UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to __________
Commission file number 000-53041
SOUTHWEST IOWA RENEWABLE ENERGY, LLC
(Exact name of registrant as specified in its charter)
Iowa 20-2735046
---- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2101 42nd Avenue, Council Bluffs, Iowa 51501-8409
-------------------------------------------------
(Address of principal executive offices)
(712) 366-0392
--------------
(Registrant's telephone number, including area code)
------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]
Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No |X|
As of June 30, 2008, the issuer had 13,139 Units issued and outstanding.
TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION
Item Number Item Matter Page Number
Item 1. Unaudited Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4T. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . 20
PART II--OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. . . . . . . . . 20
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . 20
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
i
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Balance Sheets
June 30, 2008 and September 30, 2007
June 30, September 30,
2008 2007
(unaudited)
- ----------------------------------------------------------------------------------------------------------------
ASSETS (Notes 3 and 4)
CURRENT ASSETS
Cash and cash equivalents $ 4,141,214 $ 1,742,940
Prepaid expenses and other 72,909 124,952
---------------------------------------------
Total current assets 4,214,123 1,867,892
PROPERTY AND EQUIPMENT
Land 2,064,090 2,064,090
Construction in progress 145,422,606 59,504,547
Office and other equipment 100,751 79,090
---------------------------------------------
147,587,447 61,647,727
Accumulated depreciation (20,161) (7,233)
---------------------------------------------
147,567,286 61,640,494
OTHER ASSETS
Cash held for plant construction -- 15,638,542
Deferred financing costs, net 3,355,111 2,800,846
---------------------------------------------
3,355,111 18,439,388
$ 155,136,520 $ 81,947,774
=============================================
See Notes to Unaudited Financial Statements.
1
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Balance Sheets (continued)
June 30, 2008 and September 30, 2007
June 30, September 30,
2008 2007
(unaudited)
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Accounts and retainage payable $ 6,673,611 $ 3,657,500
Accrued expenses 863,473 43,730
Current maturities of long-term debt (Note 4) 34,486,509 1,303,250
---------------------------------------------
Total current liabilities 42,023,593 5,004,480
LONG-TERM DEBT, less current maturities (Note 4) 38,779,650 168,333
COMMITMENTS (Notes 5, 6 and 7)
MEMBERS' EQUITY (Note 2)
Members' capital 76,474,111 76,474,111
Earnings (deficit) accumulated during the development stage (2,140,834) 300,850
---------------------------------------------
74,333,277 76,774,961
$ 155,136,520 $ 81,947,774
===========================================
See Notes to Unaudited Financial Statements.
2
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Unaudited Statements of Operations
Three Months Nine Months March 28, 2005
Ended Three Months Nine Months Ended (Date of
June 30, Ended June Ended June 30, Inception) to
2008 30, 2007 June 30, 2008 2007 June 30, 2008
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $ --- $ --- $ --- $ --- $ --- $
-------------- -------------- -------------- ------------- ----------------
General and administrative expenses
(Note 6) 1,412,924 1,460,264 2,717,137 2,170,334 5,860,247
-------------- -------------- -------------- ------------- ----------------
(Loss) before other income (1,412,924) (1,460,264) (2,717,137) (2,170,334) (5,860,247)
-------------- -------------- -------------- ------------- ----------------
Other income and (expense):
Grant
95,937 114,235 136,513 114,235 305,994
Interest income 19,189 669,273 124,415 2,685,373 3,372,457
Miscellaneous income 2,800 1,800 14,525 34,308 75,046
Loss on disposal of property
--- --- --- --- (34,084)
-------------- -------------- -------------- ------------- ----------------
117,926 785,308 275,453 2,833,916 3,719,413
-------------- -------------- -------------- ------------- ----------------
Net income (loss) $ (1,294,998) $ (674,956) $ (2,441,684) $ 663,582 $ (2,140,834)
============== ============== ============== ============= ================
Weighted average units outstanding 13,139 13,086 13,139 11,701 6,878
============== ============== ============== ============= ================
Net income (loss) per unit - basic
and diluted ($98.56) ($51.58) ($185.83) $56.71 ($311.26)
============== ============== ============== ============= ================
See Notes to Unaudited Financial Statements
3
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Unaudited Statements of Members' Equity
Earnings
(Deficit)
Accumulated
During the
Members' Capital Development Stage Total
- ----------------------------------------------------------------------------------------------------------------------
Balance, March 28, 2005 (date of inception) $ --- $ --- $ ---
Issuance of 285 Series A membership units (Note 2) 570,000 --- 570,000
Subscription receivable for 257 Series A membership
units (Note 2) (514,000) --- (514,000)
Net (loss) --- (29,634) (29,634)
-------------------------------------------------------
Balance, September 30, 2005 56,000 (29,634) 26,366
Receipt of membership units subscribed 514,000 --- 514,000
Issuance of 1,047 Series A membership units (Note 2) 5,202,000 --- 5,202,000
Issuance of 1 Series B membership unit (Note 2) 6,000 --- 6,000
Net (loss) --- (752,231) (752,231)
-------------------------------------------------------
Balance, September 30, 2006 5,778,000 (781,865) 4,996,135
Issuance of 7,473 Series A membership units (Note 2) 44,838,000 --- 44,838,000
Issuance of 3,333 Series B membership units (Note 2) 19,998,000 --- 19,998,000
Issuance of 1,000 Series C membership units (Note 2) 6,000,000 --- 6,000,000
Offering costs (139,889) --- (139,889)
Net income --- 1,082,715 1,082,715
-------------------------------------------------------
Balance, September 30, 2007 76,474,111 300,850 76,774,961
Net (loss) --- (2,441,684) (2,441,684)
=======================================================
Balance, June 30, 2008 $ 76,474,111 $ (2,140,834) $ 74,333,277
=======================================================
See Notes to Unaudited Financial Statements.
4
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Unaudited Statements of Cash Flows
March 28, 2005
Nine Months Nine Months (Date of
Ended Ended Inception) to
June 30, 2008 June 30,2007 June 30, 2008
- -------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,441,684) $ 663,582 $ (2,140,834)
Adjustments to reconcile net income (loss) to net cash (used in)
operating activities:
Depreciation 12,928 3,179 20,161
Loss on disposal of property --- --- 34,084
Changes in working capital components
(Increase) decrease in prepaid
expenses and other 52,043 (50,741) (72,909)
Increase (decrease) in accounts payable 504,369 (50,772) 560,942
Increase (decrease) in accrued expenses 11,686 (101,074) 55,416
-----------------------------------------------------------
Net cash (used in) operating activities (1,860,658) 464,224 (1,543,140)
-----------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (82,015,361) (30,007,929) (141,511,786)
(Increase) decrease in cash for plant construction 15,638,542 (37,815,286) ---
Proceeds from sale of property and equipment
--- --- 1,415,541
-----------------------------------------------------------
Net cash (used in) investing activities (66,376,819) (67,823,215) (140,096,245)
-----------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of membership units $ --- $ 69,876,000 $ 75,654,000
Payments of financing costs (785,648) (1,169,441) (2,626,494)
Payments for offering costs --- --- (139,889)
Proceeds from long-term borrowings 72,721,316 200,000 74,204,566
Payments of long-term borrowings (1,299,917) (6,667) (1,311,584)
-----------------------------------------------------------
Net cash provided by financing activities 70,635,751 68,899,892 145,780,599
-----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (879,240) 1,540,901 4,141,214
CASH AND CASH EQUIVALENTS
Beginning 1,742,940 820,743 ---
-----------------------------------------------------------
Ending $ 4,141,214 $ 2,361,644 $ 4,141,214
===========================================================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING, OPERATING AND FINANCING
ACTIVITIES
Construction in progress included in accounts payable $ 6,112,669 $ 1,039,144 $ 6,112,669
Membership units issued for deferred financing costs --- --- 960,000
Interest capitalized and included in long-term debt and accruals 1,412,617 --- 1,412,617
See Notes to Unaudited Financial Statements.
5
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Principal business activity: Southwest Iowa Renewable Energy, LLC (the Company),
located in Council Bluffs, Iowa, was formed in March 2005 to build a 110 million
gallon annual production dry mill corn-based ethanol plant. As of June 30, 2008,
the Company is in the development stage with its efforts being principally
devoted to organizational, equity-raising activities and construction of the
ethanol plant.
The accompanying financial statements as of June 30, 2008 and for the three and
nine months ended June 30, 2008 and 2007 and the period from inception March 28,
2005 to June 30, 2008 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 period from inception March 28, 2005 to September 30, 2007. The
results of operations for the three and nine months ended June 30, 2008 and 2007
and the period from inception March 28, 2005 to June 30, 2008 are not
necessarily indicative of the results for the entire year.
A summary of significant accounting policies follows:
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.
Concentrations of credit risk: The Company's cash balances are maintained
in bank deposit accounts which at times may exceed federally insured
limits.
Cash and cash equivalents: The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
Cash held for plant construction: The cash that will be used for the
construction of the plant has been classified as long-term according to its
estimated use.
Deferred financing costs: Deferred financing costs associated with the
construction, revolving and bridge loans and are recorded at cost and
include expenditures directly related to securing debt financing. These
costs are amortized using the effective interest method over the 5-year
term of the Construction and Revolving Loan Credit Facility agreement and
over the 12 month term of the Bridge Loan.
Deferred offering costs: The Company classifies all costs directly related
to raising capital as deferred offering costs until the capital is raised,
at which point the costs were reclassified as an offset to equity as
issuance costs.
6
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Property and equipment: Property and equipment is stated at cost.
Construction in progress is comprised of costs related to the construction
of the ethanol plant, depreciation of such amounts will commence when the
plant begins operations over estimated useful lives ranging from 5 to 40
years. As of June 30, 2008, approximately $2,304,800 of interest has been
capitalized. Depreciation is computed using the straight-line method over
the following estimated useful lives:
Years
------------------
Office and other equipment 5 - 7
Maintenance and repairs are expenses as incurred; major improvements and
betterments are capitalized.
Income taxes: The Company has elected to be taxed 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.
Net income (loss) per unit: Earnings per unit have been computed on the
basis of the weighted average number of units outstanding during each
period presented.
Grant income: The Company recognizes grant income as other income for
reimbursement of expenses incurred upon complying with the conditions of
the grant.
Organizational costs and startup costs: The Company expenses all
organizational and startup costs as incurred.
Fair value of financial instruments: The carrying amounts of cash and cash
equivalents, accounts payable and accrued expenses approximate fair value.
The fair value of long-term debt is estimated based on anticipated interest
rates which management believes would currently be available to the Company
for similar issues of debt, taking into account the current credit risk and
other market factors.
Note 2. Members' Equity
Effective March 7, 2008, the Company entered into a Series C Unit Issuance
Agreement (the "Series C Agreement") with ICM, Inc. ("ICM") and a Series E Unit
Issuance Agreement (the "Series E Agreement", together with the Series C
Agreement, the "Unit Issuance Agreements") with Bunge North America, Inc.
("Bunge") in connection with the LCs (see Note 3). Under the Unit Issuance
Agreements, the Company has agreed to pay Bunge and ICM each a fee for the
issuances of their respective LCs equal to 6% per annum of the undrawn face
amount of their respective LCs. The Unit Issuance Agreements provide that the
Company will use its best efforts to raise funds through a subsequent private
placement offering of Units (the "Private Placement"), or such other form of
equity or debt financing as the Company's Board of Directors may deem necessary,
in an amount sufficient to pay off the Bridge Loan (see Note 3) in full prior to
maturity. Although the Company anticipates that funds obtained from the Private
Placement or such other equity or debt financing will enable it to pay off the
Bridge Loan in full prior to maturity, in the event that the LCs are drawn upon
as discussed below or if Bunge or ICM make any payment to Commerce Bank, N.A.
(the Bridge Lender) that reduces amounts owed by the Company under the Bridge
Loan (each, a "Bridge Loan Payment"), the Unit Issuance Agreements provide that
the Company will immediately reimburse Bunge and/or ICM, as applicable, for the
amount of such Bridge Loan Payment by issuing Units to Bunge and ICM, as further
described below.
7
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 2. Members' Equity (Continued)
Under the Series C Agreement, if ICM makes a Bridge Loan Payment, the Company
will immediately issue Series C Units to ICM based on a Unit price that is equal
to the lesser of $3,000 or one half (1/2) of the lowest purchase price paid by
any party for a Unit who acquired (or who has entered into any agreement,
instrument or document to acquire) such Unit as part of the Private Placement
after the date of the Series C Agreement but prior to the date of any Bridge
Loan Payment made by ICM. The Series C Agreement further provides that ICM will
have the right to purchase its pro rata share of any Units issued by the Company
at any time after the date of the Series C Agreement.
Under the Series E Agreement, if Bunge makes a Bridge Loan Payment, the Company
will immediately issue Series E Units to Bunge based on a Unit price that is
equal to the lesser of $3,000 or one half (1/2) of the lowest purchase price
paid by any party for a Unit who acquired (or who has entered into any
agreement, instrument or document to acquire) such Unit as part of the Private
Placement after the date of the Series E Agreement but prior to the date of any
Bridge Loan Payment made by Bunge. The Series E Agreement further provides that
Bunge will have the right to purchase its pro rata share of any Units issued by
the Company at any time after the date of the Series E Agreement.
Note 3. Construction and Revolving Loan/Credit Agreements
In May 2007, the Company entered into a $126,000,000 senior secured debt credit
facility with AgStar Financial Services, PCA ("Agent"), consisting of an
$111,000,000 construction loan and a $15,000,000 revolving line of credit under
the terms of a Credit Agreement (the "Credit Agreement"). Letters of credit
pertaining to the construction may be drawn on the construction loan not to
exceed $3,000,000 in aggregate. Borrowings under the construction loan include a
variable interest rate based on LIBOR plus 3.65% for each advance under the
Credit Agreement. Upon completion of construction, the construction loan may be
segmented into two credit facilities, an amortized term facility of $101,000,000
and a revolving term facility of $10,000,000. Upon conversion, the Company has
the option of converting 50% of the term note into fixed rate loans at the
lender's bonds rate plus 3.25%. The portion of the term loan not fixed and the
term revolving line of credit will accrue interest equal to LIBOR plus 3.45%.
LIBOR at June 30, 2008 was 2.46%. The Credit Agreement requires the maintenance
of certain financial and non-financial covenants. Borrowings under the Credit
Agreement are collateralized by substantially all of the Company's assets. The
construction/revolving term credit facility require monthly principal payments
starting the seventh month following conversion of the construction loan to a
term loan. The conversion will occur 60 days after completion of the
construction. The loan will be amortized over 114 months and will mature five
years after the conversion date. The revolving term credit agreement expires in
five years after the conversion of the loan at which time the principal
outstanding is due. Borrowings are subject to borrowing base restrictions as
defined in the Credit Agreement. The Credit Agreement also includes certain
prepayment penalties. As of June 30, 2008 the outstanding balance under the
Credit Agreement was approximately $38,621,000.
On March 7, 2008, the Company amended the terms of the Credit Agreement and made
the following arrangements:
The Company obtained a Bridge Loan from the Bridge Lender in the maximum
principal amount of $36,000,000 (the "Bridge Loan"). The Bridge Loan debt is
secured by two letters of credit, described below.
8
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 3. Construction and Revolving Loan/Credit Agreements (Continued)
Bunge caused its bank to issue a letter of credit in the amount equal to 76% of
the maximum principal amount of the Bridge Loan in favor of the Bridge Lender
(the "Bunge LC"), and ICM caused its lender to similarly issue a letter of
credit in the amount equal to 24% of the maximum principal amount of the Bridge
Loan in favor of the Bridge Lender (the "ICM LC" and, together with the Bunge
LC, the "LCs"). Both LCs expire on March 16, 2009, and the Bridge Lender will
only draw against the LCs to the extent that the Company defaults under the
Bridge Loan or if the Company has not repaid the Bridge Loan in full by March 1,
2009. In the event the Bridge Lender draws against the LCs, the amounts drawn
will be in proportion to Bunge's and ICM's respective ownership of the Company's
Units which are not Series A--76% and 24%, respectively. As the Company repays
the principal of the Bridge Loan, the LCs' stated amounts will automatically be
reduced in the same proportion. As of June 30, 2008, there was an outstanding
principal and interest balance of approximately $34,473,000 under the Bridge
Loan.
The Company entered into the Unit Issuance Agreements with Bunge and ICM, which
govern the Company's repayment of Bunge and/or ICM, as the case may be, in the
event the LCs are drawn upon (see Note 2).
Note 4. Long-Term Debt
Long-term debt consists of the following as of June 30, 2008:
June 30, 2008
--------------
$200,000 Note payable to Iowa Department Economic Development ("IDED") $ 171,666
non-interest bearing monthly payments of $1,667 due through maturity date
of March 2012 on non-forgivable portion (A)
Bridge Loan payable to Commerce Bank, N.A. 34,473,176
Construction loan payable to Agstar Financial Services (PCA) bearing
interest at LIBOR plus 3.65% (6.11% at June 30, 2008). See maturity
discussed in Note 3. 38,621,317
-------------------
73,266,159
Less current maturities
(34,486,509)
-------------------
$ 38,779,650
===================
(A) This debt is comprised of two components under the Master Contract (the
"Master Contract") dated November 21, 2006 and amended June 5, 2008 between
the Company and the IDED. A $100,000 loan is non interest-bearing and due
in monthly payments of $1,667 beginning April 2007, with a final payment of
$1,667 due March 2012; and a $100,000 forgivable loan. Both notes under the
Master Contract are collateralized by substantially all of the Company's
assets and subordinate to the above $126,000,000 financial institution debt
and construction and revolving loan/credit agreements included in Note 3.
The $100,000 forgivable loan may be forgiven upon IDED's confirmation of
the creation and retention of qualifying jobs as per the Master Contract.
If the Company does not meet the requirements of the Master Contract, the
note is due on an agreed upon payment schedule.
9
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 5. Related-Party Transactions
In September, 2005, the Company entered into an agreement that expired May 2007
(and was not renewed) with a management company that included a member and
director on the board of directors, for project development services for a
monthly fee of $10,000 per month, plus actual travel and other approved
expenses. The agreement also included a fee of up to $1,600,000 for a 100
million gallon per year plant that was due upon financial closing for the
project. No expenses were incurred in 2008 as the agreement had expired.
Expenses under this agreement totaled $1,610,719 and $1,642,370 for the three
and nine months ended June 30, 2007, respectively. Expenses under this agreement
for the period from March 28, 2005 (date of Inception) to June 30, 2008 were
$1,842,492.
In September 2006, the Company entered into a design-build agreement with a
related party, ICM, for a lump-sum contract price of $118,000,000 (the "ICM
Contract"). Under the ICM Contract, the Company was required to make a down
payment of 10% of the original contract price which $2,000,000 was paid at the
delivery of the letter of intent, an additional $2,000,000 was paid in November
2006 when the Company broke escrow and the remaining $7,800,000 of the 10% was
paid in January 2007.
Under the ICM Contract, monthly applications are submitted for work performed in
the previous period, subject to retainage. In April 2008, six change orders in
the amount of $29,247,000 were issued. As of June 30, 2008, the Company incurred
approximately $118,052,000 of construction in progress. Approximately
$29,195,000 future commitment remains as of June 30, 2008, which is expected to
be paid in 2008. There are approximately $5,589,717 in accounts payable under
the ICM Contract as of June 30, 2008.
The Company entered into an agreement in October 2006 with a related party,
Bunge, to purchase all of the distiller's grains with soluble (DGS) produced by
the Company's ethanol plant (the "DGS Agreement"). The Company agreed to pay a
purchase price subject to the sales price, transportation costs, rail lease
charge and a fixed rate marketing fee for the DGS produced. The DGS Agreement
commences when the Company begins producing DGS and continues for ten years when
it will automatically renew for successive three-year terms unless a 180-day
written notice is given of either party's election not to renew before the
expiration of the initial term or the then current renewal term. The Company is
required to pay a minimum annual marketing fee of $150,000 under the DGS
Agreement. Beginning on the third anniversary of the effective date of the DGS
Agreement and thereafter, the annual minimum amount and the purchase price may
be adjusted based on terms within the contract. Either party may terminate the
DGS Agreement based its specific provisions.
In October 2006, the Company entered into an agreement with a company in which
Bunge holds a membership interest, AGRI-Bunge, LLC, to procure all grain
required for the Company's ethanol plant. The Company agreed to pay an agency
fee mutually agreed to by both parties for corn delivered by truck or rail, with
a minimum annual fee of $225,000. The agreement commences when the Company first
needs corn for production. It is currently anticipated that this will occur
December 2008 and will continue for ten years when it will automatically renew
for successive three-year terms unless a 180-day written notice is given of
either party's election not to renew before the expiration of the initial term
or the then current renewal term. Either party may terminate the agreement based
on specific guidelines in the agreement.
10
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 5. Related-Party Transactions (Continued)
On January 30, 2008, the Company and Bunge entered into a Support Services
Agreement (the "Services Agreement"), under which Bunge agreed to provide
engineering support on the project, provide reports to Lender and assist the
Company with requests by the Agent. The Company will pay, in addition to Bunge's
out of pocket expenses, an hourly fee of $95 for such services. The Services
Agreement terminates upon the earlier of completion of the ethanol plant or
December 31, 2008. Bunge may terminate the Services Agreement at any time, and
the Company may terminate under specified circumstances. Expenses of $83,400
have been paid under this agreement for the three and nine months ended June 30,
2008 and $83,400 for the period from March 28, 2005 (date of inception) to June
30, 2008.
Note 6. Commitments
The total cost of the project, including the construction of the ethanol plant
and start-up expenses, is expected to be approximately $225,000,000. The Company
is funding the development of the ethanol plant by using the total equity raised
of $75,654,000, long term financing of approximately $126,000,000 under the
Credit Agreement and bridge financing of approximately $36,000,000 under the
Bridge Loan. The Company intends to issue equity to pay off the Bridge Loan.
The Company also entered into various other contracts during 2006, 2007 and 2008
for the construction of the ethanol plant, office building, rail track and
acquisition of equipment totaling approximately $35,712,000, with a future
commitment of approximately $28,470,000 as of June 30, 2008, which is expected
to be paid in 2008. Of this total, approximately $522,952 is included in
accounts payable as of June 30, 2008.
In November 2006, the Company entered into an agreement with an unrelated entity
for marketing, selling and distributing all of the ethanol produced by the
Company. The Company will pay a fee mutually agreed to by both parties for each
gallon of ethanol sold. This agreement is effective through December 31, 2010
and will renew annually until terminated by 90 days' written notice. As of June
30, 2008, the ethanol plant is not operational and no amounts are due under this
agreement.
The Company has entered into a steam contract with an unrelated party dated
January 22, 2007, under which the vendor agreed to provide the steam required by
the Company, up to 475,000 pounds per hour. The Company agreed to pay a net
energy rate for all steam service provided under the steam contract and a
monthly demand charge for condensate not returned (steam delivered less the
condensation returned). The net energy rate is set for first three years then
adjusted each year beginning on the third anniversary date. The steam contract
will remain in effect for ten years from the earlier of the date the Company
commences a continuous grind of corn for ethanol production, or January 1, 2009.
In October, 2007 the Company entered into an agreement with an investment
banking firm, an unrelated party, to assist in obtaining additional equity.
While the Bridge Loan is not due until March 1, 2009, the Company's goal is to
raise sufficient equity to replace the Bridge Loan as soon as possible.
Initially, the Company is seeking one or more institutional investors to provide
the additional equity. The Company will pay a monthly fee of $10,000 for the
services of the investment banking firm until the agreement is terminated by
both parties or the equity is secured.
In April, 2008 the Company entered into a Firm Throughput Service Agreement with
a natural gas supplier, an unrelated party, under which the vendor agreed to
provide the gas required by the Company, up to 900 Dth per day. The Company
agreed to pay the maximum reservation and commodity rates as provided under the
vendor's FERC Gas Tariff as revised from time to time, as well as other
additional charges. The agreement specifies an in-service date of October 1,
2008, and the term of the agreement is seven years.
11
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 6. Commitments (Continued)
In March, 2008, the Company entered into the Unit Issuance Agreements, pursuant
to which the Company has agreed to pay Bunge and ICM each a fee for the
issuances of their respective LCs equal to 6% per annum of the undrawn face
amount of their respective LCs for a total annual amount of approximately
$2,160,000. For the three and nine months ended June 30, 2008, the Company
capitalized $546,000 and $690,000 of interest related to the Unit Issuance
Agreements. No payments have been made as of June 30, 2008.
In January, 2007, the Company entered into an agreement with Iowa Interstate
Railroad, LTD to provide the transportation of the Company's commodities from
Council Bluffs, Iowa to an agreed upon customer location. The agreement
commences on the date that the contract is approved by the Surface
Transportation Board, then it continues for five years and will automatically
renew for additional one year periods unless cancelled by either party by giving
a minimum of 90 days written notice prior to the expiration date. The Company
agreed to pay a mutually agreed upon rate per car.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward Looking Statements
This report on Form 10-Q by Southwest Iowa Renewable Energy, LLC (the
"Company," "we" or "us") contains forward-looking statements that involve future
events, our future performance and our expected future operations and actions.
In some cases you can identify forward-looking statements by the use of words
such as "may," "should," "anticipate," "believe," "expect," "plan," "future,"
"intend," "could," "estimate," "predict," "hope," "potential," "continue," or
the negative of these terms or other similar expressions. These forward-looking
statements are only our predictions and involve numerous assumptions, risks and
uncertainties. Our actual results or actions may differ materially from these
forward-looking statements for many reasons, including the following factors:
• Overcapacity in the ethanol industry;
• Our ability to obtain any additional equity financing which may be
required to complete plant construction and commence operations, or
our inability to fulfill our debt financing covenants;
• Changes in our business strategy, capital improvements or development
plans;
• Construction delays and technical difficulties in constructing the
plant;
• Changes in the environmental regulations that apply to our plant site
and operations;
• Our ability to hire and retain key employees for the operation of the
plant;
• Changes in general economic conditions or the occurrence of certain
events causing an economic impact in the agricultural, oil or
automobile industries;
• Changes in the availability and price of electricity, steam and
natural gas;
• Changes in federal and/or state laws (including the elimination of any
federal and/or state ethanol tax incentives);
• Changes and advances in ethanol production technology; and competition
from alternative fuel additives.
Our actual results or actions could and likely will differ materially from
those anticipated in the forward-looking statements for many reasons, including
the reasons described in this report. We are not under any duty to update the
forward-looking statements contained in this report. We cannot guarantee future
results, levels of activity, performance or achievements. We caution you not to
put undue reliance on any forward-looking statements, which speak only as of the
date of this report. You should read this report completely and with the
understanding that our actual future results may be materially different from
what we currently expect. We qualify all of our forward-looking statements by
these cautionary statements.
Overview, Status and Recent Developments
We are a development stage Iowa limited liability company which was formed
on March 28, 2005 to develop, construct, own and operate a 110 million gallon
dry mill corn-based ethanol plant near Council Bluffs, Iowa (the "Facility").
Based upon engineering specifications from ICM, our primary constructor, we
expect the Facility to process approximately 39.3 million bushels of corn per
year into 110 million gallons of denatured fuel grade ethanol, 300,000 tons of
distillers' dry grains with solubles ("DDGS") and 50,000 tons of wet distillers'
grains with solubles ("WDGS," together with DDGS, "Distillers Grains"). The fuel
grade ethanol will be sold in markets throughout the United States and
Distillers Grains sold in markets throughout the United States and
internationally. To execute our business plan, we raised capital through two
offerings--an initial seed round in the fourth quarter of 2005 and a secondary
round in the first quarter of 2006. With the proceeds of our two equity
offerings, we began construction of our Facility in February of 2007. The
current status of the various components of the Facility was as follows:
• Grain handling: the MCC building is substantially complete;
• Storage tank progress: the piping and pumps are being installed;
• Process building: structural steel progress is 95% complete, piping is
being installed, installation of heat exchangers, pumps and electrical
cable tray work continue, and sheeting is being installed;
• North and South Rail Line: the loop tracts are 70% complete, rail
across Pony Creek Bridge is completed, and we continue to install
switches on the loop;
13
• Wells: wet weather conditions caused delay in this process during
June, and step testing of the wells is nearly complete;
• Steam Pipeline: two additional foundations will be added to span
easement of 42" force main and the pipe installers are on site welding
the steam line;
• Energy center: the structural steel work is complete and conveyor work
has begun; ICM's dryer group is mobilized on site; centrifuges and
other equipment are being installed and sheeting will begin in August;
• Wet cake pads: the conveyor group is mobilized and the equipment is on
site, completion is expected later this summer;
• Cooling tower: additional progress in this area will commence when
connections to the process building are completed;
• Natural gas pipeline: 4" piping is on-site and completion of the gas
system is expected by October 1st, 2008;
• Scales: construction of the scales is completed; the scale house and
probe building foundations are expected to be done in August;
• Administration building: the drywall work has been started, and the
roof completed; windows were installed, and we estimate occupancy in
September, 2008;
• Site paving contract issued this month and paving began in July.
On May 2, 2007, we entered into a $126,000,000 credit facility (as amended,
the "Credit Agreement") with AgStar Financial Services, PCA ("AgStar"), as agent
for a syndicate group of lenders (the "Lenders"). Effective March 7, 2008, we
amended the terms of our primary lending agreements, obtained a bridge loan in
the maximum principal amount of $36,000,000 (the "Bridge Loan") from Commerce
Bank, N.A. (the "Bridge Lender") and entered into arrangements with the Bridge
Lender and our key equity holders and operational partners, ICM and Bunge North
America, Inc. (a wholly owned subsidiary of Bunge Limited, a publicly-traded,
global agribusiness company) ("Bunge"). On March 7, 2008, we made the following
arrangements:
• We obtained the Bridge Loan in the maximum principal amount of
$36,000,000, which is secured by two letters of credit, as described
below. As of June 30, 2008, we have drawn $34,473,000 under the Bridge
Loan for payment of construction in progress.
• Bunge caused its bank to issue a letter of credit in the amount equal
to 76% of the maximum principal amount of the Bridge Loan in favor of
the Bridge Lender (the "Bunge LC"), and ICM caused its lender to
similarly issue a letter of credit in the amount equal to 24% of the
maximum principal amount of the Bridge Loan in favor of the Bridge
Lender (the "ICM LC" and, together with the Bunge LC, the "LCs"). Both
LCs expire on March 16, 2009, and the Bridge Lender will only draw
against the LCs to the extent that we default under the Bridge Loan or
if we have not repaid the Bridge Loan in full by March 1, 2009. In the
event the Bridge Lender draws against the LCs, the amounts drawn will
be in proportion to Bunge's and ICM's respective ownership of the
Company's Units which are not Series A--76% and 24%, respectively. As
we repay the principal of the Bridge Loan, the LCs' stated amounts
will automatically be reduced in the same proportion.
• We entered into a Series C Unit Issuance Agreement with ICM (the
"Series C Agreement") and a Series E Unit Issuance Agreement with
Bunge (the "Series E Agreement", together with the Series C Agreement,
the "Unit Issuance Agreements") in connection with their respective
issuances of the LCs. Under the Unit Issuance Agreements, we agreed to
pay Bunge and ICM each a fee for the issuances of their respective LCs
equal to 6% per annum of the undrawn face amount of their respective
LCs. The Unit Issuance Agreements provide that we will use our best
efforts to raise funds through a subsequent private placement offering
of Units (the "Private Placement"), or such other form of equity or
debt financing as our Board of Directors may deem necessary, in an
amount sufficient to pay off the Bridge Loan in full prior to
maturity. Although we anticipate that funds obtained from the Private
Placement or such other equity or debt financing will enable us to pay
off the Bridge Loan in full prior to maturity, in the event that the
LCs are drawn upon as discussed above or if Bunge or ICM make any
payment to the Bridge Lender that reduces amounts owed by us under the
Bridge Loan (each, a "Bridge Loan Payment"), the Unit Issuance
Agreements provide that we will immediately reimburse Bunge and/or
ICM, as applicable, for the amount of such Bridge Loan Payment by
issuing Units to Bunge and ICM, as further described below.
14
• Under the Series C Agreement, if ICM makes a Bridge Loan Payment, we
will immediately issue Series C Units to ICM based on a Unit price
that is equal to the lesser of $3,000 or one half (1/2) of the lowest
purchase price paid by any party for a Unit who acquired (or who has
entered into any agreement, instrument or document to acquire) such
Unit as part of the Private Placement after the date of the Series C
Agreement but prior to the date of any Bridge Loan Payment made by
ICM. The Series C Agreement further provides that ICM will have the
right to purchase its pro rata share of any Units issued by us at any
time after the date of the Series C Agreement.
• Under the Series E Agreement, if Bunge makes a Bridge Loan Payment, we
will immediately issue Series E Units to Bunge based on a Unit price
that is equal to the lesser of $3,000 or one half (1/2) of the lowest
purchase price paid by any party for a Unit who acquired (or who has
entered into any agreement, instrument or document to acquire) such
Unit as part of the Private Placement after the date of the Series E
Agreement but prior to the date of any Bridge Loan Payment made by
Bunge. The Series E Agreement further provides that Bunge will have
the right to purchase its pro rata share of any Units issued by us at
any time after the date of the Series E Agreement.
We have retained an investment banking firm to assist us in obtaining the
additional equity to replace the Bridge Loan. While the Bridge Loan is not due
until March 1, 2009, our goal is to raise sufficient equity to replace the
Bridge Loan as soon as possible. Initially, we are seeking one or more
institutional investors to provide the additional equity. The Board may also
determine to make an offering to existing Members and other investors to
compliment the additional institutional equity.
Results of Operations
For the three and nine-month period ended June 30, 2008, we incurred a net
loss of approximately ($1,295,000) and ($2,442,000), respectively. For the three
and nine-month period ended June 30, 2007, we had a net loss of approximately
($675,000) and net income of $664,000, respectively. We have incurred an
accumulated net loss of approximately ($2,141,000) for the period March 28, 2005
(date of inception) through June 30, 2008. These losses were incurred for
general and administrative expenses relating to organization and development as
we continue to construct our plant. Net income resulted from interest income on
the equity financing before full construction of the plant was underway.
Liquidity and Capital Resources
We intend to rely on our current equity and available debt to fund
completion of the project, cover start-up costs and purchase inventory prior to
our operational date. We will seek to issue equity to replace the Bridge Loan,
as described above. Under the terms of the amended Credit Agreement, our Lenders
have agreed to fund the facility and we have drawn on the Construction Loan.
Once operational, we anticipate that cash flow from operations will allow us to
operate at a profit and will provide the necessary cash to make our principal
debt and interest payments. However, to the extent we are not able to access
additional working capital, our ability to adequately hedge against market risks
will be restricted. Market trends and governmental regulations could have a
significant impact on our ability to remain profitable and provide enough cash
flow to make our debt and interest payments. As of June 30, 2008 we have drawn
approximately $38,621,000 under the Credit Agreement and approximately
$34,473,000 of principal and interest under the Bridge Loan.
The current tightening of the credit markets and the current market
conditions for both corn and ethanol could materially impede our ability to
obtain additional funding if we need to raise additional equity or borrow
additional funds to make improvements to the Facility.
We expect our future cost of goods sold will consist primarily of costs
relating to the corn supply necessary to produce ethanol and Distillers Grains
for sale. Corn prices have increased sharply since August 2006 and we expect
corn prices to remain at historical high price levels well into 2008. Although
we do not expect to begin operations until December, 2008, we expect that the
demand for corn will continue to not only increase prices, but also cause
continuing volatility on those prices, which may significantly impact our cost
of goods sold.
15
Once operational, we will be dependent on our supply of corn to produce
ethanol and its co-products at our Facility. We expect the price of corn to
remain above historical price levels and we will have to compete with other
ethanol plants for our corn origination. Generally, higher corn prices will
produce lower profit margins. Grain prices are primarily dependent on world
feedstuffs supply and demand and on U.S. and global corn crop production, which
can be volatile as a result of a number of factors, the most important of which
are weather, current and anticipated stocks and prices, export prices and
supports and the government's current and anticipated agricultural policy.
The price at which we will purchase corn will depend on prevailing market
prices. A shortage may develop, particularly if there are other ethanol plants
competing for corn, an extended drought or other production problems. Historical
grain pricing information indicates that the price of grain has fluctuated
significantly in the past and may fluctuate significantly in the future. Because
the market price of ethanol is not related to grain prices, ethanol producers
are generally not able to compensate for increases in the cost of grain
feedstock through adjustments in prices charged for their ethanol. We,
therefore, anticipate that our plant's profitability will be negatively impacted
during periods of high corn prices.
There has been an increase in the number of claims against the use of
ethanol as an alternative energy source. Many of such claims have drawn a link
between recently increasing global food prices and the use of corn to produce
ethanol. Others claim that the production of ethanol requires too much energy.
Such claims have led some, including members of Congress, to urge the
modification of current government policies which affect the production and sale
of ethanol in the United States, such as the Volumetric Ethanol Excise Tax
Credit, the Renewable Fuels Standard ("RFS") and the Energy Independence and
Security Act of 2007. Similarly, several states which currently have laws which
affect the production and sale of ethanol, such as mandated usage of ethanol,
have proposed to modify or eliminate such mandates. The governor of the state of
Texas recently submitted a petition to the United States Environmental
Protection Agency ("EPA") requesting a waiver of 50 percent of the nationwide
RFS mandate for the production of ethanol derived from grain, citing adverse
economic impact due to higher corn prices in Texas. The administrator of the EPA
can waive the RFS if the RFS would severely harm the economy or environment of a
state, region or the United States or if there is an inadequate supply of
renewable fuel. While the EPA has denied Texas' request, i the EPA grants any
other waiver of the RFS with respect to ethanol derived from grain, it could
have a material adverse effect on our financial performance once operational. To
the extent that state or federal laws are modified, the demand for ethanol may
be reduced, which could negatively and materially affect our ability to operate
profitably once we commence operations.
Cash (used in) / provided by operations for the nine-month period ended
June 30, 2008 and June 30, 2007, and from March 28, 2005 (date of inception)
through June 30, 2008, was ($1,860,658), $464,224 and ($1,543,140),
respectively. Cash has been used primarily for pre-operational and
administrative expenses. For the nine month period ended June 30, 2008 and June
30, 2007, and from March 28, 2005 (date of inception) through June 30, 2008, net
cash used in investing activities was ($69,654,333), ($67,823,215) and
($143,373,759) respectively, primarily related to the construction of our plant.
For the nine month period ended June 30, 2008 and June 30, 2007, and from
March 28, 2005 (date of inception) through June 30, 2008, cash provided from
financing activities was $70,635,751, $68,899,892 and $145,780,599,
respectively. This cash was generated through our equity financing of
$75,654,000, the Bridge Loan of $34,100,000 and $38,621,000 from our
construction loan.
Sources of Funds
The total project cost to construct our Facility and commence operations is
currently estimated to be approximately $225,000,000, assuming no unknown
material changes are required. To date, we have planned to finance the
construction of the Facility with a combination of equity and debt capital. We
initially raised equity from our seed capital investors and completed a
secondary private offering in March 2006. We intend to draw on our debt
financing under the terms of the Credit Agreement, as amended, and the Bridge
Loan. We have also received grant income from the United States Department of
Agriculture ("USDA") and a loan from the IDED. The following schedule sets forth
the sources of funds from our equity offering proceeds and our debt financing
proceeds and grants:
16
Source of Funds Amount Percent of Total
Equity:
Member Equity (Seed Capital Offerings) $ 1,650,000 0.74%
Member Equity (Secondary Offering) $ 74,004,000 32.94%
Other:
Interest, Grant and Other Income $ 3,881,389 1.72%
Total Equity and Other $ 79,535,389 35.40%
Debt:
Term Debt $ 111,000,000 49.40%
Bridge Loan $ 34,100,000 15.20%
Total Debt $ 145,100,000 64.60%
- -------------------------------------------------------------------------------------------------
Total $ 224,635,389 100%
Other Income
In addition to our equity financing, the Credit Agreement and the Bridge
Loan, we have earned approximately $3,372,000 of interest income, and rental and
grant income of approximately $381,000, through June 30, 2008.
Debt Financing
In May 2007, we closed on our debt financing with AgStar as agent for the
Lenders. Our debt financing is principally governed by the Credit Agreement with
the Lenders, along with other agreements, which were amended March 7, 2008 in
connection with the Bridge Loan. The Credit Agreement provides for a
$111,000,000 construction loan which is convertible into a term loan (the
"Construction Loan"), at a variable interest rate of LIBOR (the London Interbank
Offered Rate) plus 3.65%. The Credit Agreement requires that we make monthly
principal payments commencing seven months following the date the Construction
Loan converts to a term loan (60 days after completion of construction of the
Facility) (the "Conversion Date"). On the Conversion Date, the Credit Agreement
provides that the Construction Loan will be converted into a term loan of up to
$101,000,000 (the "Term Loan") and a term revolving loan of up to $10,000,000
(the "Term Revolver"); and up to 50% of the outstanding Construction Loan can be
converted to a fixed rate term loan ("Fixed Rate Loan"). In addition, the Credit
Agreement provides for a revolving line of credit of approximately $15,000,000
(the "Revolving Line of Credit"). The Revolver provides for a variable interest
rate of LIBOR plus 3.45%. Finally, the Credit Facility provides for a loan up to
$1,000,000 on a revolving basis (the "Swingline Revolver"). Under the Credit
Agreement, we are to provide no less than 40% of the cost of construction.
In addition to all other payments due under the Credit Agreement, we also
agreed to pay, beginning at the end of the third fiscal quarter after the
Conversion Date, the amount equal to 65% of our Excess Cash Flow (as defined in
the Credit Agreement), up to a total of $4,000,000 per year, and $16,000,000
over the term of the Credit Agreement. Such payment will be applied to the
outstanding principal of the Term Loan (once funded), and will not be subject to
the prepayment fee. The prepayment fee is due if the Construction Loan or Term
Loan is paid in full within 24 months after the Conversion Date. We also agreed
to pay to each Lender, annually, a letter of credit fee equal to 150 basis
points of each Lender's maximum amount available to us under its letter of
credit. We will pay a commitment fee of 35 basis points per year of the unused
portion of each Lender's Revolving Commitment, as defined in the Credit
Agreement, and payable in arrears in quarterly installments. The repayment of
any loan will be made to the Lenders pro rata based on each Lender's
contribution to the total outstanding principal of that loan.
Governmental Programs
• IDED: We entered into a Master Contract (the "IDED Contract") with the
IDED, effective November 21, 2006 and amended June 5, 2008, which provides for
financial assistance from IDED. The awards granted under the IDED Contract can
be reduced or terminated if there is a change in the IDED revenues appropriated
to us under the Master Contract or for any other reason beyond IDED's control.
All amounts of financing received from IDED will be spent on the construction of
our Facility. As part of the Master Contract, we granted to IDED a second
position
17
security interest in all of our assets, and a first position security interest
in our rolling stock valued at $200,000. We covenant to (i) maintain our
business and Facility in Iowa, (ii) create certain numbers of jobs, based on the
job category (the "Job Requirement"), (iii) provide certain benefits, (iv)
complete the Facility and comply with performance requirements regarding its
completion, (v) maintain our properties in a condition of good repair, (vi) pay
all taxes, assessments and fees, and (vii) insure our risks as any person
similarly situated would. We agree to provide reports including a mid-year
status report, an end-of-year status report, an end of project report, and an
end of job maintenance period report. Additionally, we agreed to not be a party
to any merger or consolidation, we agree to not sell, transfer, or lease any
property covered by a security interest, and we agreed to not form or acquire
any subsidiaries or transfer any assets pledged as security to any subsidiary.
The Master Contract contains standard events of default, and in addition
declares an event of default when we are subject to any judgment in excess of
$100,000, in the aggregate.
The IDED Contract contains a VAAPFAP Funding Agreement ("VA Funding
Agreement"), which provides us with an interest-free loan of $100,000, payable
over 60 months, and a $100,000 forgivable loan, payable over 36 months. The
forgivable loan is only due if IDED determines that we failed to comply with the
terms of the VA Funding Agreement and the IDED Contract. In addition to the
requirements for funding under the IDED Contract, we must also provide evidence
that we have access to steam energy from MidAmerica Energy's plant to replace
natural gas before we will receive funds under the VA Funding Agreement. In the
event we fail to meet our Job Requirement, IDED can either require full
repayment of the loan or repayment on a pro rata basis. If we fail to meet our
Job Requirement, the forgivable loan will be forgiven on a pro rata basis, with
the remaining balance being amortized over a two year period and carrying a 6%
interest rate, due from the first day of disbursement of the shortfall amount.
We have signed two promissory notes, each for $100,000, covering the loans
provided for under the VA Funding Agreement. The VA Funding Agreement terminates
upon (i) IDED determining we have fully met all of the requirements of the VA
Funding Agreement, including repayment, (ii) an event of default, (iii) lack of
any distribution under the VA Funding Agreement within 24 months of the award
date, or (iv) mutual agreement.
The IDED Contract also contains a High Quality Job Creation Program Funding
Agreement ("HQJCP Funding Agreement"). Under the HQJCP Funding Agreement, we are
allowed to claim an investment tax credit ("Tax Credit") of up to 5% (with a
maximum of $6,922,308) of our qualifying expenses directly related to new jobs
created by the start-up, location, expansion, or modernization of our Facility,
we are eligible for a refund of sales, service, and use taxes we pay to
contractors or subcontractors, and we are eligible for a value-added tax
exemption. Under the HQJCP Funding Agreement, we must create 45 new high quality
jobs. These new jobs must be created within five years of Facility completion
and must be maintained for at least two years thereafter. We also agree to make
a qualifying investment of $141,331,160 toward the purchase and construction of
our Facility. Additionally, we must (i) offer our new employees a pension or
profit sharing plan, (ii) create a high value-added good or service in
"Value-Added Agriculture" (one of Iowa's target industries), (iii) provide
employees 90% of the cost of medical and dental insurance, and (iv) have active
productivity and safety programs. If we fail to create the number of required
jobs, then we will be required to repay these tax benefits pro rata to the
percent of jobs we failed to create over the number of jobs we are required to
create. If we fail to meet the four requirements above for two years in a row,
then we forfeit all tax benefits we receive under the HQJCP Funding Agreement.
If we sell or dispose of any building, land, or structure that has received tax
incentives under this program, then our tax liability will be increased as
outlined in the HQJCP Funding Agreement. In the event we layoff employees or
close our Facility prior to receiving any tax benefits, the benefits may be
reduced or terminated by IDED. The HQJCP Funding Agreement terminates upon (i)
IDED determining we have fully met all of the requirements of the HQJCP Funding
Agreement, including repayment, (ii) an event of default, (iii) lack of any
distribution under the HQJCP Funding Agreement within 24 months of the award
date, or (iv) mutual agreement.
• USDA: We have entered into a Value-Added Agricultural Product Market
Development (VAPG) Grant Agreement ("Grant Agreement") with the United States of
America, dated November 3, 2006, under which we receive a grant of up to
$300,000 for payment of (i) administrative staff salaries during construction
and start-up, (ii) the rental of temporary office space, and (iii) permanent
staff salaries for three months. As a condition to receiving the grant, we
agreed to contribute at least $300,000 of our own money to be spent at an equal
or greater rate than the Grant Agreement funds. We also agree to maintain a
financial management system and receive payment in accordance with federal
regulations. Additionally, we agreed to comply with certain bonding coverage,
audit and reporting obligations. Finally, we agreed to comply with federal
regulations concerning property, procurement and records access.
18
Uses of Funds
The following table describes the estimated use of our offering and debt
financing proceeds. The figures are estimates only, and the actual uses of
proceeds may vary significantly from the descriptions given below.
Estimated Uses of Funds Amount Percent of Total
Plant Construction $ 118,000,000 52.5 %
Other Construction $ 66,900,394 29.8 %
Land and Site Development $ 10,778,614 4.8 %
Site Utilities, Fire Protection and Water Supply $ 3,893,788 1.7 %
Rolling Stock $ 2,000,000 0.9 %
Administration Building, Computer Systems and Furnishings $ 1,040,000 0.5 %
Rail line $ 12,984,509 5.8 %
Construction Insurance $ 400,000 0.2 %
Equity and Debt Financing Expenses+ $ 1,414,000 0.6 %
Organizational $ 5,424,414 2.4 %
Start-Up $ 1,799,670 0.8 %
- --------------------------------------------------------------------------------------------------------
Total $ 224,635,389 100 %
+ Does not include additional expenses we may incur to raise additional equity
as discussed elsewhere in this report.
The ICM Contract provides for a fixed fee of $118,000,000 to build the
primary portions of our Facility. In April 2008, we executed six change orders
under the ICM Contract in the amount of $29,247,000. These change orders change
were for items outside of the scope of the ICM Contract and therefore were time
and material based items instead of fixed price. Through June 30, 2008, we have
paid ICM $107,384,000 for construction services under the ICM Contract, leaving
$39,863,000 of future commitment, which we expect to pay in 2008. The Standard
Form of Design-Build Agreement and General Conditions Between Owner and
Contractor dated as of December 18, 2006 between us and Todd & Sargent, Inc.
(the "TS Contract") provides for a fee, subject to change orders, of $9,661,000
to design and construct a 1,000,000 bushel grain receiving and storage facility
and Distillers Grain storage facility. As of June 30, 2008, the work provided
for under the TS Contract has been substantially completed. Through June 30,
2008, we have paid TS $9,561,000, leaving a balance of $100,000 in future
commitments. Additionally, we have agreed to pay $6,082,000 for excavation
services. Through June 30, 2008, we have paid $6,045,000 under the excavation
contract, leaving $37,000 of future commitment.
Application of Critical Accounting Estimates
Management uses estimates and assumptions in preparing our financial
statements in accordance with accounting principles generally accepted in the
United States. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. We do not believe that any of the
significant accounting policies described in the notes to the financial
statements is critical at this time; however we expect to continue to review our
accounting policies as we commence operation of our ethanol plant in order to
determine if any of these accounting policies are critical.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future material effect on our
consolidated financial condition, results of operations or liquidity.
Recent Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board issued SFAS No.
161, "Disclosures about Derivative Instruments and Hedging Activities." The new
standard is intended to improve financial reporting about derivative
19
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity's financial position,
financial performance, and cash flows. SFAS No. 161 achieves these improvements
by requiring disclosure of the fair values of derivative instruments and their
gains and losses in a tabular format. It also provides more information about an
entity's liquidity by requiring disclosure of derivative features that are
credit risk related. Finally, it requires cross-referencing within footnotes to
enable financial statement users to locate important information about
derivative instruments. SFAS No. 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. We are currently evaluating the impact that
this statement will have on our financial statements.
Item 4T. Controls and Procedures.
Our management, including our President and Chief Executive Officer (our
principal executive officer), Mark Drake, along with our Chief Financial Officer
(our principal financial officer), Cindy Patterson, have reviewed and evaluated
the effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15 under the under the Securities Exchange Act of 1934, as amended), as of
June 30, 2008. Based upon this review and evaluation, these officers believe
that our disclosure controls and procedures are presently effective in ensuring
that material information related to us is recorded, processed, summarized and
reported within the time periods required by the forms and rules of the
Securities and Exchange Commission.
Our management, including our principal executive officer and our principal
financial officer, have reviewed and evaluated any changes in our internal
control over financial reporting that occurred as of June 30, 2008 and there has
been no change that has materially affected or is reasonably likely to
materially affect our internal control over financial reporting.
PART II
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
Not Applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
We held our annual Members' meeting on April 3, 2008, at which director Ted
Bauer was re-elected. The terms of directors Hubert Houser, Karol King, Michael
Guttau, Bailey Ragan, Michael Scharf and Greg Krissek continued after the
meeting. At the meeting, Mr. Bauer received 2,825 votes for re-election, 166
votes against/withheld, and there were no abstentions.
Item 5. Other Information.
None.
Item 6. Exhibits.
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3(i) Articles of Organization, as filed with the Iowa Secretary of State on
March 28, 2005 (incorporated by reference to Exhibit 3(i) of
Registration Statement on Form 10 filed by Registrant on January 28,
2008).
3(ii) Second Amended and Restated Operating Agreement dated March 7, 2008
(incorporated by reference to Exhibit 4(i) of Amendment No. 1 to
Registration Statement on Form 10 filed by Registrant on March 21,
2008).
31.1 Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002) executed by the Principal Executive
Officer.
31.2 Rule 15d-14(a) Certification (pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002) executed by the Principal Financial
Officer.
32.1 Rule 15d-14(b) Certifications (pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002) executed by the Principal Executive
Officer.
32.2 Rule 15d-14(b) Certifications (pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002) executed by the Principal Financial
Officer.
21
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Date: August 14, 2008 /s/ Mark Drake
---------------------------------------
Mark Drake, President and
Chief Executive Officer
Date: August 14, 2008 /s/ Cindy Patterson
---------------------------------------
Chief Financial Officer
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