. The Restated Revolving Term Note also required payment by the Company of a $6,000 fee in consideration of the increased commitment. All other terms and conditions set forth in the Restated Revolving Term Note remain the same as set forth in the Prior Revolving Term Note. As of December 31, 2018, the outstanding amount payable by the Company under the Restated Revolving Term Note was $15,400,000.
In connection with the execution of the Credit Agreement, the Company and the Lender also entered into an Amended and Restated Letter of Credit Promissory Note dated December 28, 2018 (the “Restated Letter of Credit Note”) which amended, restated and superseded the Revolving Letter of Credit Promissory Note dated February 23, 2018 (the “Prior Letter of Credit Note”) to increase the interest rate to provide that interest will accrue at a variable interest rate (adjusting on a weekly basis) based upon the one-month LIBOR index rate plus 3.75% instead of 3.40%. All other terms and conditions set forth in the Restated Letter of Credit Note remain the same as set forth in the Prior Letter of Credit Note. As of December 31, 2018, the outstanding amount payable by the Company under the Restated Letter of Credit Note was $1,658,100.
Renewable Fuel Standard
The ethanol industry is dependent on the Federal Renewable Fuels Standard (the “RFS”) , a federal ethanol support and economic incentive which mandates ethanol use, and the RFS continues to be a driving factor in the growth of ethanol usage. The RFS requires that in each year a certain amount of renewable fuels must be used in the United States. The RFS is a national program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective. The U.S. Environmental Protection Agency (the “EPA”) is responsible for revising and implementing regulations to ensure that transportation fuel sold in the United States contains a minimum volume of renewable fuel.
The RFS usage requirements increase incrementally each year through 2022 when the mandate requires that the United States use 36 billion gallons of renewable fuels. Starting in 2009, the RFS required that a portion of the RFS must be met by certain “advanced” renewable fuels. These advanced renewable fuels include ethanol that is not made from corn, such as cellulosic ethanol and biomass based biodiesel. The use of these advanced renewable fuels increases each year as a percentage of the total renewable fuels required to be used in the United States.
Annually, the EPA is supposed to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligation. On July 5, 2017, the EPA released a proposed rule to set the 2018 renewable volume requirements which proposed setting the annual volume requirements for renewable fuel at 19.24 billion gallons of renewable fuels per year (the “Proposed 2018 Rule”). On November 30, 2017, the EPA issued the final rule for 2018 which varied only slightly from the Proposed 2018 Rule with the annual volume requirement for renewable fuel set at 19.29 billion gallons of renewable fuels per year (the "Final 2018 Rule"). Although the volume requirements set forth in the
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Final 2018 Rule are slightly higher than the 19.28 billion gallons required under the final 2017 renewable fuel volume requirements, the 2018 volume requirements are still significantly below the 26 billion gallons statutory mandate for 2018 with significant reductions in the volume requirements for advanced biofuels. However, the Final 2018 Rule does maintain the number of gallons which may be met by conventional renewable fuels such as corn-based ethanol at 15.0 billion gallons.
On June 26, 2018, the EPA issued a proposed rule that would set the 2019 annual volume requirements for renewable fuel at 19.88 billion gallons of renewable fuels per year and maintaining the number of gallons which may be met by conventional renewable fuels such as corn based ethanol at 15 billion gallons (the "Proposed 2019 Rule"). On November 30, 2018, the EPA issued the final rule that set the 2019 annual volume requirements for renewable fuel at 19.92 billion gallons per year and maintained the number of gallons that may be met by conventional renewable fuels such as corn based ethanol at 15.0 billion gallons (the "Final 2019 Rule").
Under the RFS, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. Since 2018 is the first year the total proposed volume requirements are more than 20% below statutory levels, the EPA Administrator directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. The Final 2019 Rule is approximatley 29% below the statutory levels; therefore, the reset will be triggered under the RFS and the EPA will be required to modify statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the volume requirements post-2022.
In October 2018, the Trump administration released timelines for certain EPA rulemaking initiatives relating to the RFS including the “reset” of the statutory blending targets. The EPA is expected to propose rules modifying the applicable volume targets for cellulosic biofuel, advanced biofuel, and total renewable fuel for the years 2020-2022. The proposed rules are also expected to include proposed diesel renewable volume obligations for 2021 and 2022. The timetable for the consideration of the proposed rule is expected to overlap with the annual standard-setting rulemaking, therefore, it is expected that the proposed rule will also include the applicable renewable volume obligations for 2020. The rule is scheduled to be proposed in January and finalized by December 2019.
On October 19, 2017, EPA Administrator Pruitt issued a letter (the “Pruitt Letter”) to several U.S. Senators representing states in the Midwest reiterating his commitment to the text and spirit of the RFS, among other topics, he stated the EPA is actively exploring its authority to remove arbitrary barriers to the year-round use of E15 and other mid-level ethanol blends so that E15 may be sold throughout the year without disruption and that the EPA will not pursue regulations to allow ethanol exports to generate renewable identification numbers (“RINs”). In addition, on April 12, 2018, as part of a series of meetings focused on RIN prices and E15 year-round sales involving President Trump, Senators, key federal agency and industry leaders, President Trump indicated that EPA would be moving forward to authorize year-round sales of E15 by rulemaking designed to address the waiver that currently inhibits sales of E15 in certain markets during summer driving months. The letter and these statements represent actions that would likely have a positive impact on the ethanol industry either directly or indirectly.
On October 8, 2018, President Trump directed the EPA to begin rulemaking to permit the sale of E15 year round and the President has stated a goal of having a final rule out before the start of summer driving season on June 1, 2019. However, the EPA has not yet taken steps to enact the year round sale of E15 and it is unclear when the EPA may take such action. Also, any final rule from the agency is susceptible to legal challenges.
The Pruitt Letter also stated that the EPA would soon finalize a decision to deny the request to change the point of obligation for renewable identification numbers, or RINs, from refiners and importers to blenders. The EPA assigns individual refiners, blenders and importers the volume of renewable fuels they are obligated to use based on their percentage of total fuel sales. Obligated parties use RINs to show compliance with RFS-mandated volumes. RINs are attached to renewable fuels by producers and detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached RINs affects the price of ethanol in certain markets and influences purchasing decisions by obligated parties. Consistent with the position in his letter, on November 22, 2017, the EPA issued a Notice of Denial of Petitions for rulemaking to change the RFS point of obligation which resulted in the EPA confirming the point of obligation will not change.
Despite the Pruitt Letter and the recent actions by President Trump relating to E15, there continues to be uncertainty regarding the future of the RFS as a result of the recently revealed EPA grants of a number of small refiner exemptions from the volume purchase requirements of the RFS, as well as an exemption granted to a refiner as part of bankruptcy proceedings. When the EPA issues waivers to the refineries, the refineries are no longer required to earn or purchase blending credits known as "RINS". Additionally, the EPA has announced that it is reviewing RFS waivers denied to small refiners by the Obama administration and has retroactively awarded biofuels credits to at least two refiners to alleviate their 2018 obligations. The joint impact of large increases in small refiner waivers granted by the EPA and the expected reduction in Chinese imports has had a very negative
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impact on ethanol D6 RIN prices. RIN prices have fallen by over 60%, largely removing a powerful blending incentive from the ethanol marketplace. The reduction in RIN prices can also have an adverse impact on ethanol prices. If the EPA continues to grant discretionary waivers and RIN prices continue to fall, it could negatively affect ethanol prices.
Legal challenges are underway to the EPA’s recent reductions in the RFS volume requirements, including the Final 2018 Rule and the Proposed 2019 Rule as well as the denial of petitions to change the RFS point of obligation and the recent small refiner waivers. If the EPA’s decision to reduce the volume requirements under the RFS is allowed to stand, if the volume requirements are further reduced, if the RFS point of obligation were changed or if the EPA continues to grant waivers to small refiners, the market price and demand for ethanol would be adversely effective which would negatively impact our financial performance.
On May 18, 2018, the Advanced Biofuel Association initiated a legal challenge to the EPA’s process for granting exemptions from compliance under the RFS to small refineries. In its petition, the Advanced Biofuel Association seeks judicial review of the EPA’s decision to modify criteria to lower the threshold by which the agency determines whether to grant small refineries an exemption for the RFS for reasons of disproportionate economic hardship.
Additionally, on May 29, 2018, the National Corn Growers Association, National Farmers Union and the Renewable Fuels Association filed a petition challenging the EPA’s grant of waivers to three specific refineries seeking that the court reject the waivers granted to the three as an abuse of EPA authority. These waived gallons are not redistributed to obligated parties, and in effect, reduce the aggregate renewable volume obligations (“RVOs”) under the RFS. If the specific waivers granted by the EPA and/or its lower criteria for granting small refinery waivers under the RFS are allowed to stand, or if the volume requirements are further reduced, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.
Related to the recent lawsuits, the Renewable Fuels Association, American Coalition for Ethanol, Growth Energy, National Biodiesel Board, National Corn Growers Association, Biotechnology Industry Organization, and National Farmers Union petitioned the EPA on June 4, 2018 to change its regulations to account for lost volumes of renewable fuel resulting from the retroactive small refinery exemptions. This petition to the EPA seeks a broader, forward-looking remedy to account for the collective lost volumes caused by the recent increase in retroactive small refinery RVO exemptions. It is unclear what regulatory changes, if any, will emerge from the petition to the EPA.
Although the maintenance of the 15 billion gallon threshold for volume requirements that may be met with corn-based ethanol in the Final 2018 Rule and the Proposed 2019 Rule together with the Pruitt Letter, President Trump’s directive relating to permitting the year round sale of E15 and the resulting actions taken by the EPA consistent with the Pruitt Letter signals support from the EPA and the Trump administration for domestic ethanol production, there is still significant uncertainty about the level of support for the RFS within the Trump administration. The Trump administration could still elect to materially modify, repeal or otherwise invalidate the RFS and it is unclear what regulatory framework and renewable volume requirements, if any, will emerge as a result of any such reforms; however, any such reform could adversely affect the demand and price for ethanol and the Company’s profitability.
Executive Summary
Highlights for the three months ended December 31, 2018, are as follows:
•Total revenues decreased 9.3%, or $2.1 million, compared to the 2017 comparable period.
•Total cost of goods sold increased 6.7%, or $1.5 million, compared to the 2017 comparable period.
•Other income increased approximately $3.0 million from the three months ended December 31, 2017. The increase was due to a settlement payment received in exchange for the early termination of a contract.
•Net loss was approximately $1.8 million, which represents an increased net loss of $.9 million when compared to the net loss of $.9 million for the 2017 comparable period.
The Company has entered into agreements with third parties for the installation of a grains drying and cooling system. The total commitments are for $11.5 million. The Company made progress payments of $10.7 million under this contract through December 31, 2018. The remaining payments will be made as invoiced throughout the life of the project. The project is estimated to be
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completed in the second quarter of fiscal year 2019. This new drying and cooling system will aid in our development of a new high quality species specific animal feed which we have branded as PureStream™ protein. We currently intend to market this new product to the growing swine and poultry markets in Iowa. When compared to traditional distillers grains, our new PureStream™ protein animal feed products are expected to be higher in crude protein and richer in the essential amino acids that drive growth in swine and poultry.
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 our statement of operations for the three months ended December 31, 2018 and 2017 (dollars in thousands):
Three Months Ended December 31, | |||||||||||||||
(Unaudited) | |||||||||||||||
Income Statement Data | 2018 | 2017 | |||||||||||||
Revenue | $20,372 | 100.0 | % | $22,470 | 100.0 | % | |||||||||
Cost of goods sold | 24,295 | 119.3 | % | 22,777 | 101.4 | % | |||||||||
Gross (loss) | (3,923 | ) | (19.3 | )% | (307 | ) | (1.4 | )% | |||||||
General and administrative expenses | 861 | 4.2 | % | 946 | 4.2 | % | |||||||||
Operating (loss) | (4,784 | ) | (23.5 | )% | (1,253 | ) | (5.6 | )% | |||||||
Other income (expense), net | 2,948 | 14.5 | % | 306 | 1.4 | % | |||||||||
Net (loss) | $ | (1,836 | ) | (9.0 | )% | $ | (947 | ) | (4.2 | )% |
Results of Operations for the Three Months Ended December 31, 2018 as Compared to the Three Months Ended December 31, 2017
Revenues. Total revenues decreased by 9.3% for the three months ended December 31, 2018 as compared to the three months ended December 31, 2017. Ethanol sales decreased by 12.9%, sales from co-products increased by .8% and other revenue increased 13.8% for the three months ended December 31, 2018 as compared to the three months ended December 31, 2017. The change in ethanol revenue was a result of a 9.8% decrease in the price per gallon received as well as a 3.4% decrease in sales volume for the three months ended December 31, 2018, when compared to the three months ended December 31, 2017. Ethanol prices decreased due to relatively high inventories in the domestic market coupled with ongoing record domestic production of ethanol. EPA regulations limit on the number of RINs (which are sold in conjunction with ethanol gallons) which the Company can generate in any given calendar year. As a result, in the three months ended December 31, 2018, the Company elected to build up inventory levels of ethanol until such time as the ethanol gallons could be sold together with the RINs and therefore sales volume during the three month period decreased. Ethanol revenue for the three months ended December 31, 2018 also included a $1,575 net loss for ethanol derivatives, compared to a $48,825 net gain in the same quarter for the prior year.
Sales from co-products increased by .8% for the three months ended December 31, 2018 from the three months ended December 31, 2017. Co-products include dried distillers grains, wet distillers grains, corn oil, syrup and carbon dioxide. The change in co-product sales resulted primarily from an increase in distillers grain revenue. Distillers grain revenue increased as market prices increased as a result of steady world and U.S. protein prices amidst firm demand attributable to the Argentinian drought and positive U.S. meat producing margins.
Other revenue increased 23.3% during the three months ended December 31, 2018 when deferred revenue was recognized upon the Company's receipt of a settlement payment related to the early termination of a contract.
Cost of goods sold. Cost of goods sold increased by 6.7%, or approximately $1.5 million, for the three months ended December 31, 2018 from the three months ended December 31, 2017. The increase was primarily due to increases in corn costs and depreciation. Cost of
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goods sold includes corn costs, process chemicals, denaturant, natural gas costs, electricity, production labor, repairs and maintenance, and depreciation.
Corn costs, including hedging, increased $1.26 million, or 8.0%, for the three months ended December 31, 2018 compared to the three months ended December 31, 2017. The increase resulted from an 8.5% increase in corn prices which was partially offset by lower production resulting in a decreased demand for corn. For the three months ended December 31, 2018 corn costs included a $63,462 net loss for derivatives relating to corn costs, compared to a $410,550 net gain in the same quarter for the prior year. Corn costs represented 66.6% of cost of goods sold for the three months ended December 31, 2018, compared to 65.8% for the three months ended December 31, 2017.
Repairs and maintenance decreased approximately 23.4% or $.3 million for the three months ended December 31, 2018 from the three months ended December 31, 2017. The decrease was due an increased focus on preventative maintenance to avoid larger costly repairs as well as a focus on cost control.
Depreciation expense increased approximately $.7 million or 87.6% for the three months ended December 31, 2018 from the three months ended December 31, 2017. The increase in depreciation resulted from the addition of several assets including a decanter, fermenter and buildings for the new dryer system. Depreciation was also accelerated on the old regenerative thermal oxidizer (RTO) to adjust the asset to its revised useful life before it was replaced in December 2018.
General and administrative costs decreased by $84,776 or 9.0% for the three months ended December 31, 2018 from the three months ended December 31, 2017. The decrease is due to lower legal and professional fees during the three months ended December 31, 2018.
Other Income increased approximately $2.6 million from the three months ended December 31, 2018 from the three months ended December 31, 2017. The increase was due to an approximately $3,000,000 settlement payment received in exchange for the early termination of a contract.
Industry Factors that May Affect Future Operating Results
During the three months ended December 31, 2018, the ethanol industry experienced extremely weak ethanol production margins as a result of a combination of factors including the following:
• | Corn prices were steady during the three months ended December 31, 2018; however, the price per bushel traded in an unusually narrow range, barely exceeding 20 cents per bushel. Ongoing trade disputes with China, and trade concerns in general resulted in a significant collapse in export sales of corn. Although quarterly export shipments were actually robust, the export shipments were the result of sales made over the summer when availability of corn supplies from South America had dwindled to nothing as a result of drought in corn growing areas of Argentina and Brazil. This pattern of strong actual shipments and falling new sales stalemated the market. Despite increased total U.S. corn supplies, farmer selling resistance engendered an unusually strong post-harvest basis rally which put downward pressure on margins. Margins in November and December approached and sometimes exceeded historically low levels not seen since 2012. |
• | The latest estimates of supply and demand provided by the United States Department of Agriculture (the "USDA") pushed 2018/2019 season ending corn stocks down to 1.781 billion bushels versus 2017/2018 season ending corn stocks of 2.140 billion bushels. Despite the lower estimates for 2018/2019 season ending corn stocks, demand estimates for corn remained strong. However, as a result of expected improvements in the South American corn crop, the modest tightening of the corn stocks/use ratio did not have any material impact on corn prices during the quarter. Based on these factors, management is not anticipating upward basis moves during the course of the crop year. |
• | Gasoline demand during the calendar year 2018 actually fell a modest 0.3% versus 2017; however, even modest decrease in gasoline demand can have adverse impacts on the ethanol market. Domestic ethanol usage was only 0.5% above the weak consumption during the second calendar quarter of 2017. Ethanol prices collapsed during the quarter with cash Midwest prices at the plant approaching $1.00 per gallon. Despite relatively robust 3% annualized economic growth rates and the lowest unemployment rates in decades, motor gasoline usage continues to stagnate. The U.S. Energy Information Administration (the "EIA"), forecasts growth of 0.60% in 2019 gasoline demand. While this represents an improvement over 2018 demand, there has been little growth in domestic gasoline demand over the last 3 years which adversely impacts the demand for and prices of ethanol. |
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• | A growing U.S. economy should have contributed to modest growth in gasoline demand in the past year. Unemployment has reached record lows in many parts of the U.S. Unfortunately, domestic ethanol demand has shown very little growth. Although there has been substantial growth in export demand in recent years, we currently expect that the export growth curve will be reversed downward in 2019. As a result of the current trade war, despite a long term commitment to increased ethanol blending in gasoline, Chinese demand is likely to remain near zero. With protective tariffs still in place and improved availability of sugar cane ethanol, Brazilian imports of U.S. ethanol are forecast to fall by 112 million gallons. Brazil has recently been the largest export destination for U.S. ethanol accounting for 32% of domestic ethanol exports as of August 31, 2018 despite the 20% tariff on U.S. ethanol imports in excess of 150 million liters, or 39.6 million gallons per quarter, imposed in September 2017 by Brazil’s Chamber of Foreign Trade (CAMEX) according to the USDA Foreign Agriculture Service. Any decrease in exports to Brazil could have a material adverse impact on the demand and price for ethanol. |
• | The U.S. government continues to take positions which negatively impact domestic offtake of ethanol. Exemptions for small refiner blending of ethanol have now been granted even to Exxon. Under the RFS, a small refinery - that processes less than 75,000 barrels per day - can petition the EPA for a waiver of their requirement to submit RINs. The EPA, through consultation with the Department of Energy and the Department of Agriculture, can grant them a full or partial waiver, or deny it within 90 days of submittal. The EPA granted significantly more of these waivers for 2016 and 2017 than they had in the past, totaling 790 million gallons of waived requirements for 2016 and 1.46 billion gallons for 2017. This effectively reduced the RFS volumes for those compliance years by that amount, and has lowered RIN values significantly over the past calendar year which in turn adversely impacts the market and price for ethanol. |
• | Although President Trump has directed the EPA to begin rulemaking to permit the sale of E15 year round and the President has stated a goal of having a final rule out before the start of summer driving season on June 1, 2019, the EPA has not yet taken steps to enact the year round sale of E15 and it is unclear when the EPA may take such action. The current government shutdown or staffing shortfalls could delay a final rule and any final rule from the agency is also susceptible to legal challenges. |
• | Even if the EPA adopted final rules to implement the E15 initiative by this summer as directed by President Trump, any measurable improvement in demand is likely years away. Ethanol is trading at minute discounts to gasoline. This discourages higher blend rates. The current administration has pursued an aggressive campaign of collapsing RIN prices. As noted above, the primary weapon wielded in this quest has been small refiner waivers. RIN prices have collapsed from 70 cents to under 15 cents, crippling a powerful ethanol blending driver. There are only 5,000 fuel stations out of a total of 150,000 stations in the US which have blending pumps. New gasoline station pumps are very costly. Thus, even were the gasoline versus ethanol spread to move back to big gasoline premiums and if the pace of small refiner waivers to be reversed, getting the delivery system for E15 installed would be a lengthy process. Under current market conditions and government policy, it has slowed to a standstill. |
• | Recent EPA actions, especially the increase in the grant of small refiner waivers, have called into question the EPA’s commitment to the initial goals of the original RFS to incentivize and grow renewable fuels consumption. Given the inability of the industry to meet advanced biofuel targets, particularly in cellulosic ethanol, EPA has substantially reduced the RFS mandated required volume levels. While the 15 billion corn based ethanol figure remains intact, recent academic studies posit that the small refiner waivers will result in nearly 200 million gallons of reduced usage of ethanol. |
• | With the problems regarding both export and domestic demand outlined above, an additional force which drove our margins lower during the quarter was year over year increased domestic production capacity. Large new plants and plant additions came on line in the Midwest. Between new capacity and ongoing debottlenecking and efficiency gains, year over year quarterly capacity is estimated to have increased by 2.5-3%. Ethanol stocks touched a high in excess of 1 billion gallons during the quarter. |
We use futures and options 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. We also incorporate risk management strategies to cover some of the risk involved with changing ethanol and distillers grain market prices. We continue to monitor the markets and attempt to provide for an adequate supply of corn and protection against rapid price increases for corn and price decreases for ethanol and distillers grains.
Continued large old crop corn supplies, expected acreage increases for corn this spring and excess ethanol production capacity have had a negative impact on the market price of ethanol which has adversely impacted our profitability. With the negative margins that resulted we saw 4% reductions in production reported by the EIA at the end of the quarter. The EIA also reported no growth in inventory stocks during the last 5 weeks of the quarter. Some producers have responded to poor margins by curtailing production rates. Reduced production rates should continue to allow margins to improve from the low margins registered during late November 2018 through early December 2018. According to the EIA, as of December 31, 2018, weekly ending stocks of ethanol were 2% higher than the same time last year.
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Given what we expect to be an ongoing reduction in production rates, we expect tightening stocks/use ratios and improving margins into the spring. If a trade agreement is reached with China and exports improve, better margins could continue through the summer. However, despite the poor margin environment and the fact that plant run rates have been reduced, most plants have not been permanently shuttered and therefore, we could see a rise in production rates as margins start to improve which could offset the benefits of any increased margins and negatively impact our profitability.
During the fourth calendar quarter of 2018, the higher prices we received for our distillers grains positively impacted our margins. The increase in our distillers grain prices resulted primarily from steady world and U.S. protein prices amidst firm demand which management believes is attributable to the Argentinian drought and positive U.S. meat producing margins. In addition to being an animal feed substitute for corn, distillers grains are increasingly considered a protein feed substitute for soybean meal in the United States. Argentina is a leading exporter of soybean meal and tight supplies in Argentina due to the drought have resulted in increased soybean meal prices increasing demand for distillers grains as a feed substitute. In addition, in 2018, strong protein meal prices enabled distillers grains prices to rally versus corn, our basic raw material and protein consuming animal units continued to grow. However, domestic feeding margins in cattle and hogs in particular could have a negative impact on total distillers grains domestic demand. Poultry numbers as evidenced by the weekly Egg Set and Chicks Placed reports have also slowed somewhat. While we remain optimistic on distillers grains demand, given the very high soybean stocks in the U.S., the prospects for a recovery in South American production and a potential pause in growth of animal numbers in the U.S., management is reserved on the possibilities of further distillers grain price improvements.
Corn oil prices were slightly better in the fourth quarter after falling to multiyear lows. The avalanche of soybean stocks in the U.S. resulted in high crush rates and substantial soybean oil production. Soybean oil prices declined to the lows for the year during the fourth quarter and while corn oil prices appreciated relative to soy, the large soy supplies will likely keep a tight lid on corn oil prices. The lack of a new blenders’ tax credit for biodiesel could eventually negatively impact the price and demand for corn oil and biodiesel production margins could be constrained. Corn oil supplies in the U.S. are expected to grow due to yield improvements which could offset the impact of lower ethanol production rates. Corn oil demand remains subject to government action on trade and the blenders’ credit and based on this uncertainty regarding demand, the large domestic supplies of corn oil and increases in production, management does not anticipate an increase in corn oil prices.
Credit and Counterparty Risks
Through our normal business activities, we are subject to significant credit and counterparty risks that arise through normal commercial sales and purchases, including forward commitments to buy and sell, and through various other over-the-counter (OTC) derivative instruments that we utilize to manage risks inherent in our business activities. We define credit and counterparty risk as a potential financial loss due to the failure of a counterparty to honor its obligations. The exposure is measured based upon several factors, including unpaid accounts receivable from counterparties and unrealized gains (losses) from OTC derivative instruments (including forward purchase and sale contracts). Part of our risk management strategy requires that we actively monitor credit and counterparty risk through credit analysis.
Liquidity and Capital Resources
Based on the financial projections prepared by management, we anticipate that we will have sufficient cash from existing cash, our current credit facilities, 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 an anticipated increase in the supply of ethanol will cause ethanol prices to stay near current levels. Working capital was approximately $2.0 million as of December 31, 2018 and is projected to be sufficient with current cash balances and credit facilities available for the remainder of the fiscal year. Management continues to monitor our liquidity position on a weekly basis.
Our financial position and liquidity are, and will continue to be, influenced by a variety of factors, including, without limitation:
• | our ability to generate cash flows from operations; |
• | the level of our outstanding indebtedness and the interest we are obligated to pay; |
• | our capital expenditure requirements, which consists primarily of plant improvements to improve efficiencies and expenditures for our new PureStream™ protein process; and |
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• | our margin maintenance requirements on all commodity trading accounts. |
The following table summarizes our sources and uses of cash and cash equivalents from the unaudited statement of cash flows for the periods presented:
Three Months Ended December 31, | ||||||||
(Unaudited) | ||||||||
Cash Flow Data: | 2018 | 2017 | ||||||
Net cash provided by operating activities | $ | 1,021,048 | $ | 740,165 | ||||
Net cash (used in) investing activities | (1,325,770 | ) | (3,786,981 | ) | ||||
Net cash provided by financing activities | 200,000 | 2,698,775 | ||||||
Net (decrease) in cash and cash equivalents | $ | (104,722 | ) | $ | (348,041 | ) |
Cash Flow Provided by Operations
For the three months ended December 31, 2018, net cash provided by operating activities increased by $.3 million when compared to net cash provided by operating activities for the three months ended December 31, 2017. The increase in cash provided by operating activities is due to the timing in working capital components.
Cash Flow Used in Investing Activities
Cash flows from investing activities reflect the impact of property and equipment acquired for the ethanol plant. Net cash used in investing activities decreased by $2.5 million for the three months ended December 31, 2018 compared to the three months ended December 31, 2017. The decrease was due to several large progress payments made on the installation of a grains drying and cooling system in the previous fiscal year. This project is estimated to be completed in the second quarter of fiscal year 2019.
Cash Flow Provided by Financing Activities
Cash flows from financing activities include transactions and events whereby cash is obtained from, or paid to, depositors, creditors or investors. Net cash provided by financing activities decreased by $2.5 million for the three months ended December 31, 2018 compared to the three months ended December 31, 2017. The decrease is due to a reduction in borrowings on our term revolver offset by distributions paid to members in December 2017.
Critical Accounting Estimates and Accounting Policies
Our 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 we operate. 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 our 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 our 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 the Company 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 us for the sale of ethanol and distillers grain are included in costs of goods sold.
All of our ethanol production is sold to Eco-Energy. The purchase price payable to us under our agreement with Eco-Energy is
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the purchase price set forth in the applicable purchase order, less a marketing fee payable to Eco-Energy.
We have an agreement with Gavilon to purchase all of the distillers grains produced at our ethanol plant. The purchase price payable to us is the corresponding price being paid to Gavilon for the distillers grains, less certain logistics costs and a service fee.
Derivative Instruments
We enter into derivative contracts to hedge our exposure to price risk related to forecasted corn needs, forward corn purchase contracts and ethanol sales. We do not typically enter into derivative instruments other than for hedging purposes. All future derivative contracts are recognized on the December 31, 2018 balance sheet at their fair value. Although we believe our derivative positions are economic hedges, none have 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 our 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 net realizable value or actual cost using the first-in, first-out method. In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonable predictable costs of completion, disposal and transportation. For the three months ended December 31, 2018 and 2017, the Company had a lower of cost or net realizable value inventory adjustment of $1,082,234 and $167,729, respectively.
Off-Balance Sheet Arrangements
We currently do 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 our operations, we are 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
We are exposed to market risk with respect to the price of ethanol, which is our principal product, and the price and availability of corn and natural gas, which are the principal commodities we use to produce ethanol. Our other primary product is distillers grains, and we are 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 we may experience market conditions where the prices we receive for our ethanol and distillers grains are declining, but the price we pay for our corn, natural gas and other inputs is increasing. Our 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. We are, however, subject to various material risks related to our 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 our management, including the supply and demand for gasoline, the availability of substitutes, international trade and the effects of domestic and foreign laws, regulations and government policies.
In general, rising corn prices result in lower profit margins and, accordingly, represent unfavorable market conditions. We will generally not be able to pass along increased corn costs to our ethanol customers. We are subject to various material risks related to the availability and price of corn, many of which are beyond our control. 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 our corn costs were to increase $.10 per bushel from one year to the next, the impact on costs of goods sold would be approximately $2.1 million for the year, assuming corn use of 21 million bushels during the year.
Falling ethanol prices indicate weak market conditions and will usually negatively impact profit margins. Lincolnway Energy will typically be unable to pass through the impact of decreased ethanol revenues to its corn suppliers. Lincolnway Energy is subject to various material risks related to the demand for and price of ethanol, many of which are beyond the control of the Company. For example, the demand for and price of ethanol is subject to significant fluctuations due to various unpredictable factors which are beyond the control of Lincolnway Energy's management, including driving habits, consumer vehicle buying decisions, petroleum price movement, plant capacity utilization, and government policies with respect to biofuel use, railroad transportation requirements, national and international trade and supply and demand. If Lincolnway Energy's ethanol revenue were to decrease $.05 per gallon from one year to the next, the impact on gross revenues would be approximately $3.1 million for the year.
During the quarter ended December 31, 2018, corn prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $3.67 per bushel for March 2019 delivery to a high of $3.90 per bushel for March 2019 delivery. The corn prices based on the Chicago Mercantile Exchange daily futures data during the quarter ended December 31, 2017 ranged from a low of $3.45 per bushel for March 2018 delivery to a high of $3.69 per bushel for March 2018 delivery.
The average price we received for our ethanol FOB Nevada, Ia., during the three months ended December 31, 2018 was $1.11 per gallon, as compared to $1.23 per gallon during the three months ended December 31, 2017.
During the quarter ended December 30, 2018, ethanol prices based on the Chicago Mercantile Exchange daily futures data ranged from a low of $1.22 per gallon for January 2019 delivery to a high of $1.37 per gallon for January 2019 delivery. The ethanol prices based on the Chicago Mercantile Exchange daily futures data during the three months ended December 31, 2017 ranged from a low of $1.25 per gallon for January 2018 delivery to a high of $1.45 per gallon for January 2018 delivery.
We may from time to time take various cash, futures, options or other positions in an attempt to minimize or reduce our price risks related to corn and ethanol. The extent to which we enter into such positions may vary substantially from time to time and based on various factors, including seasonal factors and our 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
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are influenced by many factors and occurrences that are beyond our control. We could incur substantial losses on our cash, futures, options or other positions.
Although we intend our futures and option positions to accomplish an economic hedge against our future purchases of corn or futures sales of ethanol, we have 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. To avoid the higher costs associated with hedge accounting, we are instead using fair value accounting for the positions. Generally that means as the current market price of the positions changes, the realized or unrealized gains and losses are immediately recognized in our 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, our net loss on corn derivative financial instruments that was included in our cost of goods sold for the three months ended December 31, 2018 was $63,462, as opposed to a net gain of $410,550 for the three months ended December 31, 2017.
We attempt 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. We continue to stay at a near neutral corn position due to an uptrend in ethanol sales margins. We continue 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 our control.
Another important raw material for our production of ethanol is natural gas. Our cost per MMBTU is subject to various factors that are outside of the control of our management. The factors include changes in weather, increase in transportation costs and the overall economic activity. Our natural gas costs will therefore vary, and the variations could be material. Our natural gas costs for the three months ended December 31, 2018 represented approximately 6.0% of our total cost of goods sold for that period.
Interest Rate Risk
We have various outstanding loan agreements that expose us to market risk related to changes in the interest rate imposed under the loan agreement and promissory notes.
We have entered into loan agreements, including an irrevocable letter of credit, with Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA (collectively, "Farm Credit"). The interest rate on the Farm Credit revolving term loan and irrevocable letter of credit is a variable interest rate based on the one-month LIBOR index plus 3.75%. We do not anticipate any significant increase in interest rates during Fiscal 2019.
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our President and Chief Executive Officer and our Director of Finance (our principal financial officer), have evaluated the effectiveness of our 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, our President and Chief Executive Officer and our Director of Finance have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures have been effective to provide reasonable assurance that the information required to be disclosed in the reports our 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 our principal executive and principal financial officers or persons performing such functions, as appropriate, to allow timely decisions regarding disclosure. We believe 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 our 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, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time the Company is involved in various litigation matters arising in the ordinary course of its business. None of these matters, either individually or in the aggregate, currently is material to the Company except as reported in the Company's annual report on Form 10-K for the fiscal year ended September 30, 2018, there were no material developments to such matters.
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Item 1A. Risk Factors.
There have been no material changes to the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018. Additional risks and uncertainties, including risk and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
The following exhibits are filed as part of this quarterly report.
Description of Exhibit | Page | |||||
10 | Amendment dated December 28, 2018 to the Credit Agreement dated July 3, 2017, as amended February 23, 2018 and September 24, 2018 between the Company and Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA. | * | ||||
10 | Amended and Restated Revolving Term Promissory Note dated December 28, 2018 between the Company and Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA | |||||
10 | Amended and Restated Letter of Credit Promissory Note dated December 28, 2018 between the Company and Farm Credit Services of America, FLCA and Farm Credit Services of America, PCA | |||||
31 | Rule 13a-14(a)/15d-14(a) Certifications | |||||
Rule 13a-14(a) Certification of President and Chief Executive Officer | E-1 | |||||
Rule 13a-14(a) Certification of Director of Finance | E-2 | |||||
32 | Section 1350 Certifications | |||||
Section 1350 Certification of President and Chief Executive Officer † | E-3 | |||||
Section 1350 Certification of Director of Finance† | E-4 | |||||
101 | Interactive Data Files (furnished electronically herewith pursuant to Rule 405 of Regulation S-T) | |||||
* Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Committee on January 2, 2019. | ||||||
† This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference. |
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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 | ||
February 14, 2019 | By: | /s/ Eric Hakmiller |
Name: Eric Hakmiller | ||
Title: President and Chief Executive Officer | ||
February 14, 2019 | By: | /s/ Kristine Strum |
Name: Kristine Strum | ||
Title: Director of Finance (Principal Financial Officer) |
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