UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
10868 189th Street, Council Bluffs, Iowa 51503
---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (712) 366-0392
Securities registered under Section 12(b) of the Exchange Act: None.
Title of each class Name of each exchange on which registered
Securities registered under Section 12(g) of the Exchange Act:
Series A Membership Units
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No |X|
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the 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 |X| No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 December 15, 2008, the aggregate market value of the Membership Units held
by non-affiliates (computed by reference to the most recent offering price of
such Membership Units) was $52,134,000.
As of September 30, 2008, the Company had 8,805 Series A, 3,334 Series B and
1,000 Series C Membership Units outstanding.
DOCUMENTS INCORPORATED BY REFERENCE--None
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TABLE OF CONTENTS
PART I
Item Number Item Matter Page Number
Item 1. Business. 1
Item 1A. Risk Factors. 15
Item 2. Properties. 30
Item 3. Legal Proceedings. 30
Item 4. Submission of Matters to a Vote of Security Holders. 31
PART II
Item 5. Market for Registrant's Common Equity, Related Member 31
Matters, and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data. 32
Item 7. Management's Discussion and Analysis of Financial Condition 32
and Results of Operation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 40
Item 8. Financial Statements and Supplementary Data. 40
Item 9. Changes in and Disagreements With Accountants on Accounting 54
and Financial Disclosure.
Item 9A(T). Controls and Procedures. 54
Item 9B. Other Information. 55
PART III
Item 10. Directors, Executive Officers and Corporate Governance. 55
Item 11. Executive Compensation. 57
Item 12. Security Ownership of Certain Beneficial Owners and 59
Management and Related Member Matters.
Item 13. Certain Relationships and Related Transactions, and Director 60
Independence.
Item 14. Principal Accountant Fees and Services. 63
PART IV
Item 15. Exhibits and Financial Statement Schedules. 64
Signatures
Item 1. Business.
Southwest Iowa Renewable Energy, LLC (the "Company," "we" or "us") is 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, Inc. ("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 soluble ("WDGS," together with DDGS, "Distillers Grains"). The fuel
grade ethanol will be sold in limited markets throughout the United States and
Distillers Grains sold in surrounding communities in southwestern Iowa and
southeastern Nebraska.
Our Facility is located in Pottawattamie County in southwestern Iowa. It is
near two major interstate highways, within a half a mile of the Missouri River
and will have access to five major rail carriers. This location is in close
proximity to raw materials and product market access. The Facility will receive
corn and chemical deliveries primarily by truck but will be able to utilize rail
delivery if necessary. The site has access to water from ground wells and from
the Missouri river. In addition to close proximity to the Facility's primary
energy source, steam, there are two natural gas providers available, both with
infrastructure immediately accessible.
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--and on May 2, 2007, we entered into a $126,000,000 credit
facility (as amended, the "Credit Agreement") with AgStar Financial Services,
PCA ("Agent"), as agent for a syndicate group of lenders ("Lenders"). As
discussed in more detail below under Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operation - Overview, Status and
Recent Developments, 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"), in order to resolve a construction budget shortfall of
$34,000,000.
Information respecting our losses, assets, and other financial information
is contained below under Item 8 - Financial Statements and Supplementary Data.
Primary Contractors
We have entered into contracts with various contractors to construct the
Facility, though our primary contractors are ICM, Todd & Sargent, Inc. ("T&S"),
and HGM Associates, Inc. ("HGM"). Below are summaries of the contracts we have
with these three parties.
On September 25, 2006, we entered into an Agreement Between Owner and
Design/Builder on the Basis of Stipulated Price with ICM (the "ICM Contract"),
which provides that ICM will design and construct a dry mill fuel-grade ethanol
plant, capable of producing 110 million gallons of denatured fuel-grade ethanol
per year and 338,000 tons of DDGS. For such services we will pay ICM
approximately $118,000,000, but the total cost of work may increase based upon
changes in the work to be performed. On January 11, 2008, ICM notified us that
due to our funding issues, additional time will be required to complete the work
under the ICM Contract. We expect the construction of the Facility to be
substantially completed in December 2008. In addition to designing and building
the Facility, ICM will provide training to our employees to operate the Facility
through a six week training course.
Under the ICM Contract, ICM has the right to stop work, upon seven days
written notice to us, if we do not pay ICM amounts coming due that we have
certified for payment; provided, however, ICM may not stop work if there is a
good faith dispute regarding the amount of payment due. ICM has the right to
terminate the ICM Contract on seven days written notice if (i) the work is
suspended, without fault on the part of ICM, by us or by order of the court or
other public authority for a period of more than 90 days, or (ii) we fail to pay
ICM undisputed amounts within 30 days of receiving an application for payment.
We may suspend ICM's performance at any time and without cause for up to 90 days
by providing written notice to ICM and the date on which performance is to
resume. In addition, we may terminate the ICM Contract for cause for any of the
following reasons: (w) ICM fails to perform its work in accordance with the
agreement, (x) ICM intentionally or willfully disregards any law or regulation,
(y)
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ICM materially breaches any provision of the agreement, or (z) ICM becomes
financially insolvent, files for a voluntary petition of bankruptcy, or an
involuntary petition of bankruptcy is filed and not dismissed within 180 days of
such filing.
On December 18, 2006, we entered into a Standard Form of Design-Build
Agreement and General Conditions Between Owner and Contractor with T&S (the "T&S
Contract"), under which T&S agreed to provide us with the design and
construction of a 1,000,000 bushel grain receiving and storage facility and
Distillers Grain storage facility. The work provided for under the T&S Contract
was completed by September 2008. We agreed to pay T&S $9,661,000, subject to any
change orders, and as of September 30, 2008, we have paid T&S $9,562,000 under
the T&S Contract. The T&S Contract can be terminated by T&S if (i) the work has
stopped for 90 day period due to a court order, a national emergency or other
government act which results in a lack of available materials, (ii) work
stopping for at least 90 days as a result of us suspending the work or our
failure to pay (work can be stopped 30 days after our failure to pay), (iii) our
material delay of T&S's performance, (iv) our material breach of the T&S
Contract, or (v) our failure to furnish reasonable evidence that we will be able
to pay the costs of the project as they come due. We can terminate the T&S
Contract if T&S breaches the agreement in specified ways. If we terminate the
T&S Contract after commencement of construction, we agreed to pay an additional
5% of the remaining balance of the contract price.
On November 27, 2006, we entered into an Engineering Services Agreement
with HGM (the "HGM Contract"). Under the HGM Contract, HGM agreed to provide us
with professional design services for the development, design, and construction
of our Facility. Such services include geotechnical coordination, site grading,
utilities (including wells and water mains, natural gas, sanitary sewer, process
sewer outfall, and fire loop), substation coordination, a landscape plan,
construction staking, construction administration, a resident project
representative, compaction and material testing coordination, record drawings,
and site coordination.
We agreed to pay HGM either hourly rates or fixed prices, depending on the
services. The fixed prices total $93,200 for plant site grading revisions, the
plant road design, the water well and raw water main, the outfall sewer, the
sanitary sewer/collection/lift station, the potable water system the fire main,
the landscape plan, and natural gas. Hourly fees will be paid for geotechnical
coordination, construction staking and construction administration; in addition,
hourly fees will be paid for (i) any additional services added at a later date
and (ii) any revisions made by us requiring HGM to change any plan or
specifications. The hourly fees range from $35 to $280 per hour. There is no
estimated total cost for any hourly services. In addition to these fees, we
agreed to reimburse HGM for direct non-salary expenses including travel
expenses, reproduction costs and computer plots, postage, express mail, courier
services and handling of drawings, renderings, artwork, models, photography, and
other deliverables. The estimated cost of such reimbursable expense is $1,300,
but the actual amount may exceed such estimate.
Either party may terminate the HGM Contract for cause upon at least 14 days
notice. Termination for cause includes violation of the covenants, agreements
and stipulations of the HGM Contract and nonpayment by us. In lieu of
termination due to our nonpayment, HGM may elect to suspend its services. If HGM
elects to suspend its services due to nonpayment, HGM has no liability for any
delay or damage caused. In addition to termination for cause, we may terminate
the HGM Contract for any reason with at least 30 days notice to HGM.
Status of Plant Construction
With the proceeds of our two equity offerings, we began construction of our
Facility in February of 2007. Construction is nearing completion and our
Facility is anticipated to be operational early in the second quarter of fiscal
2009. Further detail is provided in Item 7 -- Management's Discussion of
Financial Condition and Results of Operation -- Construction Status.
Plan of Operation for Fiscal Year 2009
Generally
During the second quarter of our fiscal 2009, we plan to continue working
toward achieving nameplate production for the Facility, and to raise additional
capital through one or more equity financings, as further
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discussed elsewhere in this report. We do not presently, nor intend to in the
future, conduct any research or development activities.
Employees
The Company had 14 full time employees as of September 30, 2008. In October
2008 we were fully staffed with 52 employees in anticipation of the commencement
of our operations. We are not subject to any collective bargaining agreements
and we have not experienced any work stoppages. Our management considers the
Company's employee relationships to be favorable.
Rail Access
A six mile loop railroad track for rail service to our Facility comes off
the Council Bluffs Energy Center line where interstate I-29 crosses and proceeds
south along the east side of Pony Creek. We have obtained easements with the
property owners along this route to permit our intended access. The track
terminates in a loop-track south of the Facility, which will accommodate 100 car
unit trains. On June 18, 2008, we executed an Industrial Track Agreement with
CBEC Railway, Inc. (the "Track Agreement"), which governs our use of the loop
railroad and requires, among other things, that we maintain the loop track.
On June 25, 2007, we entered into a Railcar Sublease Agreement ("Railcar
Agreement") with Bunge for the sub-lease of 320 ethanol cars and 300 DDGS cars
which will be used in the delivery and marketing of ethanol and DDGS. We will be
responsible for all maintenance and mileage charges as well as the monthly lease
expense and certain railcar modification expenses. Under the Railcar Agreement,
we will lease railcars for terms lasting 120 months and continuing on a
month-to-month basis thereafter. The Railcar Agreement will terminate upon the
expiration of all railcar leases.
Principal Products
Ethanol
Ethanol is a chemical produced by the fermentation of sugars found in
grains and other biomass. Ethanol can be produced from a number of different
types of grains, such as wheat and sorghum, as well as from agricultural waste
products such as sugar, rice hulls, cheese whey, potato waste, brewery and
beverage wastes and forestry and paper wastes. However, according to the
Renewable Fuels Association ("RFA") website (www.Ethanolrfa.org) approximately
90% of ethanol in the United States today is produced from corn because corn
produces large quantities of carbohydrates, which convert into glucose more
easily than other kinds of biomass.
Ethanol has been used in motor fuels in the United States for the last
century, but for all practical purposes had not been used commercially until
1978. At that time a deliberate public policy objective to create a fuel-grade
ethanol industry was established by Congress when it created an excise tax
exemption in order to encourage the production of ethanol from renewable
resources. According to the RFA website (www. ethanolrfa.org), the industry has
grown from virtually zero production at that time to a current annual production
level of approximately 10.7 billion gallons, with approximately another 2.9
billion gallons currently expected to come on line by 2009.
We entered into an Ethanol Merchandising Agreement ("Lansing Agreement")
with Lansing Ethanol Services, LLC ("Lansing"), under which we agree to sell to
and Lansing agrees to buy all ethanol produced at our Facility for the first six
months of our operations. Contract terms for the sale of ethanol will be
specified in sale contracts. Pricing for the ethanol will be set by our Risk
Management Committee. Under the Lansing Agreement, we assume all responsibility
for market price fluctuations of ethanol, but once a price is fixed in a sales
contract, that price controls. If we are made an offer to sell ethanol at a
price greater than Lansing pays, Lansing has the option of paying that amount or
allowing us to sell to the other offeror. For its services, we agreed to pay
Lansing a per-gallon fee for ethanol delivered under the Lansing Agreement. We
also agreed to allow Lansing to store up to 2.8 million gallons of ethanol at
the Facility at any time at no cost to Lansing. We intend to exercise our
contractual right under our agreement with Lansing to terminate this agreement
six months after our ethanol production begins. After the first six months of
our operations, Bunge will be the exclusive purchaser of our ethanol pursuant to
an Ethanol Purchase Agreement dated December 15, 2008 (the "Ethanol Agreement").
Bunge will market our ethanol
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in national, regional and local markets. Under the Ethanol Agreement, the
Company has agreed to sell Bunge all of the ethanol produced at the Facility,
and Bunge has agreed to purchase the same, up to the Facility's nameplate
capacity of 110,000,000 gallons a year. We will pay Bunge a per-gallon fee for
ethanol sold by Bunge under the Ethanol Agreement, subject to a minimum annual
fee of $750,000 and adjustments according to specified indexes after three
years. The initial term of the Ethanol Agreement, which will commence upon the
termination of the Lansing Agreement, is three years and it will automatically
renew for successive three-year terms unless one party provides the other notice
of their election to terminate 180 days prior to the end of the term.
Distillers Grains
The chief co-product of the ethanol production process is Distillers
Grains, which are the residues that remain after high quality cereal grains have
been fermented by yeast. In the fermentation process, the remaining nutrients
undergo a three-fold concentration to yield wet distillers grains to which is
added evaporator syrup to create wet distillers grains with solubles, or WDGS.
WDGS is a highly digestible feed ingredient marketed primarily to the dairy,
beef, sheep, swine and poultry industries. Once operational, we intend to
annually dry 300,000 tons of our WDGS to become distillers dried grains with
solubles, or DDGS, which has a longer shelf life (three summer days, five winter
days) than WDGS and can better withstand transportation over greater distances.
We plan to annually market 50,000 tons of our Distillers Grains as WDGS.
We entered into a Distiller's Grain Purchase Agreement dated October 13,
2006 ("DG Agreement") with Bunge, under which Bunge is obligated to purchase
from us and we are obligated to sell to Bunge all Distillers Grains produced at
our Facility. If we find another purchaser for Distillers Grains offering a
better price for the same grade, quality, quantity, and delivery period, we can
ask Bunge to either market directly to the other purchaser or market to another
purchaser on the same terms and pricing.
The initial term of the DG Agreement began July 15, 2008 or a different
date if agreed upon in writing by both parties, and lasts for ten years. The DG
Agreement will automatically renew for additional three year terms unless one
party provides the other party with notice of election to not renew 180 days or
more prior to expiration. Under the DG Agreement, Bunge will pay us a Purchase
Price equal to the Sales Price minus the Marketing Fee and Transportation Costs.
The Sales Price is the price received by Bunge in a contract consistent with the
DGS Marketing Policy or the spot price agreed to between Bunge and us. Bunge
receives a Marketing Fee consisting of a percentage of the Net Sales Price,
subject to a minimum yearly payment of $150,000. Net Sales Price is the Sales
Price less the Transportation Costs and Rail Lease Charges. The Transportation
Costs are all freight charges, fuel surcharges, and other accessorial charges
applicable to delivery of Distillers Grains. Rail Lease Charges are the monthly
lease payment for rail cars along with all administrative and tax filing fees
for such leased rail cars.
Description of Dry Mill Process
Our Facility will produce ethanol by processing corn. The corn will be
received by semitrailer truck (or railcar if needed), and will be weighed and
stored in a receiving building. It will then be transported to a scalper to
remove rocks and debris before it is conveyed to storage bins. Thereafter, the
corn will be transported to a hammer mill or grinder where it is ground into a
mash and conveyed into a tank for processing. We will add water, heat and
enzymes to break the ground corn into a fine liquid. This liquid will be heat
sterilized and pumped to a tank where other enzymes are added to convert the
starches into glucose sugars. Next, the liquid is pumped into fermenters, where
yeast is added, to begin a 48 to 50 hour batch fermentation process. A
distillation process will divide the alcohol from the corn mash. The alcohol
which exits the distillation process is then partially dried. The resulting 200
proof alcohol is pumped into storage tanks. Corn mash from the distillation
process is then pumped into one of several centrifuges. Water from the
centrifuges is dried into a thick syrup. The solids that exit the centrifuge or
evaporators are called wet cake and are conveyed to dryers. Corn mash is added
to the wet cake as it enters the dryer, where moisture is removed. This process
produces Distillers Grains.
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Raw Materials
Corn Requirements
Ethanol can be produced from a number of different types of grains and
waste products. However, approximately 90% of ethanol in the United States today
is produced from corn. The cost of corn is affected primarily by supply and
demand factors such as crop production, carryout, exports, government policies
and programs, risk management and weather. Despite strong corn production over
the last three growing seasons, corn prices rose dramatically in our 2008 fiscal
year due in part to additional corn demand from the ethanol industry and
flooding in the Midwest. With the volatility of the commodity markets we cannot
predict the future price of corn with any certainty.
We anticipate that our Facility will need approximately 39.3 million
bushels of corn per year, or approximately 108,000 bushels per day, as the
feedstock for its dry milling process. The grain supply for our plant will be
obtained primarily from local markets. To assist in our securing the necessary
quantities of grain for our plant, we entered into a Grain Feedstock Supply
Agreement dated December 15, 2008 (the "Supply Agreement") with AGRI-Bunge, LLC
("AB"), an entity affiliated with Bunge. Under the Supply Agreement, AB has
agreed to provide us with all of the corn we need to operate our ethanol plant,
and we have agreed to only purchase corn from AB. AB will provide grain
originators who will work at the Facility for purposes of fulfilling its
obligations under the Supply Agreement. The Company will pay AB a per-bushel fee
for corn procured by AB for the Company under the Supply Agreement, subject to a
minimum annual fee of $675,000 and adjustments according to specified indexes
after three years. The term of the Supply Agreement is ten years, subject to
earlier termination upon specified events. The Supply Agreement suspends the
operation of the Agency Agreement entered into by the Company and AB on October
13, 2006, as amended December 15, 2008 (the "Agency Agreement"). Under the
Agency Agreement, we agreed to pay an agency fee to AB for corn delivered,
subject to an annual minimum fee of $225,000, for AB's service of procuring all
grain requirements for our plant. In the event we obtain a grain dealer's
license, then the operation of the Supply Agreement will terminate and the
Agency Agreement will be reinstated.
The price and availability of corn are subject to significant fluctuations
depending upon a number of factors which affect commodity prices in general,
including crop conditions, weather, governmental programs and foreign purchases.
In the ordinary course of business, once we are operational, we anticipate that
we will enter into forward purchase contracts for our commodity purchases.
Energy Requirements
The production of ethanol is a very energy intensive process which uses
significant amounts of electricity and a supply of a heat source. Presently, we
anticipate that about 34,000 BTUs of energy are required to produce a gallon of
ethanol. Additionally, water supply and quality are important considerations.
Steam
Unlike most ethanol producers in the United States which use coal or
natural gas as their primary energy source, our primary energy source will be
steam. We believe that utilizing steam will make us more competitive by
providing us with critical support and services in the areas of risk management,
quality control, experienced commodity trading and experience in the
implementation of the latest technologies. We have entered into an Executed
Steam Service Contract ("Steam Contract") with MidAmerican Energy Company
("MidAm") dated January 22, 2007, as amended on October 3, 2008, under which
MidAm agreed to provide the steam required by us, up to 475,000 pounds per hour.
We agree to pay a Net Energy Rate for all steam service provided under the Steam
Contract and a Monthly Demand charge for Condensate Not Returned. Condensate Not
Returned is the steam delivered to us less the condensation we return to MidAm.
The Net Energy Rate is set for first three years then adjusted each year started
on the third anniversary date. The Steam Contract remains in effect for ten
years from the earlier of the date we commence a continuous grind of corn for
ethanol production, or February 1, 2009.
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Natural Gas
Although steam will be our primary energy source and will account for
around 85% of our energy usage, we will install natural gas back-up boilers for
use when our steam service is temporarily unavailable. Natural gas will also be
needed for incidental purposes. Natural gas prices fluctuate with the energy
complex in general. Recently, natural gas prices have trended lower as a result
of the drop in crude oil prices. We do not expect natural gas prices to remain
steady in the near future and will trend even higher into the winter months of
2008-2009 as seasonal demand for natural gas increases due to heating needs in
the colder weather. We have entered into a natural gas supply agreement with
Constellation Energy for our long term natural gas needs.
Electricity
Our plant will require a large continuous supply of electrical energy. We
plan on purchasing electricity from MidAm under an Electric Service Contract
("Electric Contract") dated December 15, 2006. Under the Electric Contract, we
are allowed to install a standby generator, which would operate in the event
MidAm is unable to provide us with electricity. In the Electric Contract, we
agreed to own and operate a 13 kV switchgear with metering bay, all distribution
transformers, and all 13 kV and low voltage cable on our side of the switchgear.
We agreed to pay (i) a service charge of $200 per meter, (ii) a demand charge of
$3.38 in the Summer and $2.89 in the Winter (iii) a reactive demand charge of
$0.49/kVAR of reactive demand in excess of 50% of billing demand, (iv) an energy
charge ranging from $0.03647 to $0.01837 per kilowatt hour, depending on the
amount of usage and season, (v) tax adjustments, (vi) AEP and energy efficiency
cost recovery adjustments, and (vii) a CNS capital additions tracker. These
rates only apply to the primary voltage electric service provided under the
Electric Contract. The electric service will continue at these prices for up to
60 months, but in any event will terminate on June 30, 2012. The pricing under
the Electric Contract is based on the assumptions that we will have an average
billing demand of 7,300 kilowatts per month and that we will average an 85% load
factor over a 12 month period. If these assumptions are not met, then we will
pay the most applicable tariff rate. Additionally, at any time, we may elect to
be charged under one of MidAm's electric tariffs.
Water
We will require a significant supply of water. Much of the water used in an
ethanol plant is recycled back into the process. There are, however, certain
areas of production where fresh water is needed. Those areas include boiler
makeup water and cooling tower water. Boiler makeup water is treated on-site to
minimize all elements that will harm the boiler and recycled water cannot be
used for this process. Cooling tower water is deemed non-contact water (it does
not come in contact with the mash) and, therefore, can be regenerated back into
the cooling tower process. The makeup water requirements for the cooling tower
are primarily a result of evaporation. Much of the water can be recycled back
into the process, which will minimize the effluent. Our Facility's engineering
specifications provide that our fresh water requirements are approximately
1,000,000 gallons per day. We anticipate that our water requirements will be
supplied through three ground wells which are permitted to produce up to
2,000,000 gallons of water per day. We could also access water from the Missouri
River.
Principal Supply & Demand Factors
Ethanol
Generally
Ethanol prices have come down dramatically during the three months ending
September 30, 2008 as a direct response to falling corn prices. Management
currently expects ethanol prices will continue to be directly related to the
price of corn. Management believes the industry will need to grow both product
delivery infrastructure and demand for ethanol in order to support production
margins in the near and long term. According to the Renewable Fuels Association,
as of October, 2008, there were 176 ethanol plants in operation nationwide with
the capacity to produce nearly 10.7 billion gallons of ethanol annually. An
additional 27 new plants and five company expansions are currently under
construction, which will add an additional estimated 2.9 billion gallons of
annual production capacity. Unless the new supply of ethanol is equally met with
ethanol demand, downward pressure on ethanol prices could continue.
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According to the RFA, ethanol demand has been relatively stable at
approximately 7 billion gallons per year throughout 2008. Ethanol demand
expanded significantly in 2006 due to replacement of MTBE with ethanol as the
oxygenate in reformulated fuel required for carbon monoxide non-attainment areas
in the winter months. This could mean that there may be some slight seasonality
to the demand for ethanol, with increases in demand occurring during the winter
months. However, we believe that most of the increase in ethanol demand due to
MTBE replacement has already occurred. Management believes that it is important
that ethanol blending capabilities of the gasoline market be expanded in order
to increase demand for ethanol. Recently, there has been increased awareness of
the need to expand ethanol distribution and blending infrastructure, which would
allow the ethanol industry to supply ethanol to markets in the United States
that are not currently blending ethanol.
VEETC
The profitability of the ethanol industry is impacted by federal ethanol
supports and tax incentives, such as the Volumetric Ethanol Excise Tax Credit
("VEETC") blending credit. The passage of the VEETC has helped to provide the
flexibility necessary to expand ethanol blending into higher blends of ethanol,
such as E85. The VEETC went into effect on January 1, 2005. Prior to VEETC, the
federal excise tax on 10% ethanol-blended gasoline was 13.2 cents per gallon,
compared to 18.4 cents per gallon on regular gasoline. Under VEETC, the lower
federal excise tax on ethanol-blended gasoline was eliminated. In place of the
lower excise tax, the VEETC created a new volumetric ethanol excise tax credit
of $0.51 per gallon of ethanol. Gasoline distributors apply for this credit.
Based on volume, the VEETC is expected to allow greater refinery flexibility in
blending ethanol since it makes the tax credit available on all ethanol blended
with gasoline, diesel and ethyl tertiary butyl ether, including ethanol in E-85.
Under provisions of the 2008 Farm Bill, the tax exemption will drop to 45 cents
per gallon in 2009. The VEETC is scheduled to expire on December 31, 2010. A
number of bills have been introduced in the Congress to extend ethanol tax
credits, including some bills that would make the ethanol tax credits permanent.
There can be no assurance, however, that such legislation will be enacted.
RFS
The federal legislation which impacts ethanol demand the most are the
Energy Policy Act of 2005 (the "2005 Act") and the Energy Independence and
Security Act of 2007 ("2007 Act"). Most notably, the 2005 Act created the
Renewable Fuels Standard ("RFS"), which was designed to favorably impact the
ethanol industry by enhancing both the production and use of ethanol. 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 2007 Act amended several components of the RFS. The RFS now requires
(i) the fuel refining industry as a whole (including refiners, blenders and
importers) to use 4.5 billion gallons of renewable fuels in 2007, increasing to
15.2 billion gallons by 2012 and 36 billion gallons by 2022; (ii) advanced
biofuel (renewable fuel derived from corn starch other than ethanol and
encompassing cellulosic biofuel and biomass-based diesel), cellulosic biofuel
and biomass-based diesel to be used in addition to conventional biofuel
(ethanol); (iii) for 2008, the use of approximately nine billion gallons of
renewable fuels (only ethanol); (iv) in 2012, the use of 13.2 billion gallons of
ethanol, two billion gallons of advanced biofuel, .5 billion gallons of
cellulosic biofuel, and one billion gallons of biomass-based diesel, for a total
of 15.2 billion gallons of renewable fuel; and (v) by 2036, usage of 15 billion
gallons of ethanol, excluding advanced biofuel.
The 2007 Act also requires facilities beginning operation after its
enactment to operate with at least a 20% reduction in lifecycle greenhouse gas
emissions compared to gasoline. In the event the EPA determines this size of
reduction is not feasible, it may reduce the required reduction, but in no event
will a new plant be allowed to operate at less than a 10% reduction in lifecycle
greenhouse gas emissions. Presently, we are assessing our options to comply with
this requirement. We believe that our use of steam as our primary energy source
will reduce our emissions, as compared to other ethanol plants which utilize
natural gas or coal as their primary heat source.
The ethanol industry has expanded production and is projected to be
significantly higher than the 2007 RFS amount. This means the ethanol industry
must continue to generate demand for ethanol beyond the minimum floor
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set by the RFS in order to support current ethanol prices. We will be dependent
on Lansing's and then Bunge's ability to market the ethanol in this competitive
environment.
State Initiatives
In 2006, Iowa passed legislation promoting the use of renewable fuels in
Iowa. One of the most significant provisions of the Iowa renewable fuels
legislation is a renewable fuels standard encouraging 10% of the gasoline sold
in Iowa to consist of renewable fuels by 2009. This renewable fuels standard
increases incrementally to 25% of the gasoline sold in Iowa by 2019.
Additionally, certain plants located in Nebraska that were in production on June
30, 2004 are eligible for state incentives, which authorize a producer to
receive up to $2.8 million of tax credits per year for up to eight years. While
we cannot qualify for these incentives, they do provide an economic advantage to
some of our competitors.
E85
Demand for ethanol has been affected by the increased consumption of E85
fuel. E85 fuel is a blend of 85% ethanol and 15% gasoline. According to the
Energy Information Administration, E85 consumption is projected to increase from
a national total of 11 million gallons in 2003 to 47 million gallons in 2025.
E85 can be used as an aviation fuel, as reported by the National Corn Growers
Association, and as a hydrogen source for fuel cells. According to the Renewable
Fuels Association, there are currently more than five million flexible fuel
vehicles capable of operating on E85 in the United States and automakers such as
Ford and General Motors have indicated plans to produce several million more
flexible fuel vehicles per year. The National Ethanol Vehicle Coalition reports
that there are currently approximately 1,150 retail gasoline stations supplying
E85. While the number of retail E85 suppliers has increased each year, this
remains a relatively small percentage of the total number of U.S. retail
gasoline stations, which is approximately 170,000. In order for E85 fuel to
increase demand for ethanol, it must be available for consumers to purchase it.
As public awareness of ethanol and E85 increases along with E85's increased
availability, management anticipates some growth in demand for ethanol
associated with increased E85 consumption.
Cellulosic Ethanol
Due to the current high corn prices, discussion of cellulose-based ethanol
has recently increased. Cellulose is the main component of plant cell walls and
is the most common organic compound on earth. Cellulose is found in wood chips,
corn stalks and rice straw, among other common plants. Cellulosic ethanol is
ethanol produced from cellulose, and currently, production of cellulosic ethanol
is in its infancy. It is technology that is as yet unproven on a commercial
scale. However, several companies and researchers have commenced pilot projects
to study the feasibility of commercially producing cellulosic ethanol. If this
technology can be profitably employed on a commercial scale, it could
potentially lead to ethanol that is less expensive to produce than corn-based
ethanol, especially if corn prices remain high. Cellulosic ethanol may also
capture more government subsidies and assistance than corn-based ethanol. This
could decrease demand for our product or result in competitive disadvantages for
our ethanol production process.
Local Production
Because we are located on the border of Iowa and Nebraska, and because
ethanol producers generally compete primarily with local and regional producers,
the ethanol producers located in Iowa and Nebraska presently constitute our
primary competition. According to the Iowa Renewable Fuels Association, in 2008,
Iowa had 31 ethanol refineries in production, producing 2.4 billion gallons of
ethanol from 890 million bushels of corn. There are an additional 13 ethanol
refineries under construction or expansion in Iowa as of October, 2008. If all
these plants are completed, it is anticipated it will add 1.34 billion gallons
of new ethanol production capacity annually in Iowa. We expect more plants will
begin construction, but at a slower pace than previous years. According to the
Nebraska Ethanol Board, there are currently 24 existing ethanol plants in
Nebraska, and three plants under construction. Additionally, certain plants
located in Nebraska that were in production on June 30, 2004 are eligible for
state incentives, which authorize a producer to receive up to $2.8 million of
tax credits per year for up to eight years. Those producers qualifying for this
incentive will have a competitive advantage over us.
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Distillers Grains
Management expects that Distillers Grains prices will continue to decrease
slightly in the foreseeable future as the supply increases (the result of
increased ethanol production) and with the poor state of the economy and lower
corn prices. Management believes DDG's will trade with a 75% to 80% value to
corn.
Regulatory Environment
Governmental Approvals
Ethanol production involves the emission of various airborne pollutants,
including particulate matters, carbon monoxide, oxides of nitrogen, volatile
organic compounds and sulfur dioxide. Ethanol production also requires the use
of significant volumes of water, a portion of which is treated and discharged
into the environment. We are required to obtain various environmental,
construction and operating permits, as discussed below. Under the HGM Contract,
HGM has agreed to take primary responsibility for obtaining some of those
permits. In addition, ICM is responsible for obtaining various construction
permits and registrations. Even though we have successfully acquired the permits
necessary at our stage of construction, any retroactive change in environmental
regulations, either at the federal or state level, could require us to obtain
additional or new permits or spend considerable resources on complying with such
regulations. In addition, although we do not presently intend to do so, if we
sought to expand the Facility's capacity in the future, we would likely be
required to acquire additional regulatory permits and could also be required to
install additional pollution control equipment.
Our failure to obtain and maintain the permits discussed below or other
similar permits which may be required in the future could force us to make
material changes to our Facility or to shut down altogether. The following are
summaries of the various governmental approvals needed to obtain in order to
become operational.
Environmental Regulations and Permits
We will be subject to regulations on emissions from the U.S. Environmental
Protection Agency ("EPA") through the Iowa Department of Natural Resources
("IDNR"). The EPA's and IDNR's environmental regulations are subject to change
and often such changes are not favorable to industry. Consequently, even if we
have the proper permits now, we may be required to invest or spend considerable
resources to comply with future environmental regulations. The capital expenses
required for us to comply with the following environmental regulations are
included in the price we agreed to pay ICM under the ICM Contract.
Air Pollution Construction and Operation Permits
Based on reportable emissions, our Facility is considered a minor source of
regulated air pollutants, but due to our steam system with MidAm, we will be
subject to Title V of the Clean Air Act ("Title V") and the Maximum Achievable
Control Technology Standards promulgated by the EPA. We were required to apply
for an Air Construction Permit with the IDNR and the EPA as a major emitter due
our proximity to MidAm's adjacent plant and a soybean crush plant. We received
an Air Permit for construction from IDNR and the EPA, respecting our ethanol
process equipment, storage tanks, scrubbers, and bag houses' emissions sources,
and we were required to modify our Air Permit for our auxiliary boilers. Air
Permits are required for our auxiliary boilers. Such a permit is required prior
to construction of or modification to an air pollution emission source. The Air
Permit for construction allows us to build, initially operate and test a new
source of air pollution, but does not cover any of our activities after the
Facility is operational. Therefore, we are required to obtain an Air Permit for
our operations from both the EPA and IDNR before we can commence operations at
the Facility. The Air Permit for operations will allow us to operate our
Facility within certain requirements detailed in that permit. Our revised air
permit is expected to be awarded in mid-December allowing us to complete
construction of our permanent backup boiler system. This back-up system is
expected to be operational by February 1, 2009, and will have the capacity to
supply 100% of our Facility's steam needs in the event of a MidAm shutdown.
There is an annual fee associated with holding an Air Permit for operations, and
that annual fee is based on the prior year's actual emission levels. The Air
Permit for operations is required to be renewed every five years.
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We are required to collect and keep information outlining our annual
pollution emissions. Every year we must provide an accounting of the actual
pollution generated by the Facility to the EPA and IDNR in order to maintain our
status as a Conditionally Exempt Small Quantity Generator and our Air Permit for
operating. This accounting is the basis for the Air Permit fees, discussed
above.
Because we are installing auxiliary boilers at our Facility, the EPA
requires us to install Continuous Emissions Monitoring or Partial Emissions
Monitoring. In addition, the EPA requires us to have and maintain an Operations
Monitoring Plan, which will be outlined in our Air Permit for operations.
There is a risk that regulatory changes might impose additional or
different requirements. To date, we have not been determined to be a
non-attainment area for any pollutant. Being designated a non-attainment area
means the EPA has determined that more of a particular pollutant is being
emitted in one area than the EPA allows. If our Facility becomes a
non-attainment area, then the State of Iowa could impose a State Implementation
Plan which would require the imposition of Prevention of Significant
Deterioration requirements and the installation of Best Available Control
Technologies for any future modifications or expansions of the Facility. Any
such event would significantly increase the operating costs and capital costs
associated with any future expansion or modification of the Facility.
Prevention of Significant Deterioration
Our Facility is adjacent to the MidAm coal-fired electrical generating
facilities. These facilities produce steam as a byproduct that will be used by
our Facility for production purposes, as discussed elsewhere in this 10-K. It is
possible that the IDNR or the EPA could determine that the use of steam from
MidAm's facilities as the power source for our Facility renders MidAm's plant to
be a "support facility" of our Facility. The EPA's interpretation of its
Prevention of Significant Deterioration regulations ("PSD") generally provides
that if two facilities are adjacent to each other but have different SIC codes,
one of the facilities can still be determined to be a support facility for the
other. The result is that our Facility is subject to PSD regulations, meaning
that both the MidAm plant and our Facility will be considered one major source
of air pollutants for the applicability of both Title V and PSD. Because our
Facility and the MidAm plant are considered one major source of air pollutants,
then we may have difficulty maintaining our Air Permits, discussed above, due to
the higher level of emissions coming from the combined source. Because our
Facility must comply with PSD, it will also be subject to Best Available Control
Technology ("BACT") requirements. Compliance with BACT requirements will require
additional compliance and testing from our engineers to establish that the
design of the Facility uses BACT, which have materially increased our capital
costs by $150,000. If we are unable to achieve BACT compliance, then our
Facility's ability to obtain permits and operate will be jeopardized. PSD
compliance also requires (i) the coordination of additional air dispersion
modeling by both MidAm and our Facility in order to obtain an air discharge
permit from IDNR, and (ii) our Facility to meet both National Ambient Air
Quality Standards and not exceed ambient air increment limits for major
modifications. If the air dispersion modeling indicates that the Facility is
unable to meet either of these PSD requirements, then the Facility would be
unable to obtain the necessary operating permits, unless the design or capacity
of our plant were reduced or modified. Any reduction in the capacity of the
plant or modification to the design in order to meet these PSD requirements
would significantly increase operating costs and capital costs, and otherwise
negatively impact our ability to operate the Facility profitably.
New Source Performance Standards
The Facility is subject to the EPA's New Source Performance Standards
("NSPS") for both its distillation processes and the storage of volatile organic
compounds used in the denaturing process. Duties imposed by the NSPS include
initial notification, emission limits, compliance and monitoring requirements
and recordkeeping requirements. These standards will require equipment and
procedures which will increase our operating and capital costs.
We are required to provide the EPA with various NSPS Notifications. These
notifications are required before and after the start of construction and also
before and after beginning operation of several key processes and equipment
components. We have currently submitted all required notifications. We intend to
continue to submit the appropriate forms as the identified processes are
completed or equipment components are installed.
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Wetlands and Navigable Waters
The construction of the railroad line to the Facility or the Facility
itself, including roads, bridges, and discharge pipes, may impact wetlands or
navigable waterways under the jurisdiction of Army Corps of Engineers (the
"Corps"). We obtained a 404(b)(1) permit from the Corps for the construction of
our rail line. We are required to obtain a 404(b)(1) permit from the Corps for
the construction of our steam line and force main. An application for this
permit has been submitted to the Corps. We have also completed a Corps-required
Environmental Assessment, and it is possible that we will need to undertake
certain mitigation efforts in order to eliminate any net loss of wetlands or
other damage to streams and rivers. The Corps or other agencies have not
required an Environmental Impact Study be completed. If an Environmental Impact
Study is required at some point in the future, the construction of the Facility
could be significantly delayed. A significant delay in construction could
significantly increase operating and capital costs.
Endangered Species
Prior to Construction, we performed endangered species research to
determine if any species listed on the Iowa or Federal endangered or threatened
species list lived in the construction area. The Least Tern (Sterna antillarum,
on both Iowa and federal endangered species lists) and the Piping Plover
(Charadrius melodus, also on both Iowa and federal endangered species lists) use
the fly ash piles and pond of the adjacent MidAm power facility as seasonal
habitat. The construction of the rail line which will service our Facility will
run along and adjacent to the fly ash piles and pond. We have received direction
from the United States Fish and Wildlife Service ("USFWS") and IDNR to reduce
any potential impact on these endangered species, and will accordingly restrict
rail line construction activities to non-nesting seasons and strictly follow
construction erosion control procedures pursuant to our Construction Site Storm
Water Pollution Prevention Plan, which was created as part of an National
Pollution Discharge Elimination System ("NPDES") Stormwater Discharge Permit
required for construction activities. The Construction Site Storm Water
Pollution Prevention Plan details how storm waters will be protected from
exposure to plant pollutants, and also how we will prevent excessive soil
erosion on the construction site prior to vegetation growing in sufficient
quantities to prevent such erosion. As part of the Construction Site Storm Water
Pollution Prevention Plan we are required to examine our silt fencing for
integrity degradation each week and after each rain. It is possible that the
USFWS or IDNR could impose additional restrictions on us at a future date and
this would significantly delay construction of the rail line, which could
significantly increase our operating or capital costs or otherwise negatively
impact our ability to operate the Facility as profitably.
Rail Line Matters
We plan for our railroad line to only serve the Facility. While it is
possible that we could agree with other industries to share our railroad line,
no such industry is known at this time. We believe that the line should be
considered an exempt "industry lead track" or "spur track" under applicable rail
transportation regulations. The United State Surface Transportation Board
("STB"), which regulates the construction of new railroad lines, has not
required any Environmental Assessment of the site. If in the future additional
industries request access to our railroad line and the railroad line were deemed
by the STB to be a major project, then the STB could require an Environmental
Assessment or an Environmental Impact Study. If an Environmental Impact Study
were required by the STB, then the use of the rail line could be negatively
impacted. Any negative impact on the rail line or a required change in
operations could significantly increase our operating or capital costs or
otherwise negatively impact our ability to operate the Facility profitably.
Waste Water Discharge Permit
We will use water to cool our closed circuit systems in the Facility and we
will generate Reverse Osmosis. blowdown water. In order to maintain a high
quality of water for the cooling system, the water will be continuously replaced
with make-up water. As a result, our Facility will discharge non-contact cooling
water from the cooling towers. We received a Wastewater Discharge Permit from
IDNR to discharge non-contact water into the Missouri River. Under the
Wastewater Discharge Permit, we are required to periodically test and report our
discharge activity to IDNR.
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Storm Water Discharge Permit and Other Water Permits
We have received a Hydrostatic Testing Water Discharge Permit from IDNR to
allow the temporary discharge of water used for testing the integrity of vessels
and equipment as part of our construction activities. The Hydrostatic Testing
Water Discharge Permit allows each vessel or piece of equipment to be filled and
discharged one time. In addition, the water used in the testing process must be
tested prior to discharge.
We have received our Construction Storm Water Discharge Permit from the
IDNR. This general permit was issued after two public notices and the
preparation of a Storm Water Pollution Prevention Plan that outlines various
measures we plan to implement to prevent storm water pollution. Under our Storm
Water Pollution Prevention Plan, we must assess the effectiveness of our run off
prevention each week and after each storm. We received a Construction Site Storm
Water Discharge Permit ("CSSWDP") from IDNR. As part of the application for the
CSSWDP, we prepared a Construction Site Storm Water Pollution Prevention Plan
covering how we will control construction site erosion. We are subject to
certain ongoing reporting and monitoring requirements to retain the CSSWDP.
During construction, if we fail to maintain all conditions specified in the
CSSWDP, the Construction Site Storm Water Pollution Prevention Plan may need to
be revised or changed. This could change or delay construction, which could
significantly increase our operating or capital costs or otherwise negatively
impact our ability to operate the Facility profitably.
We have obtained the required Storm Water Discharge Permit ("SWDP") from
the IDNR. This permit requires two public notices and preparation of a Storm
Water Pollution Prevention Plan ("SWPPP"). The SWPPP outlines various measures
we plan to implement to prevent storm water pollution during plant operations.
High Capacity Well Permit
The Facility will not use municipal water, gray sewage treatment water, or
Missouri river water. We received a High Capacity Well Permit from Pottawattamie
County, Iowa authorizing us to drill three new high capacity wells to meet our
water needs and which are now complete. These wells have been completed as of
September 30, 2008. This permit allows us to draw to 2,000,000 gallons of water
a day through these wells, though the Facility is currently estimated to require
only 1,000,000 gallons of water daily. The wells have been tested and
commissioned. If the wells are not able to produce at the levels required, then
alternatives such as piping Missouri River water may be investigated. The cost
of alternative water supply sources could prohibit their use. If we are not able
to obtain the water in the condition and amounts needed for the Facility,
additional resources would need to be located. This could delay the start up of
the Facility and significantly increase our operating or capital costs.
In addition to the High Capacity Well Permit, we have received a Potable
Water Permit from IDNR. The Potable Water Permit allows us to use one of our
wells for potable water. This potable water will be used for drinking, toilets
and safety showers.
Alcohol and Tobacco Tax and Trade Bureau Requirements
We have complied with the applicable Alcohol and Tobacco Tax and Trade
Bureau (formerly the Bureau of Alcohol, Tobacco and Firearms) ("ATTTB")
regulations. These regulations require that we first make application for and
obtain an alcohol fuel producer's permit, which we have received. The term of
the permit is indefinite until terminated, revoked or suspended. The permit also
requires that we maintain certain security measures. We have secured the
required operations bond pursuant to 27 CFR sec. 19.957.
Risk Management Plan
Pursuant to the federal Clean Air Act, stationary sources with processes
that contain more than a threshold quantity of a regulated substance are
required to prepare and implement a Risk Management Plan. Since we plan to use
anhydrous ammonia, we must establish a plan to prevent spills or leaks of the
ammonia and an emergency response program in the event of spills, leaks,
explosions or other events that may lead to the release of the ammonia into the
surrounding area. The same requirement may also be true for denaturant. This
determination will be made as soon as the exact chemical makeup of the
denaturant is obtained. We are required to conduct a hazardous
12
assessment and prepare models to assess the impact of an ammonia and/or
denaturant release into the surrounding area. The program will be presented at
one or more public meetings. We have successfully obtained our EPA air permit.
In addition, it is likely that we will have to comply with the prevention
requirements under the Occupational Safety and Health Administration's Process
Safety Management Standard, which are similar to the Clean Air Act Risk
Management Plan requirements. Once completed, we will file our Risk Management
Plan with the EPA. If any of the applicable laws or regulations governing our
Risk Management Plan change, it could delay the start up of our Facility and
significantly increase our operating or capital costs.
Above Ground Storage Tank Requirements
We are required to obtain a permit from the State of Iowa in order to use
our above ground storage tank for storing ethanol. The state of Iowa may test
our above ground storage tank prior to issuing the permit. In addition to the
permit, our above ground storage tank requires a Spill, Prevention, Control and
Countermeasure Plan ("SPCCP") in order to comply with the EPA's Spill,
Prevention, Control and Countermeasure Rule, which we have submitted. Our SPCCP
addresses the likelihood and prevention of petroleum based substance spills and
detail the actions we will take in the event of any spill. Within the storage
tank area, we have a containment field designed to retain any spillage for a
minimum of 72 hours.
Hazardous Waste Characterization Tool
Under the Resource Conservation and Recovery Act, we may create and provide
to the EPA a Hazardous Waste Characterization Tool ("HWCT"). The Resources
Conservation and Recovery Act covers the disposal of solid and hazardous waste.
Typically, ethanol plants generate such a small quantity of hazardous and solid
waste that they are classified as a Conditionally Exempt Small Quantity
Generator. This classification is entirely dependent on the amount of waste
generated and can change over time. Although not required by law, the HWCT
allows us to document, on a monthly basis, that we still qualify as a
Conditionally Exempt Small Quantity Generator and therefore are not subject to
hazardous waste regulations. We have purchased a HWCT tool from ICM and are
implementing the required tracking and reporting procedures.
Top Screen Analysis
The Department of Homeland Security ("DHS") requires any facility that
possesses certain chemicals above a threshold to submit a Top Screen Analysis.
We will possess chemical subject to the Top Screen Analysis requirement and will
be required to complete the Top Screen Analysis on an on-going basis. The Top
Screen Analysis requires us to provide information such as the chemicals we
store on site, where the chemicals are stored, and the risks associated with
such chemicals. DHS requires us to complete the Top Screen Analysis within 60
days of receiving any listed chemicals.
Waste Reduction Plan
We are required to submit to IDNR and the Iowa Department of Economic
Development ("IDED") a Waste Reduction Plan. The Waste Reduction Plan will focus
on the identification of waste streams and how waste streams may be recycled.
All companies receiving state funding must prepare and submit such a plan. We
must submit a Waste Reduction Plan or we will be forced to return the state
funds we have received from the IDED, as discussed below.
Historical Site Examination
Prior to beginning construction, we conducted a complete review of the site
for the existence of historical sites, including Indian burial grounds. We did
not locate any such historical sites.
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Site Security Plan
We are in the process of developing a Site Security Plan. The Site Security
Plan is designed to enhance the security of hazardous materials being
transported to and from the Facility. We have purchased a template for our Site
Security Plan from ICM and we intend to complete the Site Security Plan prior to
beginning operations and shipping of ethanol.
On-Going Activities and Reporting
We are required to provide the EPA with Tier II Initial Reporting,
containing a report of the hazardous chemicals stored on-site, within 90 days of
commencing operations. The Tier II Initial Report is used to provide local
emergency response and fire department officials with a list of the hazardous
materials we store on site. Thereafter, we will provide the EPA with annual Tier
II reports of the hazardous materials we store on site, which will similarly be
used to inform local emergency response and fire department officials of such
hazardous substances. We have purchased a reporting package from ICM to complete
the required reporting.
We are also required to submit Form R, a Toxic Release Inventory report, to
the EPA. Form R is required for facilities processing or using certain listed
chemicals above a regulated quantity. Our annual form R will include
documentation of our release of those certain chemicals into the environment
within the previous year.
Every five years we will be required to submit a Form U Report under the
Toxic Substances Control Act ("TSCA") to the EPA. In the Form U, we are required
to report on manufacturing thresholds that were exceeded for any of the
chemicals listed in the TSCA during the reporting period.
Under the Emergency Planning and Right to Know Act, we are required to
report our receipt of certain regulated chemicals to community and state
officials within 60 days. This act requires local emergency planning communities
to prepare a comprehensive emergency response plan. The local emergency planning
agencies have been notified and are collaborating with us to complete a
comprehensive ERS plan.
As a producer of over 10,000 gallons of ethanol per year, we will be
required to comply with the RFS. Under the RFS, we must register with the EPA.
In addition, we are required provide the EPA with our Renewable Fuel
Identification Numbers, product transfer documents and quarterly reports. The
RFS requires us to keep these records for five years. We have obtained our
renewable identification number ("RIN") registration membership, and are
prepared to comply with the RFS.
Other Local Permits
We have obtained the required Septic System Permit from the Pottawattamie
County Health Department, a Zoning Permit from Pottawattamie County, and an
Entrance Permit from the Mills County Road Department.
Nuisance
Ethanol production has been known to produce an odor to which surrounding
residents could object. Ethanol production may also increase dust in the area
due to operations and the transportation of grain to the Facility and ethanol
and Distillers Grains from the Facility. Such activities may subject us to
nuisance, trespass, or similar claims by employees or property owners or
residents in the vicinity of the Facility. To help minimize the risk of nuisance
claims based on odors related to the production of ethanol and its co-products,
we have installed a reverse thermal oxidizer and flare technology in the
Facility. Nonetheless, any such claims or increased costs to address complaints
may have a material adverse effect on us, our operations, cash flows, and
financial performance. It is estimated that this equipment will involve a
significant capital expenditure, which is included in the price we agreed to pay
under the ICM Contract. We are not currently involved in any litigation
involving nuisance claims. If the Facility is subject to any litigation
regarding odor or any other factors in the operations or the transportation of
products, this could significantly increase our operating or capital costs or
otherwise negatively impact our ability to operate the Facility profitably.
14
Operational Safety Regulations
We also will be subject to federal and state laws regarding operational
safety. Risks of substantial compliance costs and liabilities are inherent in a
large-scale construction project, and in ethanol production after a plant is
constructed. Costs and liabilities related to worker safety may be incurred.
Possible future developments, including stricter safety laws for workers or
others, regulations and enforcement policies and claims for personal or property
damages resulting from our construction or operation, could result in
substantial costs and liabilities.
Item 1A. Risk Factors.
The following risks, together with additional risks and uncertainties not
currently known to us or that we currently deem immaterial could impair our
financial condition and results of operation.
Risks Associated With Our Financing Plan
Our Units have no public trading market and are subject to significant
transfer restrictions which could make it difficult to sell Units and could
reduce the value of the Units.
We do not expect an active trading market for our limited liability company
interests, or "Units," to develop. To maintain our partnership tax status, our
Units may not be publicly traded. Within applicable tax regulations, we intend
to utilize a Qualified Matching Service ("QMS") to provide limited liquidity to
our Members, but we will not apply for listing of the Units on any stock
exchange. Finally, applicable securities laws may restrict the transfer of our
Units. As a result, while a limited market for our Units may develop through the
QMS, Members may not sell Units readily, and use of the QMS is subject to a
variety of conditions and limitations. The transfer of our Units is also
restricted by our Second Amended and Restated Operating Agreement dated March 7,
2008 (the "Operating Agreement"). Transfers without the approval of our Board of
Directors ("Board") are not permitted and are invalid. Furthermore, the Board
will not approve transfer requests which would cause the Company to be
characterized as a publicly traded partnership under the regulations adopted
under the Internal Revenue Code of 1986, as amended (the "Code"). The value of
our Units will likely be lower because they are illiquid. Members may be
required to bear the economic risks associated with an investment in us for an
indefinite period of time.
Members may not receive cash distributions which could result in an
investor receiving little or no return on his or her investment.
Distributions are payable at the sole discretion of our Board, subject to
the provisions of the Iowa Limited Liability Company Act (the "Act"), our
Operating Agreement and the requirements of our creditors. We do not know the
amount of cash that we will generate, if any, if and once we begin operations.
Cash distributions are not assured, and we may never be in a position to make
distributions. Our Board may elect to retain future profits to provide
operational financing for the Facility, debt retirement and possible plant
expansion. In addition, our loan agreements restrict our ability to make
distributions. This means that Members may receive little or no return on their
investment and may be unable to liquidate their investment due to transfer
restrictions and lack of a public trading market. This could result in the loss
of a Member's entire investment.
15
Our Units will be subordinate to our debts and other liabilities, resulting
in a greater risk of loss for investors.
The Units are unsecured equity interests and are subordinate in right of
payment to all our current and future debt as discussed elsewhere in this
report. In the event of our insolvency, liquidation dissolution or other winding
up of our affairs, all of our debts, including winding-up expenses, must be paid
in full before any payment is made to the holders of the Units. In the event of
our bankruptcy, liquidation, or reorganization, all Units will be paid ratably
with all of our other equity holders as provided under the Operating Agreement,
and there is no assurance that there would be any remaining funds after the
payment of all our debts for any distribution to Members. In addition, it is
possible that in order to replace the Bridge Loan discussed elsewhere in this
report, we may have to issue additional equity interests in the Company having
preferential treatment in the event we liquidated or reorganized.
Our failure to comply with our loan covenants or raise additional equity
could require us to abandon our business.
In May 2007, we entered into the Credit Agreement with Lenders providing
for a credit facility of up to $126,000,000 for the construction and permanent
debt financing for our Facility. As discussed in more detail below under Item 7
- - Management's Discussion and Analysis of Financial Condition and Results of
Operation - Overview, Status and Recent Developments, in March, 2008, we amended
the terms of the Credit Agreement and obtained the Bridge Loan (together, the
"Current Loans") from the Bridge Lender. While we intend to obtain additional
debt or issue additional equity in order to replace the Bridge Loan, the Bridge
Loan is due on March 1, 2009 and we may be unable to raise additional funds to
retire the Bridge Loan. Any issuances of new equity to third parties will dilute
the interests of Unit holders, as will the issuance of additional units to Bunge
and ICM, which will occur automatically if we do not repay the Bridge Loan from
other sources prior to March 1, 2009.
We believe the Current Loans should provide substantially all of the
capital we will require to complete construction of our Facility , but we will
likely be required to issue additional equity (to replace the Bridge Loan or for
working capital if it were needed due to long-term negative margins). If we do
utilize a debt instrument to retire the Bridge Loan or provide working capital,
additional debt financing increases the risk that we will not be able to operate
profitably because we will need to make principal and interest payments on the
indebtedness. Debt financing also exposes our Members to the risk that their
entire investment could be lost in the event of a default on the indebtedness
and a foreclosure and sale of the Facility and its assets for an amount that is
less than the outstanding debt. Our ability to obtain additional debt financing,
if required, will be subject to approval of our lending group, which may not be
granted, the interest rates and the credit environment as well as general
economic factors and other factors over which we have no control.
Our Members will experience dilution of their equity and voting rights if
Bunge and ICM repay our Bridge Loan.
As discussed in more detail under Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operation - Overview, Status and
Recent Developments, to the extent Bunge and/or ICM repay our Bridge Loan, the
Unit Issuance Agreements provide that we must repay Bunge and/or ICM in the form
of equity. To the extent we issue additional units to Bunge and/or ICM in order
to satisfy our reimbursement obligations under the Unit Issuance Agreements, the
ownership interests of the Company's Members would be diluted. If (i) the
maximum principal amount of the Bridge Loan were drawn ($36,000,000), (ii) Bunge
and ICM each made their respective maximum Bridge Loan Payments, and (iii) the
Company did not issue any equity to any other party (thereby setting the
issuance price under the Unit Issuance Agreements at $3,000 per Unit), then the
Company would be required to issue 9,120 Series E Units to Bunge and 2,880
Series C Units to ICM. Such issuances would increase the Company's total
outstanding Units from 13,139 to 25,139. The dilutive effect of such issuances
on a Member holding 100 Units would be to reduce such Member's percentage
interest in the Company from 0.761% to 0.398%. Furthermore, as discussed under
Item 13--Certain Relationships and Related Transactions, and Director
Independence, if we issue 9,120 Series E Units to Bunge, Bunge would be entitled
to appoint an additional two directors, meaning Bunge would be able then to
appoint a total of four directors and effectively control the Company's Board of
Directors, in addition to certain other rights granted under the Series E
Issuance Agreement.
16
Our debt service requirements and restrictive loan covenants limit our
ability to borrow more money, make cash distributions to our Members and
engage in other activities.
Under the Credit Agreement, the Bridge Loan and other debt instruments, we
have made certain customary representations and we are subject to customary
affirmative and negative covenants, including restrictions on our ability to
incur additional debt that is not subordinated, create additional liens,
transfer or dispose of assets, make distributions, make capital expenditure in
excess of $1,000,000 (other than on the Facility), consolidate, dissolve or
merge, and customary events of default (including payment defaults, covenant
defaults, cross defaults, construction related defaults and bankruptcy
defaults). The Current Loans also contain financial covenants effective upon
completion of the plant including a minimum working capital amount, minimum
reserves, minimum current assets to current liabilities ratio, minimum tangible
net worth, minimum tangible owner's equity, and a minimum fixed charge coverage
ratio. Our obligations to repay principal and interest on the Current Loans make
us vulnerable to economic or market downturns. If we are unable to service our
debt, we may be forced to reduce or delay planned capital expenditures, sell
assets, restructure our indebtedness or seek additional equity capital, which
would dilute our Members' interests. If we default on any covenant, either the
Lenders or the Bridge Lender (or any subsequent lender) could make the entire
debt, once incurred, immediately due and payable. If this occurs, we might not
be able to repay our debt or borrow sufficient funds to refinance it. Even if
new financing is available, it may not be on terms that are acceptable to us.
These events could cause us to cease construction, or if the Facility is
constructed and operating, to cease operations.
Risks Associated With Construction and Development
We depend on ICM and Bunge for expertise in beginning operations in the
ethanol industry and any loss of these relationships could cause us delay
and added expense, placing us at a competitive disadvantage.
We will be dependent on our relationships with ICM and Bunge and their
employees. As discussed elsewhere in this report, Bunge has agreed to provide us
with a wide variety of critical services. Any loss of these relationships,
particularly during the construction and start-up period for the Facility, may
prevent us from commencing operations and result in the failure of our business.
The time and expense of locating new consultants, contractors or equity or
operational partners would result in unforeseen expenses and delays. Unforeseen
expenses and delays may reduce our ability to generate revenue and profitability
and significantly damage the competitive position we expect to have in the
ethanol industry such that Members could lose some or all of their investment.
We have already experienced delays in our construction schedule because of our
budget shortfall.
We will also be dependent upon ICM's experience and ability to train
personnel in operating the Facility. If the Facility is built and does not
operate to the level anticipated by us in our business plan, we will rely on ICM
to adequately address such deficiency. There is no assurance that ICM will be
able to address such deficiency in an acceptable manner. Their failure to
address deficiencies could cause us to halt or discontinue production of
ethanol, which could damage our ability to generate revenues and reduce the
value of Units.
We are dependent upon ICM to build the Facility.
ICM will perform various services and provide certain equipment necessary
for the construction and operation of our ethanol production Facility under the
terms of the ICM Contract. Upon seven days written notice, ICM has the right to
stop work if we do not pay ICM amounts coming due that we have certified for
payment. Further, ICM can terminate the ICM Contract upon seven days written
notice for any of the following reasons: (i) suspension of work for more than 90
days by us or by order of a court or other public authority, through no fault to
ICM or (ii) our failure to pay ICM undisputed amounts within 30 days of
receiving an application for payment.
Due to the competitive nature of the ethanol industry and the lack of
qualified design and construction firms available to build plants such as ours,
ICM's refusal or inability to perform under the ICM Contract could have a
material adverse effect on our ability to complete construction of our Facility
and achieve profitability in the future.
17
We may encounter problems with the steam energy plant design, which could
delay or prevent start-up of Facility operations or decrease our ability to
generate profits causing a decrease in the value of Units and Members'
investment returns.
The use of steam directly from a coal-fired public utility as a power
source for an ethanol plant is largely untested. We are aware of only a few
other ethanol plants currently operating with steam as their major source of
energy. Because our plant is next to a coal-fired plant and will use steam
directly, we may be required to meet the same air quality standards as a utility
plant when applying for our air permit. Further, it is possible that our
emissions will exceed expectations and that the Facility will incur
significantly higher regulatory, permit, and compliance costs. Because this is a
new and largely untested energy source, it is possible that during the final
design, construction, and initial start up phases of the project that additional
and costly engineering and design changes may be necessary to meet energy
production, ethanol processing, and environmental requirements. This may lead to
a decrease in the value of our Units and Member investment returns.
We are dependent on Mid American Energy Company for our steam supply and
any failure by them may result in a decrease in our profits or our
inability to operate, which may decrease the value of Units or Members'
investment return.
Under the Steam Contract, MidAm will provide us with steam to operate our
ethanol plant for ten years from the earlier of our first grind or February 1,
2009. We expect to face periodic interruptions in our steam supply under the
Steam Contract. For this reason, we have executed a change order with ICM to
install boilers at the Facility to provide a backup natural gas energy source.
The backup boiler system is anticipated to be operational by February, 2009. We
also have entered into a natural gas supply agreement with Constellation Energy
for our long term natural gas needs, but this does not assure availability at
all times. As with natural gas and other energy sources, our steam supply can be
subject to immediate interruption by weather, strikes, transportation, and
production problems that can cause supply interruptions or shortages. While we
anticipate utilizing natural gas as a temporary heat source when MidAm's plant
is down, an extended interruption in the supply of both steam and natural gas
backup could cause us to halt or discontinue our production of ethanol, which
would damage our ability to generate revenues. A decrease in our revenues may
lead to a decrease in the value of Units or Members' investment return.
We may not be able to protect ourselves from an increase in the price of
steam which may result in a decrease in profits, causing a decrease in the
value of our Units and Members' investment return.
We will be significantly dependent on the price of steam. The Steam
contract will last for ten years as long as our first grind occurs before
February 1, 2009. The Steam Contract will fix the price of steam for three years
and provide for price increases annually thereafter. The price increases are
based upon market forces over which we have no control. We anticipate that the
Steam Contract will protect us from extreme price changes for the term of the
agreement. Upon the expiration of the Steam Contract, there is no assurance that
we will be able to enter into a similar agreement following the expiration of
the Steam Contract. Although coal prices and supplies have historically been
more stable than many other forms of energy, this may not be taken into
consideration when we are negotiating a new steam contract. If higher steam
prices are sustained for some time, such pricing may reduce our profitability
due to higher operating costs. This may cause a decrease in the value of our
Units and Members' investment returns.
We may encounter hazardous or unexpected conditions at the construction
site that could increase our costs or delay the construction of the
Facility, which would delay our ability to generate revenues and decrease
the value of Units or Members' investment return.
Compliance issues with applicable environmental standards could arise at
any time during the construction and operation of our Facility. We may have
difficulty obtaining the necessary environmental permits required in connection
with the operation of the Facility. As a condition of granting necessary
permits, regulators could make demands that result in additional costs to us and
delay our ability to generate revenues.
18
The project could suffer additional delays or construction cost increases
that could postpone our ability to generate revenues and make it more
difficult for us to pay our debts, which could decrease the value of our
Units or Members' investment return.
We began construction in February 2007 and have projected that we will
begin operation of the proposed ethanol plant in the second quarter of fiscal
2009. We have already experienced construction delays, primarily the result of
cost increases that caused us to have a budget shortfall prior to obtaining the
Bridge Loan. As of September 30, 2008, we have expended approximately
$161,000,000 on the project. Our anticipated total project cost has never been a
firm estimate and we expect that it will continue to change from time to time as
construction of the project progresses. The costs under the ICM Contract are
subject to change. The total amount we have to pay under the ICM Contract, the
T&S Contract and HGM Contract may be further increased due to design changes or
cost overruns, which we have already experienced. Any further significant
increase in the construction cost of the Facility or significant expense related
to the design and construction of the steam line may delay our ability to
generate revenues and hence reduce the value of our Units and the Members'
investment return.
Additionally, construction projects often experience delays in obtaining
construction permits, construction delays due to weather conditions, or other
events. If it takes longer to obtain necessary permits or construct the Facility
than we currently anticipate, it would further delay our ability to generate
revenues and make it difficult for us to meet our debt service obligations. If
we encounter delays in obtaining the required permits, our expected construction
schedule will also be delayed. Delays and weather conditions could result in a
delay of the date we become operational and begin to generate revenue.
Defects in plant construction could result in devaluation of our Units if
our Facility does not produce ethanol and its co-products as anticipated.
There is no assurance that defects in, materials and/or workmanship in the
Facility will not occur. Under the terms of the ICM Contract, ICM warrants that
the plant will meet specified performance criteria upon start-up, and that the
plant will be free from defects in workmanship and materials respecting certain
Facility components. Though the ICM Contract requires ICM to correct certain
defects in material or workmanship during the time period specified in the ICM
Contract, material defects in material or workmanship may still occur which ICM
is not obligated to remedy. Such defects could further delay the commencement of
operations of the Facility, or, if such defects are discovered after operations
have commenced, could cause us to halt or discontinue the Facility's operations.
Halting or discontinuing the Facility's operations could delay our ability to
generate revenues and reduce the value of Units.
ICM will continue to employ subcontractors for key parts of the Facility.
The failure on the part of major subcontractors to perform in a
satisfactory manner can present risk that the Facility will not be constructed
as planned. Failure on the part of ICM to compensate subcontractors can also
present risk of claims or liens on plant assets. These claims could result in a
loss of the value of Units.
The ICM Contract does not protect us from changing prices for concrete,
labor or other inputs.
Material ongoing price increases in key inputs used in the construction of
our Facility could result in more capital expenditures than have been forecast.
If this occurs, the return on Members' investment will be reduced, resulting in
a decline in the value of Units.
ICM does not provide formal guarantees or assurances respecting our use of
steam heat technology at the Facility.
Our use of steam at the Facility is a unique feature which is being
constructed on a design and build basis by ICM under the ICM Contract. Although
the ICM Contract provides that our plant specifications be met, ICM cannot
guarantee use of our steam source.
19
Any site near a major waterway system presents potential for flooding risk.
While our site is located in an area designated as above the 100-year flood
plain, our site exists within an area at risk of a 500-year flood. While our
site is protected by levee systems, its existence next to a major river and
major creeks presents a risk that flooding could occur at some point in the
future. We have procured flood insurance as a means of risk mitigation; however,
there is a chance that such insurance will not cover certain costs in excess of
our insurance associated with flood damage or loss of income, during a flood
period. Our current insurance may not be adequate to cover the losses that could
be incurred in a flood of a 500-year magnitude. Accordingly, floods could have a
material adverse impact upon Unit value.
We may experience delays or disruption in the operation of our rail line
and loop track, which may lead to decreased revenues.
We have entered into an agreement with a third party to service our track
and railroad cars, which we will be highly dependent on. There may be times when
we have to slow production at our ethanol plant due to our inability to ship all
of the ethanol and Distillers Grains we expect to produce. If we cannot operate
our plant at full capacity, we may experience decreased revenues which may
affect the profitability of the Facility.
Risks Associated With Our Formation and Operation
We have no operational history and limited working capital, which could
result in losses that will affect the value of Units or Members' investment
return.
We were organized on March 28, 2005 and other than progressing through the
initial stages of plant construction, we have no operating history. Our Company
is currently promotional and remains in its development stages and plans to
become operational in the second quarter of fiscal 2009. We cannot make
representations about our future profitable operation or our future income or
losses. If our plans prove to be unsuccessful, Members will lose all or a
substantial part of their investment. There can be no assurance that the funds
we received in our prior equity offerings, combined with debt we have obtained,
most of which will be spent on plant construction, will be sufficient to allow
us to operate our plant until profits are attained. Furthermore, we need to
raise additional equity to replace the Bridge Loan, and we may need to raise
equity to complete construction or commence operations if our costs increase.
We have no experience in the construction and operation of an ethanol
plant, our Facility was more expensive to build than anticipated and
operating costs may be higher than we expect, which could decrease the
value of Units or Members' investment return.
The Company has and the members of its Board of Directors have little to no
experience in the organization, construction and operation of an ethanol plant,
the ethanol industry, or in governance or operation of a public company. Due to
this lack of experience, and even though we have hired management which we
believe is qualified, our Facility may cost more to construct and operate than
we currently anticipate. Further increased costs may decrease the value of our
Units and the opportunity for Members to receive a return on their investments.
Our operation costs could be higher than anticipated, which could reduce
our profits or create losses, which could decrease the value of Units or
Members' investment return.
We could experience cost increases associated with the on-going operation
of the Facility caused by a variety of factors, many of which are beyond our
control. Corn prices may increase and labor costs could increase over time,
particularly if there is a shortage of persons with the skills necessary to
operate the Facility. The adequacy and cost of electric, steam and natural gas
utilities could also affect our operating costs. Changes in price, operation and
availability of truck and rail transportation may affect our profitability with
respect to the transportation of ethanol and Distillers Grains to our customers.
In addition, the operation of the Facility will be subject to ongoing compliance
with all applicable governmental regulations, such as those governing pollution
control, ethanol production, grain purchasing and other matters. If any of these
regulations were to change, it could cost us
20
significantly more to comply with them. We will be subject to all of these
regulations whether or not the operation of the ethanol plant is profitable.
If we cannot retain competent personnel, we may not be able to operate
profitably, which could decrease the value of Units or Members' investment
return.
Though we believe we have employed capable management to date, we provide
no assurance that we can manage the start-up of the project effectively or
properly staff our operations. Any failure to manage our start-up effectively
could delay the commencement of Facility operations, and such delay is likely to
further delay our ability to generate revenue and satisfy our debt obligations,
which may decrease the value of Units or negatively affect Members' investment
return.
Our lack of business diversification could result in the devaluation of our
Units if our revenues from our primary products decrease.
Our business will solely consist of ethanol and Distillers Grains
production and sales. We will not have any other lines of business or other
sources of revenue if we are unable to complete the construction and operation
of the Facility. Our lack of business diversification could cause Members to
lose all or some of their investment if we are unable to generate revenues by
the production and sales of ethanol and Distillers Grains since we do not expect
to have any other lines of business or alternative revenue sources.
We have a history of losses and may not ever operate profitably.
From our inception on March 28, 2005 through September 30, 2008, we
incurred an accumulated net loss of approximately $3,417,000. We will continue
to incur significant losses until we complete construction and commence
operations of the Facility. There is no assurance that we will be successful in
completing our efforts to build and operate the Facility. Even if we begin
operations at the ethanol plant, there is no assurance that we will be able to
operate profitably.
An investment in our Units may decline in value due to decisions made by
our Board and Members' only recourse is to replace our Directors, which
could take several years.
Our Board of Directors may make poor decisions regarding actions of the
Company, which may cause a decrease in the value of Units. Our Operating
Agreement provides that each member of the Board of Directors will serve for a
four year term, and in all cases until a successor is elected and qualified.
Holders of Series A Units (the "Series A Members") have the right to elect the
balance of the Directors not elected by the holders of Series B or Series C
Members, or Series E Members, if we issue such Units (presently the Series A
Members may elect four Directors); however, the terms of the Directorships
elected by the Series A Members are staggered such that only one Series A
Director may be elected each year. Staggering the terms of the Series A
Directors, in addition to the rights of Bunge (the "Series B Member") and ICM
(the "Series C Member") to elect certain Directorships, including Bunge's rights
to elect directorships in the event it is issued additional Units, means that
Series A Members could only change the control of the Company through electing
all four Series A Directors, which would take four years. If our project suffers
further delays due to financing or construction or the Board of Directors makes
poor decisions, the Series A Members' only recourse is to replace the Series A
directors through elections at four successive annual meetings or an amendment
to our Operating Agreement, which may be difficult to accomplish.
Our Operating Agreement contains restrictions on Members' rights to
participate in corporate governance of our affairs, which limits their
ability to influence management decisions.
Our Operating Agreement provides that a Member or Members owning at least
30 percent of the outstanding Units may call a special meeting of the Members.
This may make it difficult for Members to propose changes to our Operating
Agreement without support from our Board of Directors. Our Directors are elected
by the three Series of Units that have been issued to date: presently, the
Series A Members elect four Directors (the "Series A Directors"),
21
our Series B Member elects two Directors, and our Series C Member elects one
Director. The Series A Directors' terms of office are divided into four classes,
with each Director serving a staggered four-year term. In addition to Series A
Members only being able to elect four of our seven Directors, the classification
of the Series A Directors will make it more difficult for Members to change the
composition of the Board because only one of the Directors can be elected at one
time. If a vacancy develops in our Board of Directors for any reason other than
removal or expiration of a term, the remaining Directors of the same Series
would fill it.
Our Directors have other business and management responsibilities which may
cause conflicts of interest in the allocation of their time and services to
the Company.
Since our project is currently managed both by our officers and to some
extent by the Board of Directors (rather than completely by a professional
management group), the devotion of the Directors' time to the project is
critical. However, the Directors have other management responsibilities and
business interests apart from our project. Most particularly, our Directors who
were nominated by Bunge and ICM have duties and responsibilities to those
companies which may conflict with our interests. As a result, our Directors may
experience conflicts of interest in allocating their time and services between
us and their other business responsibilities. No formal procedures have been
established to address or resolve these conflicts of interest.
We may have conflicting financial interests with Bunge and ICM which could
cause them to put their financial interests ahead of ours.
ICM and Bunge advise our Directors and have been, and are expected to be,
involved in substantially all material aspects of our financing and operations
to date. We have entered into a number of material commercial arrangements with
Bunge, as described elsewhere in this report. Consequently, the terms and
conditions of our agreements with ICM and Bunge have not been negotiated at
arm's length. Therefore, these arrangements may not be as favorable to us as
could have been if obtained from unaffiliated third parties. Most of the cost of
our project will be paid to ICM for the design and construction of our ethanol
plant. ICM may experience conflicts of interest that cause it to put its
financial interest in the design and construction of our plant ahead of our best
interests. In addition, because of the extensive roles that ICM and Bunge have
in the development, construction and operation of the Facility, it may be
difficult or impossible for us to enforce claims that we may have against ICM or
Bunge. Such conflicts of interest may reduce our profitability and the value of
the Units and could result in reduced distributions to investors.
Bunge has purchased Series B Units and is currently the only holder of
Series B Units. Under our Operating Agreement, the Series B Member is currently
entitled to elect two directors without any other votes. Additionally, as
discussed in more detail below under Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operation - Overview, Status and
Recent Developments, under the terms of the Series E Unit Issuance Agreement
between the Company and Bunge, Bunge may receive Series E Units. If such Series
E Units are issued to Bunge, our Operating Agreement provides that Bunge, as a
Series E Member, would be entitled, without any other votes, to elect one
additional director (to the extent that Bunge owns between 21% and 29% of the
total Units issued and outstanding; two additional directors (to the extent that
Bunge owns between 30% and 39% of the total Units issued and outstanding) or
three additional directors (to the extent that Bunge owns 40% or more of the
total Units issued and outstanding). This may create conflicts of interest due
to any such Directors' affiliation with Bunge, especially for Company action
directly or indirectly affecting Bunge.
ICM has purchased Series C Units and is currently the only holder of Series
C Units. Additionally, under the terms of the Series C Unit Issuance Agreement
between the Company and ICM, ICM may similarly receive additional Series C
Units. Under our Operating Agreement, the Series C Member is entitled to elect
one director without any other votes. Accordingly, there may be conflicts of
interest resulting from any such director's affiliation with ICM, especially for
Company action directly or indirectly affecting ICM.
ICM, Bunge and their respective affiliates may also have conflicts of
interest because ICM, Bunge and their respective employees or agents are
involved as owners, creditors and in other capacities with other ethanol plants
in the United States. We cannot require ICM or Bunge to devote their full time
or attention to our activities. As a result, ICM and / or Bunge may have, or
come to have, a conflict of interest in allocating personnel, materials and
other resources to our Facility.
22
From time to time, our Directors may serve in director or leadership roles
with trade associations which could raise a conflict of interest.
A number of our Directors have or continue to serve as directors of local
and state agricultural trade organizations. These organizations may adopt
policies, or engage in political lobbying activities that are in opposition to,
or that conflict with the Company's business needs. This may require the
Director to abstain from votes or discussion on certain Company-related business
matters.
An elected official serves as a Director.
State Senator Hubert Houser is an elected official who represents
constituents in southwest Iowa and he currently serves on the Board of
Directors. As an elected official, he is obligated to serve the needs of those
whom he represents, and in so doing, from time to time, he may need to place
these needs ahead of our needs. In addition, from time to time he may have to
abstain from voting on Company business issues that conflict with state policy,
or formal positions that the Senator is taking that may be inconsistent with our
business needs. Conversely, he may be precluded from assisting us in public
policy debate, lobbying efforts or in the interface of the Company with state or
local government agencies. Senator Houser's brother is also currently a member
of the Pottawattamie County Board of Supervisors.
Risks Associated With the Ethanol Industry
There have been increasing questions about the viability of ethanol
producers.
The recent bankruptcy filing of one of the industry's major producers has
resulted in great economic uncertainty about the viability of ethanol. The
ethanol boom of recent years spurred overcapacity in the industry and is
currently nearing the RFS mandates. The average national ethanol spot market
price has plunged over 30% since May 2008. The drop in crude oil prices from a
record $150 a barrel to its recent price of less than $40 a barrel has resulted
in the price of reformulated gasoline blendstock for oxygen blending ("RBOB")
dropping below $1 per gallon in December 2008. With ethanol spot prices
exceeding RBOB prices, the economic incentives for blenders to continue using
ethanol has become less advantageous. This could result in a significant
reduction in the demand for ethanol.
The recent bankruptcy filings of several biofuel producers have resulted in
a significant reduction in the market price per share of the publicly-traded
companies. This has created opportunities for investors to buy operating plants
for a significantly reduced price per share. These recent filings and the recent
publicity of the food versus fuel controversy have given the ethanol industry a
negative image as a viable alternative to foreign oil in many Americans' eyes.
Once operational, we will compete with larger, better financed entities,
which could negatively impact our ability to operate profitably.
There is significant competition among ethanol producers with numerous
producers and privately owned ethanol plants planned and operating throughout
the Midwest and elsewhere in the United States. Our business faces a competitive
challenge from larger plants, from plants that can produce a wider range of
products than we can, and from other plants similar to ours. Large ethanol
producers such as Abengoa Bioenergy Corp., Archer Daniels Midland, Aventine
Renewable Energy, Inc., Cargill, Inc. and New Energy Corp., among others, are
capable of producing a significantly greater amount of ethanol than we expect to
produce. In addition, there are several Nebraska, Iowa, Minnesota, Wisconsin,
South Dakota and other Midwest regional ethanol producers which have recently
formed, are in the process of forming, or are under consideration, which are or
would be of a similar size and have similar resources to us. According to the
Renewable Fuels Association, there are currently 55 operational ethanol plants
in Iowa and Nebraska with several new plants in the process of forming.
Furthermore, ethanol from certain Central American or Caribbean countries is
eligible for tariff reduction or elimination upon importation to the United
States. Ethanol imported from these Caribbean Basin countries may be a less
expensive alternative to domestically produced ethanol.
23
This competition also means that the supply of domestically produced
ethanol is at an all-time high. As of October 2008, there were 176 ethanol
plants in operation nationwide with a capacity to produce nearly 10.7 billion
gallons of ethanol annually. Another 27 new plants and five expansions are
currently under construction nationally, which will add an additional estimated
2.9 billion gallons of annual production capacity. Iowa alone is estimated to
produce approximately 2.76 billion gallons of ethanol in 2008. Excess capacity
in the ethanol industry will have an adverse impact on our operations, cash
flows and general financial conditions. If the demand for ethanol does not grow
at the same pace as increases in supply, the price of ethanol will likely
decline. If excess capacity in the ethanol industry continues, the market price
of ethanol may continue to decline to levels that are inadequate to generate
sufficient cash flow to cover our costs. This could negatively impact our future
profitability and decrease the value of our Units and Members' investment
return.
Changes in the supply, demand, production and price of corn could make it
more expensive to produce ethanol, which could decrease our profits.
Our ethanol production will require substantial amounts of corn. A
significant reduction in the quantity of corn harvested due to adverse weather
conditions, farmer planting decisions, domestic and foreign government farm
programs and policies, global demand and supply or other factors could result in
increased corn costs which would increase our cost to produce ethanol. Events
that tend to negatively impact the supply of corn are likely to increase prices
and affect our operating results. The record high of corn prices this past
spring has resulted in lower profit margins for the production of ethanol, and
market conditions generally do not allow us to pass along increased corn costs
to our customers. If the demand for corn returned to the levels of spring 2008
and drove corn prices significantly higher we may not be able to acquire the
corn needed to continue operations.
We entered into the Supply Agreement with AB, an entity affiliated with
Bunge. Under the Supply Agreement, AB has agreed to provide us with all of the
corn we need to operate our ethanol plant, and we have agreed to only purchase
corn from AB. AB will provide grain originators who will work at the Facility
for purposes of fulfilling its obligations under the Supply Agreement. The term
of the Supply Agreement is ten years, subject to earlier termination upon
specified events. The Supply Agreement suspends the operation of the Agency
Agreement between us and AB. In the event we obtain a grain dealer's license,
subject to certain procedures specified in the Supply Agreement, then the
operation of the Supply Agreement will terminate and the Agency Agreement will
be reinstated. In the ordinary course of business, we anticipate that once we
are operational, we will enter into forward purchase contracts for our commodity
purchases.
The price of corn has fluctuated significantly in the past and may
fluctuate significantly in the future. We cannot provide assurances that we will
be able to offset any increase in the price of corn by increasing the price of
our products. Any reduction in the spread between ethanol and corn prices,
whether as a result of further increase in corn price or an additional decrease
in ethanol prices, may adversely affect our results of operations and financial
conditions, leading to a decrease in the value of Units and Members' investment
return.
We have executed output contracts for the purchase of all of the ethanol we
produce once operational, which may result in lower revenues because of
decreased marketing flexibility and inability to capitalize on temporary or
regional price disparities, and could reduce the value of Units or Members'
investment return.
We executed the Lansing Agreement, which provides that Lansing will
purchase the entire output of our ethanol for the first six months of our
operations. We also agreed to allow Lansing to store up to 2.8 million gallons
of ethanol at the Facility at any time at no cost to Lansing. Thereafter, Bunge
will be the exclusive purchaser of our ethanol pursuant to the Ethanol Agreement
with them. Bunge will market our ethanol in national, regional and local
markets. We do not plan to build our own sales force or sales organization to
support the sale of ethanol. As a result, we will be dependent on Lansing and
then Bunge to sell our principal product. When there are temporary or regional
disparities in ethanol market prices, it could be more financially advantageous
to have the flexibility to sell ethanol ourselves through our own sales force.
We have decided not to pursue this route. Our strategy could result in lower
revenues and reduce the value of Units if Lansing or Bunge do not perform as we
plan.
24
Low ethanol prices and low gasoline prices could reduce our profitability.
Prices for ethanol products can vary significantly over time and decreases
in price levels could adversely affect our profitability and viability. The
price for ethanol has some relation to the price for oil and gasoline but has
not increased as much as the 2008 increases in oil and gasoline prices. The
price of ethanol tends to increase as the price of gasoline increases, and the
price of ethanol tends to decrease as the price of gasoline decreases, although
this may not always be the case. Any lowering of gasoline prices will likely
also lead to lower prices for ethanol and adversely affect our operating
results. The total production of ethanol is at an all-time high and continues to
expand at this time. Further increased production of ethanol may lead to lower
prices. Any downward change in the price of ethanol may decrease our prospects
for profitability and thus the value of our Units and Members' investment
return.
Increases in the production of ethanol could result in lower prices for
ethanol and have other adverse effects which could reduce our
profitability.
We expect that new fuel grade ethanol plants will be constructed, because
of the increase in ethanol demand resulting from the 2005 Act and the 2007 Act,
which mandate an increase in the use of renewable fuels in the U.S. to
approximately 15,200,000,000 gallons per year by 2012 and approximately
36,000,000,000 gallons per year by 2022. Because increased production capacity
is usually less costly to achieve through expansion of existing plants, we
expect expansion will also occur. The increased production of ethanol may lead
to lower prices for ethanol. The increased production of ethanol could have
other adverse effects as well. For example, the increased production will also
lead to increased supplies of co-products from the production of ethanol, such
as Distillers Grains. Those increased supplies could lead to lower prices for
this co-product.
There is scientific disagreement about the wisdom of policies encouraging
ethanol production, which could result in changes in governmental policies
concerning ethanol and reduce our profitability.
Some studies have challenged whether ethanol is an appropriate source of
fuel and fuel additives, because of concerns about energy efficiency, potential
health effects, cost and impact on air quality. Federal energy policy, as set
forth in the 2005 Act and the 2007 Act, supports ethanol production. If a
scientific consensus develops that ethanol production does not enhance our
overall energy policy, our ability to produce and market ethanol could be
materially and adversely affected.
Hedging transactions, which, if used, would be intended to stabilize our
corn costs, also involve risks and costs that could reduce our
profitability.
In an attempt to minimize the effects of the volatility of corn costs on
operating profits, we may take hedging positions in corn futures markets once
operational, provided we have sufficient working capital. Hedging means
protecting the price at which we buy corn and the price at which we will sell
our products in the future. It is a way to attempt to reduce the risk caused by
price fluctuation. The effectiveness of hedging activities is dependent upon,
among other things, the cost of corn and our ability to sell sufficient amounts
of ethanol and Distillers Grains to utilize all of the corn subject to the
futures contracts. Hedging activities result in costs such as brokers'
commissions and other transaction costs. If there are significant swings in corn
prices, or if we purchase more corn for future delivery than we can use, we may
have to pay to terminate a futures contract, or resell unneeded corn inventory
at a loss.
Ethanol production is energy intensive and interruptions in our supply of
energy, or volatility in energy prices, could have a material adverse
impact on our business.
Ethanol production requires a constant and consistent supply of energy. If
our production is halted for any extended period of time, it will have a
material adverse effect on our business. If we were to suffer interruptions in
our energy supply, either during construction or after we begin operating the
ethanol plant, our business would be harmed. We have entered into the Steam
Contract for our primary energy source. In addition, natural gas and electricity
prices have historically fluctuated significantly. Increases in the price of
steam, natural gas or electricity
25
would harm our business by increasing our energy costs. The prices which we will
be required to pay for these energy sources will have a direct impact on our
costs of producing ethanol and our financial results.
Our ability to successfully operate depends on the availability of water at
anticipated prices.
To produce ethanol, we will need a significant supply of water, and water
supply and quality are important requirements to operate an ethanol plant. We
anticipate that our water requirements for the plant will be supplied by our
wells. However, there are no assurances that we will have a sufficient supply of
water to sustain the Facility in the future, or that we can obtain the necessary
permits to obtain water directly from the Missouri River as an alternative to
our wells. As a result, our ability to make a profit may decline.
We have no current plan to sell the raw carbon dioxide we anticipate we
will produce to a third party processor resulting in the loss of a
potential source of revenue.
At this time, we have no agreement to sell the raw carbon dioxide we
anticipate we will produce. We cannot provide any assurances that we will sell
our raw carbon dioxide at any time in the future. If we do not enter into an
agreement to sell our raw carbon dioxide, we will have to emit it into the air.
This will result in the loss of a potential source of revenue.
Changes and advances in ethanol production technology could require us to
incur costs to update our Facility or could otherwise hinder our ability to
complete in the ethanol industry or operate profitably.
Advances and changes in the technology of ethanol production are expected
to occur. Such advances and changes may make the ethanol production technology
installed in our plant less desirable or obsolete. These advances could also
allow our competitors to produce ethanol at a lower cost than us. If we are
unable to adopt or incorporate technological advances, our ethanol production
methods and processes could be less efficient than our competitors, which could
cause our plant to become uncompetitive or completely obsolete. If our
competitors develop, obtain or license technology that is superior to ours or
that makes our technology obsolete, we may be required to incur significant
costs to enhance or acquire new technology so that our ethanol production
remains competitive. Alternatively, we may be required to seek third-party
licenses, which could also result in significant expenditures. We cannot
guarantee or assure that third-party licenses will be available or, once
obtained, will continue to be available on commercially reasonable terms, if at
all. These costs could negatively impact our financial performance by increasing
our operating costs and reducing our net income, all of which could reduce the
value of Members' investment.
Competition from the advancement of alternative fuels may lessen the demand
for ethanol and negatively impact our profitability, which could reduce the
value of Members' investment.
Alternative fuels, gasoline oxygenates and ethanol production methods are
continually under development. A number of automotive, industrial and power
generation manufacturers are developing alternative clean power systems using
fuel cells or clean burning gaseous fuels. Like ethanol, the emerging fuel cell
industry offers a technological option to address increasing worldwide energy
costs, the long-term availability of petroleum reserves and environmental
concerns. Fuel cells have emerged as a potential alternative to certain existing
power sources because of their higher efficiency, reduced noise and lower
emissions. Fuel cell industry participants are currently targeting the
transportation, stationary power and portable power markets in order to decrease
fuel costs, lessen dependence on crude oil and reduce harmful emissions. If the
fuel cell and hydrogen industries continue to expand and gain broad acceptance,
and hydrogen becomes readily available to consumers for motor vehicle use, we
may not be able to compete effectively. This additional competition could reduce
the demand for ethanol, which would negatively impact our profitability, causing
a reduction in the value of Members' investment.
26
Corn-based ethanol may compete with cellulose-based ethanol in the future,
which could make it more difficult for us to produce ethanol on a
cost-effective basis and could reduce the value of Members' investment.
Most ethanol is currently produced from corn and other raw grains, such as
milo or sorghum - especially in the Midwest. The current trend in ethanol
production research is to develop an efficient method of producing ethanol from
cellulose-based biomass, such as agricultural waste, forest residue, municipal
solid waste, and energy crops. This trend is driven by the fact that
cellulose-based biomass is generally cheaper than corn, and producing ethanol
from cellulose-based biomass would create opportunities to produce ethanol in
areas which are unable to grow corn. Although current technology is not
sufficiently efficient to be competitive, a report dated August 25, 2000 by the
U.S. Department of Energy entitled "Outlook for Biomass Ethanol Production and
Demand" indicated that new conversion technologies may be developed in the
future. If an efficient method of producing ethanol from cellulose-based biomass
is developed, we may not be able to compete effectively. We do not believe it
will be cost-effective to convert our Facility into a plant which will use
cellulose-based biomass to produce ethanol. If we are unable to produce ethanol
as cost-effectively as cellulose-based producers, our ability to generate
revenue will be negatively impacted and Members' investment could lose value.
Competition from ethanol imported from Caribbean basin countries may be a
less expensive alternative to our ethanol, which would cause us to lose
market share and reduce the value of Members' investment.
Ethanol produced or processed in certain countries in Central America and
the Caribbean region is eligible for tariff reduction or elimination upon
importation to the United States under a program known as the Caribbean Basin
Initiative. Large ethanol producers, such as Cargill, have expressed interest in
building dehydration plants in participating Caribbean Basin countries, such as
El Salvador, which would convert ethanol into fuel-grade ethanol for shipment to
the United States. Ethanol imported from Caribbean Basin countries may be a less
expensive alternative to domestically produced ethanol. Competition from ethanol
imported from Caribbean Basin countries may affect our ability to sell our
ethanol profitably, which would reduce the value of Members' investment.
Competition from ethanol imported from Brazil may be a less expensive
alternative to our ethanol, which would cause us to lose market share and
reduce the value of Members' investment.
Brazil is currently the world's largest producer and exporter of ethanol.
In Brazil, ethanol is produced primarily from sugarcane, which is also used to
produce food-grade sugar. Ethanol imported from Brazil may be a less expensive
alternative to domestically produced ethanol, which is primarily made from corn.
Tariffs presently protecting U.S. ethanol producers may be reduced or
eliminated. Competition from ethanol imported from Brazil may affect our ability
to sell our ethanol profitably, which would reduce the value of Members'
investment.
Risks Associated With Government Regulation and Subsidization
Federal regulations concerning tax incentives could expire or change which
could reduce our revenues.
The federal government presently encourages ethanol production by taxing it
at a lower rate which will indirectly benefit us. The VEETC currently equates to
a $.51 per gallon subsidy of ethanol which is available to distributors. Some
states and cities provide additional incentives. The 2005 Act and the 2007 Act
effectively mandate increases in the amount of annual ethanol consumption in the
United States. The result is that the ethanol industry's economic structure is
highly dependent on governmental policies. Although current policies are
favorable factors, any major change in federal policy, including a decrease in
ethanol production incentives, would have significant adverse effects on our
proposed plan of operations and might make it impossible for us to continue in
the ethanol business. Under provisions of the 2008 Farm Bill, the exemption will
drop to $.45 per gallon in 2009.
Nebraska state producer incentives are unavailable to us, which places us
at a competitive disadvantage.
Neighboring states such as Nebraska have historically provided incentives
to ethanol producers, and may do so in the future. Presently, we do not qualify
for any state-granted incentives. To the extent that neighboring states
27
provide economic incentives to our competitors, our ability to effectively
compete with such recipients will be reduced.
We are subject to extensive environmental regulation and operational safety
regulations that impact our expenses and could reduce our profitability.
Ethanol production involves the emission of various airborne pollutants,
including particulate matters, carbon monoxide, oxides of nitrogen, volatile
organic compounds and sulfur dioxide. We will be subject to regulations on
emissions from the EPA and the IDNR. The EPA's and IDNR's environmental
regulations are subject to change and often such changes are not favorable to
industry. Consequently, even if we have the proper permits now, we may be
required to invest or spend considerable resources to comply with future
environmental regulations.
Our failure to comply or the need to respond to threatened actions
involving environmental laws and regulations may adversely affect our business,
operating results or financial condition. Once our ethanol plant becomes
operational and as our business grows, we will have to develop and follow
procedures for the proper handling, storage, and transportation of finished
products and materials used in the production process and for the disposal of
waste products. In addition, state or local requirements may also restrict our
production and distribution operations. We could incur significant costs to
comply with applicable laws and regulations as production and distribution
activity increases. Protection of the environment will require us to incur
expenditures for equipment or processes.
We could be subject to environmental nuisance or related claims by
employees, property owners or residents near the Facility arising from air or
water discharges. Ethanol production has been known to produce an odor to which
surrounding residents could object. We believe our plant design should mitigate
most odor objections. However, if odors become a problem, we may be subject to
fines and could be forced to take costly curative measures. Environmental
litigation or increased environmental compliance costs could significantly
increase our operating costs.
We will be subject to federal and state laws regarding operational safety.
Risks of substantial compliance costs and liabilities are inherent in a
large-scale construction project, and in ethanol production after a plant is
constructed. Costs and liabilities related to worker safety may be incurred.
Possible future developments-including stricter safety laws for workers or
others, regulations and enforcement policies and claims for personal or property
damages resulting from our construction or operation could result in substantial
costs and liabilities that could reduce the amount of cash that we would
otherwise have to distribute to Members or use to further enhance our business.
Carbon dioxide may be regulated by the EPA in the future as an air
pollutant, requiring us to obtain additional permits and install additional
environmental mitigation equipment, which may adversely affect our
financial performance.
Our Facility will emit carbon dioxide as a by-product of the ethanol
production process. The United States Supreme Court has classified carbon
dioxide as an air pollutant under the Clean Air Act in a case seeking to require
the EPA to regulate carbon dioxide in vehicle emissions. Similar lawsuits have
been filed seeking to require the EPA to regulate carbon dioxide emissions from
stationary sources such as our ethanol plant under the Clean Air Act. Once
operational, our Facility will produce a significant amount of carbon dioxide
that will be vented into the atmosphere. While there are currently no
regulations applicable to us concerning carbon dioxide, if Iowa or the federal
government, or any appropriate agency, decides to regulate carbon dioxide
emissions by plants such as ours, we may have to apply for additional permits or
we may be required to install carbon dioxide mitigation equipment or take other
steps unknown to us at this time in order to comply with such law or regulation.
Compliance with future regulation of carbon dioxide, if it occurs, could be
costly and may prevent us from operating the Facility profitably, which may
decrease the value of our Units and Members' investment return.
28
Our site borders nesting areas used by endangered bird species, which could
impact our ability to successfully acquire operating permits. The presence
of these species, or future shifts in its nesting areas, could adversely
impact construction activities or future operating performance.
The Piping Plover (Charadrius melodus) and Least Term (Sterna antillarum)
use the fly ash ponds of the existing MidAm power plant for their nesting
grounds. The birds are listed on the state and federal threatened and endangered
species lists. Representatives of the IDNR have determined that our rail
construction will not interfere with the birds' nesting patterns and behaviors,
based upon current observations made during the construction of the neighboring
CB4 power plant. However, it was necessary for us to modify our construction
schedules and plant site design to accommodate the birds' patterns. We cannot
foresee or predict the birds' future behaviors or status. As such, we cannot say
with certainty that endangered species related issues will not arise in the
future that could negatively effect the plant's operations, or the valuation of
Units.
We may encounter or discover unforeseen environmental contaminants at our
site.
We completed a Phase One environmental survey to determine the presence of
hazardous waste on the Facility site. While we believe the historical use of our
site has primarily been bare farmland, a Phase Two environmental study (to test
for the presence of any contaminants that may have permeated the ground water or
leached into the soil as a consequence of any prior disposal or improper storage
by prior occupants or neighboring businesses) was performed and updated in
connection with the closing of our 2006 equity offering. In the future, should
such contaminants or hazards be discovered, we may be unable to utilize the
Facility site as we intend or we may incur costs for cleanup that are not
reflected in our forecasted sources and uses of funds discussed elsewhere in
this report.
We may encounter unforeseen negative public sentiment of nearby residents
who are opposed to the prospects of additional manufacturing businesses in
the area.
While we do not expect that the ethanol plant will produce air emissions or
waste water that would negatively impact the nearby residential communities,
occupants of those communities may choose to express negative sentiment toward
the addition of another major manufacturing plant in the community due to
misperceptions about the plant's expected environmental impact. Such reactions
could influence local zoning rules, impede construction, or result in unforeseen
costs related to education, legal defense, permitting, and other factors which
could adversely impact our anticipated expenses and reduce the value of Units.
In the future, environmental regulations and public policy regarding
compliance may change, adversely affecting the Facility's economic
performance.
Any future adverse changes in governmental regulations regarding emission
of carbon dioxide, water disposal, co-existence with endangered species or other
wildlife, or other factors, could result in unforeseen material costs or capital
expenditures that could cause the Company to fail to generate satisfactory
economic results, causing devaluation of Units. In addition, any changes in
environmental laws and regulations, both at the federal and state level, could
require us to spend considerable resources in order to comply with such law or
regulation. The expense of compliance may be significant enough to reduce our
profitability and negatively affect our financial condition.
Risks Related to Tax Issues in a Limited Liability Company
MEMBERS SHOULD CONSULT THEIR OWN TAX ADVISOR CONCERNING THE IMPACT THAT THEIR
OWNERSHIP IN US MAY HAVE ON THEIR FEDERAL INCOME TAX LIABILITY AND THE
APPLICATION OF STATE AND LOCAL INCOME AND OTHER TAX LAWS TO OWNERSHIP OF UNITS.
IRS classification of us as a corporation rather than as a partnership
would result in higher taxation and reduced profits, which could reduce the
value of an investment in us.
We are an Iowa limited liability company that has elected to be taxed as a
partnership for federal and state income tax purposes, with income, gain, loss,
deduction and credit passed through to our Members. However, if for
29
any reason the Internal Revenue Service ("IRS") would successfully determine
that we should be taxed as a corporation rather than as a partnership, we would
be taxed on our net income at rates of up to 35 percent for federal income tax
purposes, and all items of our income, gain, loss, deduction and credit would be
reflected only on our tax returns and would not be passed through to our
Members. If we were to be taxed as a corporation for any reason, distributions
we make to our Members will be created as ordinary dividend income to the extent
of our earnings and profits, and the payment of dividends would not be
deductible by us, thus resulting in double taxation of our earnings and profits.
If we pay taxes as a corporation, we will have less cash to distribute to our
Members.
The IRS may classify an investment in us as passive activity income,
resulting in a Member's inability to deduct losses associated with an
investment in us.
It is likely that the IRS will classify an interest in us as a passive
activity. If a Member is either an individual or a closely held corporation, and
if a Member's interest is deemed to be "passive activity," then such Member's
allocated share of any loss we incur will be deductible only against income or
gains such Member has earned from other passive activities. Passive activity
losses that are disallowed in any taxable year are suspended and may be carried
forward and used as an offset against passive activity income in future years.
These rules could restrict a Member's ability to currently deduct any of our
losses that are passed through.
Income allocations assigned to Units may result in taxable income in excess
of cash distributions, which means a Member may have to pay income tax on
our Units with personal funds.
Members will pay tax on their allocated shares of our taxable income.
Members may receive allocations of taxable income that result in a tax liability
that is in excess of any cash distributions we may make to the Members. Among
other things, this result might occur due to accounting methodology, lending
covenants imposed by our current loans that restrict our ability to pay cash
distributions, or our decision to retain the cash generated by the business to
fund our operating activities and obligations. Accordingly, Members may be
required to pay some or all of the income tax on their allocated shares of our
taxable income with personal funds.
An IRS audit could result in adjustments to our allocations of income,
gain, loss and deduction causing additional tax liability to our Members.
The IRS may audit our income tax returns and may challenge positions taken
for tax purposes and allocations of income, gain, loss and deduction to Members.
If the IRS were successful in challenging our allocations in a manner that
reduces loss or increases income allocable to Members, Members may have
additional tax liabilities. In addition, such an audit could lead to separate
audits of Members' tax returns, especially if adjustments are required, which
could result in adjustments on Members' tax returns. Any of these events could
result in additional tax liabilities, penalties and interest to Members, and the
cost of filing amended tax returns.
Item 2. Properties.
We have purchased the Facility site located near Council Bluffs, Iowa,
which consists of three parcels totaling 200 acres. This property is encumbered
under the Mortgage Agreement with Lenders. We lease a building on the Facility
site to an unrelated third party, and lease 55.202 acres on the south end of the
property to an unrelated third party for farming.
In December 2008, we entered into a lease agreement with Bunge for the
lease of property in Council Bluffs, Iowa. The property contains a storage bin
that we expect to use for storing grain to be used at the Facility. The initial
term of the lease is one year and it may be extended for additional one-year
terms upon mutual agreement.
Item 3. Legal Proceedings.
There are no items to report.
30
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrant's Common Equity, Related Member Matters, and
Issuer Purchases of Equity Securities.
In March 2008, we amended the terms of the Credit Agreement and obtained
the Bridge Loan for a maximum principal amount of $36,000,000. The Bridge Loan
is secured by two letters of credit, as described below. As of November 30,
2008, we have drawn $34,900,000 under the Bridge Loan for payment of
construction in progress, and interest on the Bridge Loan.
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. As of September 2008, we have accrued expenses
of approximately $300,000 and $950,000 to ICM and Bunge, respectively. 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. However, the recent tightening of credit in the
market has significantly reduced the availability of investors that are willing
to invest in new ethanol production. The recent bankruptcy filings of several
ethanol plants have resulted in an opportunity to purchase plants at a
significantly reduced market price. 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.
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 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 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.
31
As of September 30, 2008, the Company had (i) 8,805 Series A Units issued
and outstanding held by 774 persons, (ii) 3,334 Series B Units issued and
outstanding held by Bunge, and (iii) 1,000 Series C Units issued and outstanding
held by ICM. The Company does not have any established trading market for its
Units, nor is one contemplated. To date, the Company has made no distribution to
its Members, and it cannot be certain when it will be able to make
distributions. Further, our ability to make distributions will be restricted
under the terms of the Credit Agreement.
If the LCs are drawn upon to repay the Bridge Loan, we will be required to
immediately issue Series C Units to ICM and Series E Units to Bunge based on the
amounts of the LCs paid by Bunge and ICM. The Unit issuance price will be 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 after the date of the Series C or Series E
Agreements but prior to the date of any Bridge Loan Payment made by Bunge.
Item 6. Selected Financial Data.
Not applicable.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Forward Looking Statements
This report on Form 10-K by Southwest Iowa Renewable Energy, LLC 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 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
32
denatured fuel grade ethanol, 300,000 tons of DDGS and 50,000 tons of WDGS. 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. We expect
to become operational the second quarter of fiscal 2009.
On May 2, 2007, we entered into a $126,000,000 credit facility pursuant to
the Credit Agreement with AgStar Financial Services, PCA ("AgStar"), as agent
for the Lenders. Effective March 7, 2008, we amended the terms of our primary
lending agreements, obtained the Bridge Loan in the maximum principal amount of
$36,000,000 from the Bridge Lender and entered into arrangements with the Bridge
Lender and our key equity holders and operational partners, ICM and 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 November 30th 2008, we have drawn $34,900,000 for payment of
construction in progress and interest on the Bridge Loan.
• Bunge caused its bank to issue the Bunge LC, 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, and ICM caused its lender to similarly issue
the ICM LC, 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. 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 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 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 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.
• 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 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
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 institutional equity to replace the Bridge Loan. However, the Bridge
Loan is due March 1, 2009, and we may be unable to find a source of
33
financing to retire the Bridge Loan at that time. The Board may also determine
to make an offering to existing Members and other investors to compliment the
additional institutional equity, if any.
Construction Status
We have entered into contracts with various contractors to construct the
Facility, though our primary contractors are ICM, T&S and HGM. With the proceeds
of our two equity offerings, we began construction of our Facility in February
of 2007 with grading and GeoPier installation. TT&S began work on the grain and
DDGS silos in February of 2007, with the silos poured the end of July and the
DDG building set and sided in October, 2008. As of December, 2008, the status of
the various components of the Facility was as follows:
• Construction workers are beginning to complete their jobs and demobilize
from our site.
• Grain handling: The handling system is complete and we have brought in
960,000 bushels of corn.
• Storage tanks: Hydro testing is completed.
• Process building: The roof work is completed and electrical/instrumentation
terminations are ongoing.
• North and South Rail line: The rail tracks are complete and we have
received our locomotive and railcars.
• Water: The reverse osmosis system is complete.
• Steam Pipeline: The construction of the steam line is complete.
• Back-up boilers: Our revised air permit was issued mid-December allowing
us to complete construction of our permanent backup boiler system. This
back-up system is expected to be operational by Feb 1st and will have the
capacity to supply 100% of our plant's steam needs in the event of a MidAm
shutdown.
• Energy center and wet cake pads: The final electrical/instrumentation
terminations remain ongoing.
• Distillers Grains: The conveyor work is complete inside of the storage
building and conveyors between the storage and energy center are being
installed.
• Cooling Towers: Complete.
• Natural gas: The pipeline that connects our facility to the Northern
Natural Gas pipeline has been completed.
• Scale/Probe buildings: The scale building complete and the probe building
is operational.
• Site paving: Nearly complete.
Results of Operations
During Fiscal Year 2008, we incurred a net loss of approximately
($3,718,000). We have incurred an accumulated net loss of approximately
($3,417,000) for the period March 28, 2005 (date of inception) through September
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. However, if we are not successful in raising equity or debt
from third parties to replace the Bridge Loan, it will be converted to
additional Series C and Series E Units. Under the terms of the amended Credit
Agreement, as of September 30, 2008 we have drawn approximately $64,162,000
under the Credit Agreement and have also drawn approximately $34,762,000 of
principal and interest under the Bridge Loan. As we complete construction, we
will also be able to access our revolving line of credit under our Credit
Agreement. We anticipate that our working capital will be tight because of the
amendment to our Credit Facility on December 19, 2008 and immediate
implementation of a 75% borrowing base on accounts receivable and inventory that
could significantly reduce our cash flow. Once operational, we anticipate that
cash flow from operations will allow us to operate at a breakeven or a
profitable basis and will provide the necessary cash to make our principal debt
and interest payments. However, our business has been subject to extreme
volatility in recent months and market trends and governmental regulations and
support for our industry could have a significant impact on our ability to
remain profitable and provide enough cash flow to make our debt and interest
payments.
34
We executed a second amendment to our Credit Agreement on December 19,
2008, that granted us early access to our seasonal revolving Line of Credit. The
amendment grants access to the funds prior to the plant being operational. A
borrowing base limitation is included in the agreement that limits the
availability of funds to the lesser of $15,000,000 or 75 percent of eligible
accounts receivable and eligible inventory. We can use this line of credit to
hedge corn, natural gas and ethanol futures. The volatility in the commodities
markets this year have resulted in wide swings in margins for ethanol
production. We feel that this volatility will continue through 2009 and could
possibly limit the working capital needed to have an effective hedging strategy.
Our operations are highly dependent on commodity prices, especially prices
for corn, ethanol, distillers grains and natural gas. As a result of price
volatility for these commodities, our operating results may fluctuate
substantially. The price and availability of corn are subject to significant
fluctuations depending upon a number of factors that affect commodity prices in
general, including crop conditions, weather, governmental programs and foreign
purchases. We may experience increasing costs for corn and natural gas and
decreasing prices for ethanol and distillers grains which could significantly
impact our operating results. Because the market price of ethanol is not
directly related to corn prices, ethanol producers are generally not able to
compensate for increases in the cost of corn feedstock through adjustments in
prices charged for ethanol. Based on recent forward prices of corn and ethanol,
it is possible that in the future we may be operating the Facility at low to
negative operating margins. Increases in corn prices or decreases in ethanol
prices may result in it being unprofitable to operate our Facility.
The price of corn has been very volatile during 2008. Since the end of
fiscal 2007, the Chicago Mercantile Exchange ("CME") near-month corn price had
risen to above $7.00 per bushel. The CME near-month corn price for March 2009
was $3.97 per bushel. We believe the increase in corn prices was primarily due
to export demand, speculation, ethanol demand and current production concerns.
Higher corn prices will negatively affect our costs of production. However, we
also believe that higher corn prices may, depending on the prices of alternative
crops, encourage farmers to plant more acres of corn in the coming years and
possibly divert land in the Conservation Reserve Program to corn production. We
believe an increase in land devoted to corn production could reduce the price of
corn to some extent in the future. The United States Department of Agriculture
("USDA") is projecting a higher carryout for corn this year due to smaller than
expected usage for ethanol and exports. The USDA has projected the
season-average farm price of corn at $3.65 to $4.35 per bushel for 2008. We feel
that there will continue to be volatility in the corn market. With the USDA
projecting a 300 million bushel reduction of corn usage for ethanol production
in December 2008 and a reduction of corn exports, corn prices could continue to
decline.
Historically, ethanol prices have tended to track the wholesale price of
gasoline. Ethanol prices can vary from state to state at any given time. For the
past two years, the average U.S. ethanol price, based on the Oil Price
Information Service ("Opis") Spot Ethanol Assessment, was $2.27 per gallon. For
the same time period, the average U.S. gasoline price, based on New York
Mercantile Exchange ("NYMEX") reformulated blendstock for oxygen blending
("RBOB") contracts was $2.04 per gallon. During the first six months of fiscal
2008, the average U.S. ethanol price was $2.37 per gallon. For the same time
period, U.S. gasoline prices have averaged $2.66 per gallon, or approximately
$0.29 per gallon above ethanol prices. We believe this is due to constraints in
the ethanol blending and distribution infrastructure that has resulted from
significant increases in ethanol supply in recent years. In December 2008, JP
Morgan cut its 2009 price target for oil to $43 a barrel from $69, citing
"deterioration in the world economic environment and the ensuing sharp
contraction in global oil demand in both 2008 and 2009. Once operational, we
feel that with an average netback for ethanol of $1.50 per gallon and an average
of $3.60 per bushel of corn we will generate free cash flow that will cover our
interest and principal debt payments. If corn were to average $4.40 per bushel
we would need to generate an average netback of $1.75 per gallon to be able to
service our interest and principal payments. Netback is the sales price minus
all freight charges, storage charges or marketing fees.
Federal policy has a significant impact on ethanol market demand. Ethanol
blenders benefit from incentives that encourage usage and a tariff on imported
ethanol supports the domestic industry. Additionally, the RFS mandates increased
level of usage of both corn-based and cellulosic ethanol. The RFS policies were
challenged in a proceeding at the EPA by the State of Texas. The State of Texas
sought a waiver of 50% of the RFS mandate because of the economic impact of high
corn prices. The EPA denied this request in early August, 2008. Any adverse
ruling in the future on any other RFS waiver request could have an adverse
impact on short-term ethanol prices.
We believe the ethanol industry will continue to expand due to these
federal mandates and policies. However, we expect the rate of industry expansion
to slow significantly because of the amount of ethanol
35
production added during the past two years or to be added by plants currently
under construction. This additional supply, coupled with significantly higher
corn costs and relatively low ethanol prices, has resulted in reduced
availability of capital for ethanol plant construction or expansion.
We believe that any reversal in federal policy could have a profound
impact on the ethanol industry. In recent months, a political debate has
developed related to the alleged adverse impact that increased ethanol
production has had on food prices. The high-profile debate focuses on
conflicting economic theories explaining increased commodity prices and consumer
costs. Political candidates and elected officials have responded with proposals
to reduce, limit or eliminate the RFS mandate, blender's credit and tariff on
imported ethanol. While at present no policy change appears imminent, we believe
that the debates have created uncertainty and increased the ethanol industry's
exposure to political risk.
We expect federal policy changes to have a significant impact on ethanol
market demand. Additionally, we expect a significant increase in supply because
of the amount of ethanol production added during the past two years or to be
added by plants currently under construction. This additional supply, coupled
with significantly higher corn costs and relatively low ethanol prices, has
resulted in reduced availability of capital for ethanol plant construction or
expansion.
Cash (used in) / provided by operations for Fiscal Year 2008, Fiscal
Year 2007, and from March 28, 2005 (date of inception) through September 30,
2008, was ($2,436,118), $768,320 and ($2,118,600), respectively. Cash has been
used primarily for pre-operational and administrative expenses. For Fiscal Year
2008, Fiscal Year 2007, and from March 28, 2005 (date of inception) through
September 30, 2008, net cash (used in) investing activities was ($88,922,249),
($68,094,996) and ($162,641,675) respectively, primarily related to the
construction of our plant.
For Fiscal Year 2008, Fiscal Year 2007, and from March 28, 2005 (date of
inception) through September 30, 2008, cash provided from financing activities
was $96,172,821, $68,248,873 and $171,317,669, respectively. This cash was
generated through our equity financing of approximately $75,654,000, the Bridge
Loan of $34,100,000, and $64,162,000 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:
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 $ 3,881,400 1.72 %
Total Equity and Other $ 79,535,400 35.40 %
Debt:
Credit Facility $ 111,000,000 49.40 %
Bridge Loan $ 34,100,000 15.20 %
Total Debt $ 145,100,000 64.60 %
- ----------------------------------------------------------------------------------------------------------------------
Total $ 224,635,000 100 %
36
Other Income
In addition to our equity financing, the Credit Agreement and the Bridge
Loan, we have earned approximately $3,385,000 of interest income, and rental and
grant income of approximately $384,000, through September 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 terms of
the First Amendment to the Credit Agreement, the Company's lenders waived any
and all covenant violations or events of default as of March 7, 2008 arising out
of or related to increased project costs.
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 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
37
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.
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 $ 118,325,000 52.7 %
Other Construction $ 66,487,000 29.6 %
Land and Site Development $ 10,779,000 4.8 %
Site Utilities, Fire Protection and Water Supply $ 3,893,000 1.7 %
38
Rolling Stock $ 2,000,000 0.9 %
Administration Building, Computer Systems and Furnishings $ 1,040,000 0.5 %
Rail line $ 13,030,000 5.8 %
Construction Insurance $ 443,000 0.2 %
Equity and Debt Financing Expenses+ $ 1,414,000 0.6 %
Organizational $ 5,424,000 2.4 %
Start-Up $ 1,800,000 0.8 %
- ----------------------------------------------------------------------------------------------------------------------
Total $ 224,635,000 100 %
+ 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 2008, we executed seven change orders under the ICM
Contract in the amount of $29,247,000. These change orders were for items
outside of the scope of the ICM Contract and therefore were time and material
based items instead of fixed price. Through November 2008, we have paid ICM
$120,453,000 for construction services under the ICM Contract, leaving
$26,794,000 of future commitment, which we expect to pay in 2008 and 2009. The
TT&S Contract provides for a fee, subject to change orders, of approximately
$9,661,000 to design and construct a 1,000,000 bushel grain receiving and
storage facility and Distillers Grain storage facility, which work is completed.
Through November 2008, we have paid TT&S $9,641,000, leaving a balance of $20,000
in future commitments. Additionally, we have agreed to pay $6,371,000 for
excavation services.
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 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.
In September 2006, the FASB issued Statement No.157, Fair Value Measurement
("FAS 157"). While this statement does not require new fair value measurements,
it provides guidance on applying fair value and expands required disclosures.
FAS 157 is effective for the Company beginning in the first quarter of fiscal
2009. The Company is currently assessing the impact FAS 157 may have on the
Company's financial statements.
In February 2007, the FASB issued statement No.159, The Fair Value Option
for Financial Assets and Financial Liabilities ("FAS 159"). This statement,
which is expected to expand fair value measurement, permits entities to
39
choose to measure many financial instruments and certain other items at fair
value. FAS 159 is effective for the Company beginning in the first fiscal
quarter of 2009. We are currently assessing the impact FAS 159 may have on our
financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Southwest Iowa Renewable Energy, LLC (A development stage company)
We have audited the accompanying balance sheets of Southwest Iowa Renewable
Energy, LLC (a development stage company) as of September 30, 2008 and 2007, and
the related statements of operations, members' equity, and cash flows for years
ended September 30, 2008 and 2007 and the period from March 28, 2005 (date of
inception) to September 30, 2008. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Southwest Iowa Renewable
Energy, LLC as of September 30, 2008 and 2007, and the results of its operations
and its cash flows for years ended September 30, 2008 and 2007 and the period
from March 28, 2005 (date of inception) to September 30, 2008, in conformity
with U.S. generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
Des Moines, Iowa
December 29, 2008
40
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Balance Sheets
September 30, 2008 and 2007
- -------------------------------------------------------------------------------------------------------------------
2008 2007
-----------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,557,394 $ 1,742,940
Restricted cash 3,289,949 --
Prepaid expenses and other 43,261 124,952
------------------- ---------------------
Total current assets 9,890,604 1,867,892
------------------- ---------------------
PROPERTY AND EQUIPMENT
Land 2,064,090 2,064,090
Construction in progress 172,745,278 59,504,547
Office and other equipment 389,823 79,090
------------------- ---------------------
175,199,191 61,647,727
Accumulated depreciation (37,249) (7,233)
------------------- ---------------------
175,161,942 61,640,494
------------------- ---------------------
OTHER ASSETS
Financing costs, net of amortization 2008;
$497,672 and 2007; none 3,088,821 2,800,846
Cash held for plant construction -- 15,638,542
------------------- ---------------------
3,088,821 18,439,388
------------------- ---------------------
$ 188,141,367 $ 81,947,774
=================== === =================
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,260,253 1,315,278
Retainage Payable 7,158,896 2,342,222
Accrued expenses 1,672,950 43,730
Current maturities of long-term debt 35,198,440 1,303,250
------------------- ---------------------
Total current liabilities 50,290,539 5,004,480
------------------- ---------------------
LONG-TERM DEBT, less current maturities 63,893,467 168,333
Other 900,000 --
------------------- ---------------------
64,793,467 168,333
=================== =====================
COMMITMENTS
MEMBERS' EQUITY
Members' capital 76,474,111 76,474,111
Earnings (deficit) accumulated during the development stage (3,416,750) 300,850
------------------- ---------------------
73,057,361 76,774,961
------------------- ---------------------
$ 188,141,367 $ 81,947,774
=================== =====================
See Notes to Financial Statements.
41
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Statements of Operations
- ---------------------------------------------------------------------------------------------------------------------
March 28, 2005
(Date of
Year Ended Year Ended Inception) to
September 30, September 30, September 30,
2008 2007 2008
-------------------------------------------------------------------
Revenues $ --- $ --- $ ---
------------------- ----------------- -------------------
General and administrative expenses 4,008,188 2,222,327 7,151,298
------------------- ----------------- -------------------
(Loss) before other income (4,008,188) (2,222,327) (7,151,298)
------------------- ----------------- -------------------
Other income and (expense):
Grant 136,513 114,235 305,994
Interest income 136,850 3,187,653 3,384,892
Miscellaneous income 17,225 37,238 77,746
Loss on disposal of property --- (34,084) (34,084)
------------------- ----------------- -------------------
290,588 3,305,042 3,734,548
------------------- ----------------- -------------------
Net income (loss) $ (3,717,600) $ 1,082,715 $ (3,416,750)
=================== ================= ===================
Weighted average units outstanding 13,139 11,999 7,323
=================== ================= ===================
Net income (loss) per unit - basic and diluted ($282.94) $90.23 ($466.58)
=================== ================= ===================
See Notes to Financial Statements.
42
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Statements of Members' Equity
- -----------------------------------------------------------------------------------------------------------------------
Earnings
(Deficit)
Accumulated
During the
Development
Members' Capital Stage Total
-------------------------------------------------------------
Balance, March 28, 2005 (date of inception) $ --- $ --- --- $
Issuance of 285 Series A membership units 570,000 --- 570,000
Subscription receivable for 257 Series A
membership units (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 5,202,000 --- 5,202,000
Issuance of 1 Series B membership unit 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 44,838,000 --- 44,838,000
Issuance of 3,333 Series B membership units 19,998,000 --- 19,998,000
Issuance of 1,000 Series C membership units 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) --- (3,717,600) (3,717,600)
----------------- ---------------- ----------------
Balance, September 30, 2008 $ 76,474,111 $ (3,416,750) 73,057,361 $
================= ================ ================
See Notes to Financial Statements.
43
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Statements of Cash Flows
- ---------------------------------------------------------------------------------------------------------------------
March 28,
2005 (Date
of
Year Ended Year Ended Inception)
September September to September
30, 2008 30, 2007 30, 2008
-- -------------- --- -- -------------- --- -- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (3,717,600) $ 1,082,715 $ (3,416,750)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 30,016 7,071 37,249
Loss on disposal of property --- 34,084 34,084
Changes in working capital components:
(Increase) decrease in prepaid expenses and other 81,691 (104,575) (43,261)
Increase in other non-current liabilities 900,000 --- 900,000
Increase (decrease) in accounts payable 105,515 (188,669) 162,088
Increase (decrease) in accrued expenses 164,260 (62,306) 207,990
----------------- ----------------- -----------------
Net cash provided by (used in) operating activities (2,436,118) 768,320 (2,118,600)
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (101,270,842) (53,871,995) (160,767,267)
(Increase) decrease in cash-held for plant
construction 15,638,542 (15,638,542) ---
Increase in restricted cash (3,289,949) --- (3,289,949)
Proceeds from sale of property and equipment --- 1,415,541 1,415,541
----------------- ----------------- -----------------
Net cash (used in) investing activities (88,922,249) (68,094,996) (162,641,675)
----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of membership units --- 69,876,000 75,654,000
Payments for financing costs (785,647) (1,815,460) (2,626,493)
Payments for offering costs --- --- (139,889)
Proceeds from long-term borrowings 64,161,718 200,000 65,644,968
Proceeds from bridge loan 34,100,000 --- 34,100,000
Payments on long-term borrowings (1,303,250) (11,667) (1,314,917)
----------------- ----------------- -----------------
Net cash provided by financing activities 96,172,821 68,248,873 171,317,669
----------------- ----------------- -----------------
Net increase (decrease) in cash and cash 4,814,454 922,197 6,557,394
equivalents
CASH AND CASH EQUIVALENTS
Beginning 1,742,940 820,743 ---
----------------- ----------------- -----------------
Ending $ 6,557,394 $ 1,742,940 $ 6,557,394
================= ================= =================
SUPPLEMENTAL DISCLOSURES OF NONCASH OPERATING,
INVESTING AND FINANCING ACTIVITIES
Construction in progress included in accounts
payable $ 13,257,061 $ 3,600,927 $ 13,257,061
Membership units issued for financing costs --- 960,000 960,000
Interest capitalized and included in long-term
debt and accruals 2,624,488 --- 2,624,488
See Notes to Financial Statements.
44
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 pool
investors to build a 110 million gallon annual production dry mill corn-based
ethanol plant. As of September 30, 2008, the Company is in the development stage
with its efforts being principally devoted to organizational matters,
equity-raising activities and construction of the ethanol plant.
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.
Concentration of credit risk: The Company's cash balances are maintained in
bank deposit accounts which at times may exceed federally insured limits. The
Company has not experienced any losses in such accounts.
Risks and uncertainties: The current U.S. recession with its massive layoffs
has reduced the nation's demand for energy. The recent bankruptcy filing of
one of the industry's major producers has resulted in great economic
uncertainty about the viability of ethanol. The ethanol boom of recent years
spurred overcapacity in the industry and capacity is currently nearing the
Renewable Fuels Standard ("RFS") mandates. The average national ethanol
spot market price has plunged over 30% since May 2008. The drop in crude
oil prices from a record $150 a barrel to its recent price of less than $40
a barrel has resulted in the price of reformulated gasoline blendstock for
oxygen blending ("RBOB") dropping below $1 per gallon in December 2008.
With ethanol spot prices exceeding RBOB prices the economic incentives for
blenders to continue using ethanol has become less advantageous. This could
result in a significant reduction in the demand for ethanol.
As such, the Company may need to evaluate whether crush margins will be
sufficient to operate the plant and generate enough debt service. In the
event crust margins become negative for an extended period of time, the
Company may be required to reduce capacity or shut down the plant.
Cash and cash equivalents: The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less when purchased
to be cash equivalents.
Restricted cash: Restricted cash includes minimum balance required per AgStar
Financial Services, PCA credit agreement contingent project cost reserve
through March 2009.
Financing costs: Financing costs associated with the construction and
revolving loans discussed in Note 3 are recorded at cost and include
expenditures directly related to securing debt financing. The Company began
amortizing these costs using the effective interest method over the terms of
the agreements in March, 2008. The interest expense amortization is
capitalized during the development stage as construction in progress.
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 September 30, 2008, approximately $4,279,000 of interest has been
capitalized. Depreciation is computed using the straight-line method over the
following estimated useful lives:
45
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Years
------------------
Office and other equipment 3 - 7
Maintenance and repairs are expenses as incurred; major improvements and
betterments are capitalized.
Income taxes: The Company has elected to be treated 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 (loss) 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 carrying amount of long-term debt approximates fair value because the
interest rates fluctuate with market rates.
New accounting pronouncements:
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement No.157, Fair Value Measurement ("FAS 157"). While this statement does
not require new fair value measurements, it provides guidance on applying fair
value and expands required disclosures. FAS 157 is effective for the Company
beginning in the first quarter of fiscal 2009. The Company is currently
assessing the impact FAS 157 may have on the Company's financial statements.
In February 2007, the Financial Accounting Standards Board ("FASB") issued
statement No.159, The Fair Value Option for Financial Assets and Financial
Liabilities ("FAS 159"). This statement, which is expected to expand fair value
measurement, permits entities to choose to measure many financial instruments
and certain other items at fair value. FAS 159 is effective for the Company
beginning in the first fiscal quarter of 2009. We are currently assessing the
impact FAS 159 may have on our financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities." The new standard is intended to improve
financial reporting about derivative 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. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. We do not expect the adoption SFAS No. 161 to have a material impact
on our financial statements.
Note 2. Members' Equity
The Company was formed on March 28, 2005 to have a perpetual life with no limit
on the number of authorized units. The Company was initially capitalized by 19
management committee members who contributed an aggregate of $570,000 in
exchange for 285 Series A membership units. In December 2005, the Company issued
an additional 360 Series A membership units in exchange for $1,080,000. In March
2006, the Company completed a private
46
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 2. Members' Equity (Continued)
placement offering with one membership unit at $6,000 being at risk and the
remaining investment held in escrow until closing of the offering. The Company
approved and issued 687 Series A and 1 Series B at risk membership units at
$6,000 per unit for a total of $4,128,000. The offering was closed in November
2006 with the issuance of 7,313 Series A membership units, 3,333 Series B
membership units and 1,000 Series C membership units for a total of $69,876,000.
In May 2007, 25 Series A membership units were issued to a development group for
its efforts in the development and advancement of the ethanol project. In
addition, in May 2007, pursuant to terms of a management agreement, 135 Series A
membership units were issued to a related party, as part of a contractual
success fee arrangement which provided that upon actual closing of specified
financial transactions, the party would receive a success fee for its efforts
relating to securing the Company's financing. The success fee was to be paid
one-half in cash and one-half in membership units.
At September 30, 2008 and 2007 outstanding membership units were:
- ------------------------------------------------------------------
Series A Units 8,805
Series B Units 3,334
Series C Units 1,000
The Series A, B and C unit holders all vote on certain matters with equal
rights. The Member holding Series B units has the right to elect the number of
Directors out of those seven directorships equal to the proportion of Series B
units held as compared to the number of all outstanding units (this provision
presently entitles the Series B Member to elect two Directors), and the Series B
Member retains the right to always elect at least one Director. The Member
holding Series C units has the right to elect one Director. If Series E Units
are issued as described below, the Series E Member has the right to elect up to
three of the seven Directors. The Members holding Series A units have the right
to elect the balance of the Directors not elected by the Series B, Series C and
Series E Members (presently the Series A Members may elect four Directors).
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 is to 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. If ICM and Bunge do not extend the maturity of the LCs the LCs will be
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. Any extension of the maturity of the LCs by
ICM or Bunge would require approval by the Company's lenders.
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
47
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 2. Members' Equity (Continued)
acquire) such Unit 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 has 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 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 has 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 and amended as noted below, the Company entered into a loan
commitment with a lender for $126,000,000 senior secured debt, consisting of a
$111,000,000 construction loan and a $15,000,000 revolving line of credit. The
Credit Facility provides for a loan up to $1,000,000 on a revolving basis (the
"Swingline Revolver"). Subsequent to year-end, in December 2008 we executed a
second amendment to our Credit Agreement that granted us early access to our
seasonal Revolving Line of Credit. The amendment grants access to the funds
prior to the plant being operational. A borrowing base limitation is included in
the agreement that limits the availability of funds to the lesser of $15,000,000
or 75 percent of eligible accounts receivable and eligible inventory. Letters of
credit pertaining to the construction may be drawn on the construction loan not
to exceed $5,000,000 in aggregate. Borrowings under the construction credit
facility agreement include a variable interest rate based on LIBOR plus 3.65%
for each advance under the agreement. Upon completion of construction, the
construction loan may be segmented into two credit facilities, an amortizing
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 September 30, 2008 was 2.49%. The credit facility
and revolving credit agreement require the maintenance of certain financial and
nonfinancial covenants. Borrowings under this agreement are collateralized by
substantially all of the Company's assets. 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 agreement. The
agreements also include certain prepayment penalties. As of September 30, 2008
the outstanding balance under the Credit Agreement was approximately
$64,162,000. In addition to all other payments due under the Credit Agreement,
the Company 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.
On March 7, 2008, the Company amended the terms of the Credit Agreement 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.
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
48
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 3. Construction and Revolving Loan/Credit Agreements (Continued)
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 September 30, 2008, there was an
outstanding principal and interest balance of approximately $34,762,000 under
the Bridge Loan.
In connection with 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 and Subsequent Event
Long-term debt consists of the following as of September 30, 2008 and 2007:
2008 2007
--------------------- --- ----------------------
Note payable to Pottawattamie County, Iowa, non-interest bearing,
due 180 days after ethanol production begins or January 31, 2008,
whichever comes first, secured by land $ --- $ 1,283,250
Bridge Loan payable to Commerce Bank, N.A., bearing interest at
LIBOR plus .80% (3.29% at September 30, 2008) through maturity on
March 1, 2009, secured by two letters of credit as described in
Note 3. 34,761,857 ---
--------------------- ----------------------
$200,000 Note payable to Iowa Department Economic Development
("IDED") non-interest bearing monthly payments of $1,667 due
through maturity date of March 2012 on non-forgivable portion. (A) 168,333 188,333
Construction loan payable to AgStar Financial Services (PCA),
bearing interest at LIBOR plus 3.65% (6.14% at September 30,
2008). See maturity and collateral discussed in Note 3. (B) $ 64,161,717 $ ---
--------------------- ----------------------
$ 99,091,907 $ 1,471,583
Less current maturities (35,198,440) (1,303,250)
--------------------- ----------------------
$ 63,893,467 $ 168,333
===================== ======================
(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 discussed in Note 3.
The $100,000 forgivable loan may be forgiven upon IDED's confirmation of
the creation and retention of qualifying jobs as provided in 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.
49
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 4. Long-Term Debt and Subsequent Event (Continued)
(B) Subsequent to year-end, the Company drew on the AgStar Financial Services
(PCA) revolving line of credit discussed in Note 3 in the amount of
$6,000,000. This amount matures five years after conversion and is included
in maturities below.
Maturities of long-term debt as of September 30, 2008 are as follows below and
assume conversion of the construction/revolving term credit facility in February
2009 with principal payments beginning September 2009 as discussed in Note 3
amortized over 114 months.
Years ending September 30:
2009 $ 35,198,440
2010 5,187,577
2011 5,512,309
2012 5,845,781
2013 6,204,276
Thereafter 47,143,524
-------------------
$105,091,907
===================
Note 5. Lease Commitments and Subsequent Event
In June 2007, the Company entered an operating lease agreement with a related
party and member for the lease of 320 ethanol tank cars and 300 distillers'
grain cars. The lease begins two months prior to start-up of the plant
operation, continues for a term of ten years, and terminates upon the
termination of the final car lease. The lease calls for monthly payments of
approximately $450,000. There was no rental expense for the years ended
September 30, 2008 and 2007, and the period from March 28, 2005 (date of
inception) to September 30, 2008.
The Company leases vehicles and equipment under long-term operating leases from
unrelated third parties. The original terms of the leases are 36 months to five
years beginning March 2007 and through various dates ending May 2013. The leases
call for monthly payments ranging from $152 to $1,136. Rental expense for the
years ending September 30, 2008, 2007 and the period from March 28, 2005 (date
of inception) to September 30, 2008 was approximately $20,000, $7,000, and
$27,000, respectively.
Subsequent to year-end, the Company entered into an agreement with a related
party and member for the lease of a grain elevator located in Council Bluffs,
Iowa, for approximately $67,000 per month. The lease has an initial one-year
term, which may be renewed for successive one-year terms upon the parties'
agreement.
Also subsequent to year-end, the Company entered into a lease agreement with an
unrelated party for the lease of a locomotive for approximately $11,000 per
month. The lease has a five-year term.
Approximate future minimum operating lease payments including leases entered
into subsequent to year-end are as follows:
Years ending September 30:
2009 $ 5,235,000
2010 5,684,000
2011 6,512,000
2012 6,494,000
2013 6,493,000
Thereafter 26,705,000
------------------
$55,123,000
==================
50
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 6. Related-Party Transactions and Subsequent Events
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 securing
financing for the construction of a 110 gallon per year ethanol facility.
Financial close of the project occurred during the year ended September 30, 2007
and 135 Series A membership units were issued directly to the party's principals
for $810,000 of the $1,600,000 fee. The total fee of $1,600,000 has been
capitalized as financing costs.
In September 2006, the Company entered into a design-build agreement with a
related party, a member of the Company, for a lump-sum contract price of
$118,000,000 (the "Construction Contract"). Under the Construction 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. Monthly
applications are submitted for work performed, subject to retainage. As of
September 30, 2008 and 2007, the Company incurred approximately $134,025,000 and
$33,051,000 of construction in progress, respectively under the Construction
Contract.
The Company entered into an agreement in October 2006 with a related party, a
member of the Company, to purchase all of the distiller's grains with soluble
("DGS") produced by the plant. 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 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. In addition, the Company is
required to deliver written estimates of its anticipated production annually and
monthly. The Company is required to pay a minimum annual marketing fee of
$150,000. Beginning on the third anniversary of the effective date of the
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
agreement based on specific guidelines in the agreement.
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. On December 15, 2008, this agreement was temporarily
suspended and replaced with a grain supply agreement between the parties. The
revised agreement has a term of ten years and automatically renews for
successive three-year terms unless a 180-day written notice is given by either
party. The Company agreed to pay an annual minimum fee of $675,000 under the
revised agreement.
Also subsequent to year-end, the Company and Bunge, a related party and member,
entered into various agreements. Under the lease agreement, the Company has
leased from Bunge a grain elevator located in Council Bluffs, Iowa, for
approximately $67,000 per month. See Note 5. In connection with the lease
agreement, the Company entered into a grain purchase agreement, under which the
Company agreed to purchase the grain inventory at the grain elevator and the
grain inventory located in the Company's on-site storage facility. The Company
purchased approximately 1,900,000 bushels of at an approximate market value of
$6,000,000.
51
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 6. Related-Party Transactions and Subsequent Events (Continued)
Under the ethanol purchase agreement, the Company has agreed to sell Bunge all
of the ethanol produced at the ethanol plant, and Bunge has agreed to purchase
the same, up to the ethanol plant's nameplate capacity of 110,000,000 gallons a
year. The Company will pay Bunge a per-gallon fee for ethanol sold by Bunge for
the Company under this agreement, subject to a minimum annual fee of $750,000
and adjustments according to specified indexes after three years. The initial
term of the agreement, which will commence upon the termination of that Ethanol
Merchandising Agreement between the Company and Lansing Ethanol Services, LLC,
is three years and it will automatically renew for successive three-year terms
unless one party provides the other notice of their election to terminate 180
days prior to the end of the term.
Under the risk management services agreement, Bunge has agreed to provide the
Company with assistance in managing its commodity price risks for a quarterly
fee of $75,000. The agreement has an initial term of three years and will
automatically renew for successive three year terms, unless one party provides
the other notice of their election to terminate 180 days prior to the end of the
term.
On January 30, 2008, the Company and Bunge entered into an agreement under which
Bunge agreed to provide engineering support to the project, provide reports to
the Company's lender and assist the Company with requests by the lender's agent.
The Company will pay, in addition to Bunge's out of pocket expenses, an hourly
fee of $95 for such services. The agreement terminates upon the earlier of
completion of the ethanol plant or December 31, 2008. Bunge may terminate the
agreement at any time, and the Company may terminate under specified
circumstances. Expenses of $101,000 and none have been paid under this agreement
for the years ended September 30, 2008 and 2007, respectively, and $101,000 for
the period from March 28, 2005 (date of inception) to September 30, 2008.
In connection with obtaining the Bridge Loan, the Company entered into the Unit
Issuance Agreements, as described above in Note 2.
Note 7. 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.
In September 2006, the Company entered into the Construction Contract (See Note
6). In 2008, seven change orders in the amount of $29,247,000 were issued under
the Construction Contract. As of September 30, 2008, the Company incurred
approximately $134,025,000 of construction in progress. Approximately
$13,222,000 future commitment remains as of September 30, 2008, which is
expected to be paid in calendar 2008. There are approximately $11,999,000 in
accounts and retainage payable under the Construction Contract as of September
30, 2008.
The Company entered into a contract with and unrelated party the construction of
a grain and DGS storage facility in June of 2007 for $9,745,426. Between June
2007 and December 2008, five change orders were issued which reduced the
contract amount to $9,661,438. As of September 30, 2008, $9,561,438 has been
paid with approximately $100,000 remaining in the contracted price.
Approximately $100,000 was included in accounts and retainage payable at
September 30, 2008.
52
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 7. Commitments (Continued)
The Company entered into a contract with an unrelated party for construction of
a rail line in November 2007. The original contract amount was for $971,565 and
a change order was issued July 2008 in the amount of $227,671. As of September
30, 2008, $821,198 has been paid with $378,038 remaining in the contracted
price. Approximately $66,000 was included in accounts and retainage payable at
September 30, 2008.
The Company entered into a contract with an unrelated party in July 2008 for the
construction of parking lots and roads. The contract amount was for $1,273,944
and as of September 2008 $291,393 has been paid with $982,551 remaining in the
contracted price. Approximately $414,000 was included in accounts and retainage
payable at September 30, 2008.
The Company entered into a contract in March 2008 with an unrelated party for
installation of the electrical system for the plant's grain storage and handling
system The contract amount was for $ 1,107,566 and as of September 2008
$1,003,762 has been paid with $103,804 remaining in the contracted price. There
were no amounts included in accounts payable at September 30, 2008.
The Company also entered into various other contracts during 2007 and 2008 for
the construction of the ethanol plant, office building, rail track and
acquisition of equipment totaling approximately $2,564,000 with a future
commitment of approximately $1,624,000 as of September 30, 2008, which is
expected to be paid in calendar 2008. Of this total, approximately $354,000 is
included in accounts and retainage payable as of September 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 agreed to pay a fee mutually agreed to by both parties for
each gallon of ethanol sold. The Company notified the entity that this agreement
will be terminated six months after the plant starts production. As of September
30, 2008, the ethanol plant is not operational and no amounts are due under this
agreement. The Company is obligated to honor the agreement for a six-month
period without any penalties or termination fees.
The Company has entered into a steam contract with an unrelated party dated
January 22, 2007. The agreement was amended October 2008 to modify the
circumstances under which the steam service can be interrupted. 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
the 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 February 1, 2009. No expenses have been incurred to date under
this agreement.
In January 2007, the Company entered into an agreement with an unrelated party
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. No expenses have been incurred to date under this agreement.
53
Southwest Iowa Renewable Energy, LLC
(A Development Stage Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 7. Commitments (Continued)
In October 2007, the Company entered into an agreement with an investment
banking firm, an unrelated party, to assist in obtaining additional equity. The
Company's goal is to raise sufficient equity to replace the Bridge Loan, which
is due March 1, 2009, as soon as possible. Initially, the Company is seeking one
or more institutional investors to provide the additional equity. The Company
agreed to 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
raised. The Company recorded expense of none, $135,000, and $135,000 for the
years ended September 30, 2007, 2008 and the period from March 28, 2005 (date of
inception) to September 30, 2008, respectively under this agreement.
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 natural 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. No payments have been
incurred to date under this agreement.
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 12 months ended September 30, 2008, the Company capitalized
$1,248,000 of interest related to the Unit Issuance Agreements. No payments have
been made as of September 30, 2008 under the Unit Issuance Agreements.
In July 2008, the Company entered into a services agreement with and unrelated
party. Under the terms of the agreement, the vendor will provide operation and
maintenance services of the Company's natural gas border station. The agreement
became effective in November 2008 and has a term of one year. The Company has
incurred no expense on this contract.
In August 2008, the Company entered into an agreement with an unrelated party
which establishes terms governing the Company's purchase of natural gas. The
agreement commenced in August 2008 and has a term of two years. The Company has
incurred no expense on this contract.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
There are no items to report.
Item 9A(T). 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
September 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.
54
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 September 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.
This annual report does not include a report of management's assessment
regarding internal control over financial reporting or an attestation report of
the company's registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for new public
companies.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The Directors and / or officers listed below under "Independent Directors T&
Officers" meet the "independent director" standards applicable to companies
listed on the Nasdaq Capital Market (though the Company's Units are not listed
on any exchange or quotation system). Contrariwise, those Directors listed below
under "Interested Directors" do not meet the "independent director" standards
applicable to companies listed on the Nasdaq Capital Market. With the exception
of Mr. Scharf, who serves on the Board of Directors of Patriot Coal Corporation,
none of the Directors listed below have served on the board of directors of any
other company having a class of securities registered under Section 12 of the
Exchange Act or subject to the requirements of Section 15(d) of the Exchange
Act, nor have any of our Directors served as directors of an investment company
registered under the Investment Company Act of 1940. Under the Company's
Operating Agreement, the independent Directors' terms are staggered such that
one Director will be up for election every year.
Mr. King purchased nine (9) additional Units on August 1, 2008. This latter
purchase was not reflected in a timely Form 3 filing. However, on November 4,
2008, the latter purchase was reflected in a Form 5 filing.
Independent Directors T& Officers
Position(s) Term of Office
Name Held with the and Length of Principal Occupation(s)
and Age Company Time Served During Past 5 Years
- ----------------- ---------------- ------------------- -----------------------------------------------------------------
Karol King, 61 Series A Term expires Corn, popcorn and soybean farmer near Mondamin, Iowa, since
Director and 2009, Director 1967; President, King Agri Sales, Inc. (marketer of chemicals,
Chairman since November, fertilizer and equipment) since 1995; President, Kelly Lane
2006 Trucking, LLC, since 2007. Mr. King attended Iowa State
University and has served on the Harrison County Farm Bureau
Board, the Iowa Corn Growers Board, the Iowa Corn Promotion
Board, the US Feed Grains Council Board, the National Gasohol
Commission, and the National Corn Growers Association Board.
Ted Bauer, 56 Series A Term expires Director, Secretary and Treasurer of the Company from March
Director, 2012, Director 2005; Owner and operator of a farming operation and hunting
Secretary and since March preserve near Audubon, Iowa, since 1977; Co-Founder, and from
Treasurer 2005; Officer 2005 to 2007, Director, Templeton Rye Spirits LLC; Director,
Since November, Iowa Quality Producers Alliance, since 2003; Vice President,
2006 West Central Iowa Rural Water, from 2002 to 2007. Mr. Bauer has
an Ag Business degree from Iowa State
55
Position(s) Term of Office
Name Held with the and Length of Principal Occupation(s)
and Age Company Time Served During Past 5 Years
- ----------------- ---------------- ------------------- -----------------------------------------------------------------
University and is a graduate of the Texas A&M TEPAP
program.
Hubert Houser, Series A Term expires Lifetime owner of farm and cow-calf operation located near
66 Director 2010, Director Carson, Iowa. Mr. Houser has served in the Iowa Legislature
since 2005 since 1993, first in the House of Representatives and currently
in the Senate. Mr. Houser also served on the Pottawattamie
County Board of Supervisors from 1979 to 1992, director of the
Riverbend Industrial Park, and was a founder of the Iowa
Western Development Association and Golden Hills RC&D.
Michael Guttau, Series A Term expires Chairman, Council of Federal Home Loan Banks, Washington, D.C.;
62 Director 2011, Director Chairman (2008-present), Vice Chairman (2004-2007) and Chairman
since 2007 of Audit Committee (2004-2006) and Chairman of Risk Management
Committee (2007), Federal Home Loan Bank of Des Monies; since
1972, various positions with Treynor State Bank, currently CEO
and Chairman of the Board; Superintendent of Banking, Iowa
Division of Banking, 1995-1999; Director, Iowa Bankers
Association, Iowa Bankers Mortgage Corporation, Iowa Student
Loan Liquidity Corp., Iowa Business Development Finance Corp.
and Iowa See Capital Liquidation Corp.; President, Southwest
Iowa Bank Administration Institute. Mr. Guttau received his
B.S., Farm Operation, from Iowa State University in 1969 and
completed numerous U.S. Army education programs from 1969 to
1978.
Interested Directors
Position(s) Term of Office+
Name Held with the and Length of Principal Occupation(s)
and Age Company Time Served During Past 5 Years
- ----------------- ---------------- ------------------- -----------------------------------------------------------------
Bailey Ragan, Series B Since November 1, Various positions with Bunge North America, Inc. for more than
52++ Director and 2006 25 years, currently Vice President and General Manager, Bunge
Vice Chairman Grain.
Michael Scharf, Series B Since November 1, Senior Vice President and CFO, Bunge North America, Inc., since
61++ Director 2006 1989.
Greg Krissek, Series C Since November 1, Director of Government Affairs, ICM, Inc., since 2006; Director
45++ Director 2006 of Marketing and Governmental Affairs, United Bio Energy, from
2003 to 2006; Chairman, National Ethanol Vehicle Coalition,
2007; Secretary-Treasurer of the Board, Ethanol Promotion and
Information Council since 2004 - President since June 2008;
director, Kansas Association of Ethanol Processors since 2004;
Kansas Energy Council, since 2004 prior Director of Operations,
Kansas Corn Commission; Assistant Secretary, Kansas Department
of Agriculture, 1997 to 2000. Mr. Krissek represents ICM on the
boards of six additional private ethanol companies. Mr. Krissek
received his B.A. in Economics from Rockhurst University in
Kansas City and his Juris Doctor and MBA from the University of
Denver.
56
+ The Interested Directors' terms do not have a specified number of years, as
these Directors are nominated by the Series B Member and the Series C Member, as
discussed further below under Items 11 and 13.
++ The information provided below under Item 13, "Certain Relationships and
Related Transactions, and Director Independence," respecting the election of
Messrs. Ragan, Scharf and Krissek as Directors, is incorporated into this Item
10 by reference.
Executive Officers
Name Position(s) Held Length of Principal Occupation(s)
and Age with the Company Time Served During Past 5 Years
Mark Drake, 50 President and Since January, Global Sales and Marketing Manager - Ethanol, Phibro Animal
Chief 2007 Health Corporation (global manufacturer of antimicrobials) from
Executive 2004 - 2006; Corporate Account Manager, Novozymes North America
Officer (global biotech manufacturer of food and industrial enzymes)
from 2002 -2004; Marketing Manager, Chief Ethanol Fuels, Inc.
(fuel grade ethanol manufacturer) from 2001 - 2002. Mr. Drake
received his Associate of Science, Chemistry degree from the
College of Lake County.
Cindy Chief Since August, 2007 Controller, Golden Triangle Energy, L.L.C. (ethanol producer)
Patterson, 48 Financial from 2000 - 2007; auditor, Profit Management Consultants, 1995 -
Officer 1999; staff accountant, Mitchell Williams, 1994 - 1995. Ms.
Patterson received her BBA degree from the University of
Georgia, a Post Baccalaureate in Accounting from Southern
Indiana University and an MBA in Management from Golden Gate
University.
The Company has not adopted a code of ethics that applies to its executive
officers, but expects to do so at its next annual Board of Directors meeting.
Item 11. Executive Compensation.
Corporate Governance / Compensation Committee
The Corporate Governance / Compensation Committee (the "Governance
Committee") operates under a written charter, which the Governance Committee
approved on February 15, 2007, and which was adopted by the Board of Directors
on February 16, 2007 (the "Governance Charter"). The Governance Charter is not
available on the Company's website. The Governance Charter provides that the
Governance Committee will annually review and approve the Company's compensation
program for its Directors, officers and managers. The Governance Charter does
not exclude from the Governance Committee's membership Directors who also serve
as officers of the Board or Interested Directors. Presently, the Governance
Committee's membership consists of Messrs. Scharf (Chair), Bauer, and King.
Accordingly, Messrs. Bauer and King did participate in recommending to the Board
the Compensation Policy. The Governance Charter does provide that the Governance
Committee may form and delegate its responsibilities to subcommittees, and the
Governance Charter does not contemplate (nor does it prohibit) the use of
compensation consultants to assist the Governance Committee in its determination
of Director, officer and managers' compensation.
Compensation of Executive Officers
The Company does not currently provide any Unit options, Unit appreciation
rights, non-equity incentive plans, non-qualified deferred compensation or
pension benefits to its executive officers. The Governance Committee is
responsible for designing, reviewing and overseeing the administration of the
Company's executive compensation program. As a development stage company,
certain elements of our executive compensation system have not yet been
established. Pursuant to the Governance Charter, the Governance Committee
approved the compensation terms for Mr. Drake and Ms. Patterson when they were
hired in 2007.
57
Summary Compensation Table
The following table provides all compensation paid to our executive
officers in fiscal years 2007 and 2008. None of our officers received any bonus,
stock or option awards, non-equity incentive plan compensation, or nonqualified
deferred compensation in fiscal years 2007 and 2008.
Non-Equity
Incentive Nonqualified
Name and Stock Option Plan Deferred All Other
Principal Fiscal Bonus Awards Awards Compensation Compensation Compensation Total
Position Year Salary ($) ($) ($) ($) ($) Earnings ($) ($) ($)
Mark Drake,
President and
CEO 2008 $150,000 $0 $0 $0 $0 $0 $19,905(1) $169,905
2007 $150,000 $0 $0 $0 $0 $0 $37,080(2) $187,080
Cindy
Patterson, CFO 2008 $100,000 $0 $0 $0 $0 $0 $0 $100,000
2007 $90,000 $0 $0 $0 $0 $0 $25,000(3) $115,000
(1) This amount reflects the Company's cost to provide a vehicle for Mr. Drake's
use.
(2) This amount constitutes reimbursements for the officer's relocation expenses
in the amount of $30,000 and the cost of providing the officer with a vehicle in
the approximate amount of $7,080 for fiscal year.
(3) This amount is a signing bonus for the officer.
Compensation of Directors
The Company does not provide its Directors with any equity or equity option
awards, nor any non-equity incentive payments or deferred compensation.
Similarly, the Company does not provide its Directors with any other
perquisites, "gross-ups," defined contribution plans, consulting fees, life
insurance premium payments or otherwise. Following recommendation by the
Company's Corporate Governance / Compensation Committee and subsequent approval
by the Board on March 16, 2007, the Company pays its Directors the following
amounts (collectively, the "Compensation Policy"): (i) each Director receives an
annual retainer of $12,000, (ii) each Director receives $1,000 per Board meeting
attended (whether in person or telephonic), and (iii) once our plant is
operational, each Director will receive $3,000 per Board meeting attended
(whether in person or telephonic), provided that the foregoing amounts in (i) -
(iii) shall not exceed $24,000 per Director in any calendar year. Additionally,
the following amounts are paid to Directors for specified services: (i) the
Chairman of the Board is paid $7,500 per year, (ii) the Chairman of the Audit
Committee and Audit Committee Financial Expert is paid $5,000 per year, (iii)
the Chairmen of all other Committees are paid $2,500 per year, and (iv) the
Secretary of the Board is paid $2,500 per year.
Independent Directors
The following table lists the compensation the Company paid in Fiscal Year
2008 to its Directors who are considered "independent" under standards
applicable to companies listed on the Nasdaq Capital Market (though the
Company's Units are not listed on any exchange or quotation system) (the
"Independent Directors").
Fees Earned or Paid Equity or Non-Equity
Name in Cash All Other Compensation incentives Total
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Ted Bauer $25,500 $0 $0 $25,500
Hubert Houser $24,500 $0 $0 $24,500
Karol King $30,500 $0 $0 $30,500
Michael Guttau $28,000 $0 $0 $28,000
58
Interested Directors
The following table lists the compensation the Company paid in Fiscal Year
2008 to its Directors who are not considered "independent" under standards
applicable to companies listed on the Nasdaq Capital Market (though the
Company's Units are not listed on any exchange or quotation system) (the
"Interested Directors").
Fees Earned or Paid Equity or Non-Equity
Name in Cash All Other Compensation incentives Total
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Bailey Ragan+ $24,500 $0 $0 $24,500
Michael M. Scharf+ $24,500 $0 $0 $24,500
Greg Krissek $23,000 $0 $0 $23,000
+ The Directors fees payable to the Interested Directors are paid directly to
their corporate employers at such Directors' request, and the Interested
Directors do not receive any compensation from the Company for their service as
Directors.
Selection of the Company's directors is governed by the Nominating Committee
Charter, which was adopted by the Board of Directors on February 16, 2007. These
governing procedures have not been modified or amended. The Company also has an
audit committee, which consists of Mick Guttau (Chairman), Ted Bauer and Karol
King. Mr. Guttau is the financial expert who is required to serve on the audit
committee under SEC rules. Mr. Guttau is not considered an "independent"
financial expert under listing standards applicable to the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Member Matters.
As of September 30, 2008, there were 8,805 Series A Units, 3,334 Series B
Units, and 1,000 Series C Units issued and outstanding. The following table sets
forth certain information as of September 30, 2008, with respect to the Unit
ownership of: (i) those persons or groups (as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) who beneficially own more than 5% of any Series of Units, (ii) each
Director of the Company, and (iii) all Officers and Directors of the Company,
nine in number, as a group. The address of those in the following table is 10868
189th Street, Council Bluffs, Iowa 51503. Messrs. King, Drake, Patterson and
Bauer serve in the capacity of executive officers. Except as noted below, the
persons listed below possess sole voting and investment power over their
respective Units. The following does not reflect any Units which may be issued
to Bunge and ICM, respectively, under the terms of the Unit Issuance Agreements.
Amount and Nature of Beneficial
Title of Class Name of Beneficial Owner Ownership Percent of Class
- ------------------ ----------------------------------------- ----------------------------------- ---------------------
Series A Ted Bauer 36 Units(1) 0.41%
Series A Hubert Houser 39 Units(2) 0.44%
Series A Karol King 29 Units(3) 0.33%
Series A Michael Guttau 12 Units(4) 0.14%
-- Mark Drake -0- --
-- Cindy Patterson -0- --
-- Bailey Ragan -0- --
-- Michael Scharf -0- --
-- Greg Krissek -0- --
Series B Bunge North America, Inc. 3334 Units 100%
Series C ICM, Inc. 1000 Units 100%
Series A All Officers and Directors as a Group 116 Units 1.92%
- ------------------------------------
(1) These Series A Units are owned jointly by Mr. Bauer and his wife, Donna
Bauer.
(2) These Series A Units are owned jointly by Mr. Houser and his wife, Paula
Houser.
59
(3) These Series A Units are owned jointly by Mr. King and his wife, Rozanne
King.
(4) These Series A Units are owned jointly by Mr. Guttau and his wife, Judith
Guttau.
Item 13. Certain Relationships and Related Transactions, and Director
Independence.
Relationships and Related Party Transactions
On November 1, 2006, in consideration of its agreement to invest
$20,004,000 in the Company, Bunge purchased the only Series B Units of the
Company under an arrangement whereby the Company would (i) enter into various
agreements with Bunge or its affiliates discussed below for management,
marketing and other services to the Company, and (ii) have the right to elect a
number of Series B Directors which are proportionate to the number of Series B
Units owned by Bunge, as compared to all Units. Bunge elected Bailey Ragan and
Michael Scharf as the Series B Directors on November 1, 2006. Under the
Company's Operating Agreement, the Company may not, without Bunge's approval (i)
issue additional Series B Units, (ii) create any additional Series of Units with
rights which are superior to the Series B Units, (iii) modify the Operating
Agreement to adversely impact the rights of Series B Unit holders, (iv) change
the Company's status from one which is managed by managers, or change back to
manager management in the event the status is changed to member management, (v)
repurchase or redeem any Series B Units, (vi) cause the Company to take any
action which would cause a bankruptcy, or (vii) approve a transfer of Units
allowing the transferee to hold more than 17% of the Company's Units or to a
transferee which is a direct competitor of Bunge.
Additionally, Bunge has caused its bank to issue a letter of credit in an
amount equal to 76% of the maximum principal amount of the Bridge Loan in favor
of the Bridge Lender as security for the Bridge Loan. The Bunge LC will expire
on March 16, 2009, and the Bridge Lender will only draw against the Bunge LC to
the extent that we default under the Bridge Loan or have not repaid the Bridge
Loan in full by March 1, 2009. In the event the Bridge Lender draws against the
Bunge LC, the amounts drawn will be in proportion to Bunge's ownership of the
Company's Units which are not Series A--currently 76%. As part of the foregoing
arrangement with Bunge, the Company entered into the Series E Agreement on March
7, 2008, pursuant to which the Company has agreed (i) to pay Bunge a fee for the
issuance of the Bunge LC equal to 6% per annum of the undrawn face amount of the
Bunge LC and (ii) to reimburse Bunge with Series E Units to the extent that the
Bunge makes a Bridge Loan Payment, as further described below.
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 any offering
of Units 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. Bunge has
indicated it plans to purchase units sufficient to maintain ownership at its
current percentage of outstanding units.
To the extent that the Company issues Series E Units to Bunge pursuant to
the Series E Agreement, the Company's Operating Agreement provides (i) that
Bunge, as a Series E Member, is entitled to elect one additional director (to
the extent that Bunge owns between 21% and 29% of the total Units issued and
outstanding) two additional directors (to the extent that Bunge owns between 30%
and 39% of the total Units issued and outstanding) or three additional directors
(to the extent that Bunge owns 40% or more of the total Units issued and
outstanding); and (ii) that the Company may not, without Bunge's approval (a)
issue additional Series E Units, (b) create any additional Series of Units with
rights which are superior to the Series E Units, (c) modify the Operating
Agreement to adversely impact the rights of Series E Unit holders, (d) change
the Company's status from one which is managed by managers, or vice versa, (e)
repurchase or redeem any Series E Units, (f) cause the Company to take any
action which would cause a bankruptcy, or (g) approve a transfer of Units
allowing the transferee to hold more than 15% of the Company's Units or to a
transferee which is a direct competitor of Bunge.
The Company and Bunge entered into the DG Agreement on October 13, 2006.
The DG Agreement provides that Bunge will purchase all of the Distillers Grains
produced by us over a term of 10 years, beginning when we commence production of
Distillers Grains, with automatic renewals for three-year terms unless a party
provides six
60
months' notice. Bunge will pay us for the Distillers Grains, but retain amounts
for transportation costs, rail lease charges and marketing fees. We have agreed
to pay a minimum annual marketing fee to Bunge in the amount of $150,000. After
the third year of the DG Agreement, the parties may make adjustments to the
prices.
The Company and Bunge entered into an Agreement on October 13, 2006
respecting the use of Bunge's grain elevator in Council Bluffs, Iowa (the
"Elevator Agreement"). The Elevator Agreement does not require the payment by
the Company of any moneys and otherwise did not involve the payment of any
consideration by either party; rather, it imposes restrictions on the use and
possible disposition by Bunge of its grain elevator located in Council Bluffs,
Iowa, including a right of first refusal in favor of the Company. The parties
entered into the Elevator Agreement as part of their overall arrangement under
which Bunge initially agreed to invest in the Company.
On December 15, 2008, the Company and Bunge entered into a Lease Agreement
(the "Lease") respecting Bunge's grain elevator in Council Bluffs. Under the
Lease, the Company has leased from Bunge the grain elevator, for approximately $800,000
per year. The Lease provides customary terms and has an initial one-year term,
which will be renewed for successive one-year terms upon the parties' agreement
to so extend the term.
The Company and a company in which Bunge holds a membership interest,
AGRI-Bunge, LLC, entered into the Agency Agreement on October 13, 2006, as
amended December 15, 2008. Under the Agency Agreement, we agreed to pay an
agency fee to AB for corn delivered, subject to an annual minimum fee of
$225,000, for AB's service of procuring all grain requirements for our plant.
The Agency Agreement will commence when we first require corn, presently
projected to be in the fourth quarter of 2008, and will then continue for 10
years with automatic renewals for three year periods unless a party provides
notice to not renew within six months of the then-current term. After three
years from the commencement of the Agency Agreement, the annual minimum payment
may be adjusted.
The Company and AB entered into the Supply Agreement on December 15, 2008.
Under the Supply Agreement, AB has agreed to provide us with all of the corn we
need to operate our ethanol plant, and we have agreed to only purchase corn from
AB. AB will provide grain originators who will work at the Facility for purposes
of fulfilling its obligations under the Supply Agreement. The Company will pay
AB a per-bushel fee for corn procured by AB for the Company under the Supply
Agreement, subject to a minimum annual fee of $675,000 and adjustments according
to specified indexes after three years. The term of the Supply Agreement is ten
years, subject to earlier termination upon specified events. The Supply
Agreement suspends the operation of the Agency Agreement. In the event we obtain
a grain dealer's license, subject to certain procedures specified in the Supply
Agreement, then the operation of the Supply Agreement will terminate and the
Agency Agreement will be reinstated.
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.
On June 25, 2007, we entered into the Railcar Agreement with Bunge for the
sub-lease of 320 ethanol cars and 300 DDGS cars which will be used in the
delivery and marketing of ethanol and DDGS. We will be responsible for all
maintenance and mileage charges as well as the monthly lease expense and certain
railcar modification expenses. Under the Railcar Agreement, we will lease
railcars for terms lasting 120 months and continuing on a month to month basis
thereafter. The Railcar Agreement will terminate upon the expiration of all
railcar leases.
On December 15, 2008, the Company and Bunge entered into the Ethanol
Agreement, under which the Company has agreed to sell Bunge all of the ethanol
produced at the Plant, and Bunge has agreed to purchase the same, up to the
Plant's nameplate capacity of 110,000,000 gallons a year. The Company will pay
Bunge a per-gallon fee for ethanol sold by Bunge for the Company under the
Ethanol Agreement, subject to a minimum annual fee of $750,000 and adjustments
according to specified indexes after three years. The initial term of the
Ethanol Agreement, which will commence upon the termination of that Ethanol
Merchandising Agreement between the Company and Lansing Ethanol Services, LLC,
is three years and it will automatically renew for successive three-
61
year terms unless one party provides the other notice of their election to
terminate 180 days prior to the end of the term.
On December 15, 2008, the Company and Bunge entered into a Risk Management
Services Agreement ("Risk Management Agreement"). Under the Risk Management
Agreement, Bunge has agreed to provide the Company with assistance in managing
its commodity price risks for a quarterly fee of $75,000. The Risk Management
Agreement has an initial term of three years and will automatically renew for
successive three year terms, unless one party provides the other notice of their
election to terminate 180 days prior to the end of the term.
On November 1, 2006, in consideration of its agreement to invest $6,000,000
in the Company, ICM became the sole Series C Member of the Company. As part of
ICM's agreement to invest in the Company's Series C Units, the Company's
Operating Agreement provides that it will not, without ICM's approval (i) issue
additional Series C Units, (ii) create any additional Series of Units with
rights senior to the Series C Units, (iii) modify the Operating Agreement to
adversely impact the rights of Series C Unit holders, or (iv) repurchase or
redeem any Series C Units. Additionally, ICM, as the sole Series C Unit owner,
is afforded the right to elect one Series C Director to the Board so long as ICM
remains a Series C Member. Greg Krissek was elected as the Series C Director by
ICM on November 1, 2006.
Additionally, as discussed in more detail above under Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Status, Overview and Recent Developments, ICM has caused its bank to issue a
letter of credit in an amount equal to 24% of the maximum principal amount of
the Bridge Loan in favor of the Bridge Lender as security for the Bridge Loan.
The ICM LC will expire on March 16, 2009, and the Bridge Lender will only draw
against the Bunge LC to the extent that we default under the Bridge Loan or have
not repaid the Bridge Loan in full by March 1, 2009. In the event the Bridge
Lender draws against the ICM LC, the amounts drawn will be in proportion to
ICM's ownership of the Company's Units which are not Series A--currently 24%. As
part of the foregoing arrangement with ICM, the Company entered into the Series
C Agreement on March 7, 2008, pursuant to which the Company has agreed to (i) to
pay ICM a fee for the issuance of the ICM LC equal to 6% per annum of the
undrawn face amount of the ICM LC and (ii) to reimburse ICM with additional
Series C Units to the extent that ICM makes a Bridge Loan Payment, as further
described below.
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 any offering
of Units 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.
On September 25, 2006, the Company entered into a Design Build Contract
with ICM, under which ICM has contracted to construct a 110 million gallon per
year dry mill ethanol plant. The ICM Contract contains a lump-sum price of
$118,000,000. Under the ICM Contract, the Company was required to make a down
payment of 10% of the original contract price, of which $2,000,000 was paid at
the delivery of the parties' letter of intent, an additional $2,000,000 was paid
in November 2006 when the Company broke escrow, and the remaining $7,800,000 was
paid when the Company delivered to ICM a notice to proceed on January 23, 2007.
The Company does not presently have any policies finalized and adopted by
the Board governing the review or approval of related party transactions.
Director Independence
The Company determines its "independent director" according to the
standards applicable to companies listed on the Nasdaq Capital Market (though
the Company's Units are not listed on any exchange or quotation system). Under
the Company's Operating Agreement, the independent Directors' terms are
staggered such that one Director will be up for election every year. The
Company's independent directors are Karol King, Ted Bauer, Herbert Houser, and
Michael Guttau. The Audit Committee currently consists of Michael Guttau
(Chair), Ted Bauer and Karol King. All of the members of the Audit Committee
meet the "independent director" standards applicable to
62
companies listed on the Nasdaq Capital Market (though the Company's Units are
not listed on any exchange or quotation system). Presently, the Nominating
Committee's membership consists of Ted Bauer, Hubert Houser and Karol King, all
of whom meet the "independent director" standards applicable to companies listed
on the Nasdaq Capital Market (though the Company's Units are not listed on any
exchange or quotation system). The Compensation Committee Charter does not
exclude from the Corporate Governance/Compensation Committee's membership
Directors who also serve as officers or Interested Directors. Presently, the
Governance Committee's membership consists of Messrs. Scharf (Chair), Bauer and
King. As further described below, Mr. Scharf is considered an Interested
Director.
Item 14. Principal Accountant Fees and Services.
Independent Public Accountant Fees and Services
The following table presents fees paid for professional services rendered
by the Company's independent public accountants for the Company's fiscal year
ended September 30, 2008 ("Fiscal Year 2008") and for the Company's fiscal year
ended September 30, 2007 ("Fiscal Year 2007"):
Fee Category Fiscal Year 2008 Fees Fiscal Year 2007 Fees
- ---------------------------- ---------------------------- ----------------------------
Audit Fees $115,000 $97,555
Audit-Related Fees $0 $0
Tax Fees $60,125 $21,273
All Other Fees --- ---
---------------------------- ----------------------------
Total Fees $175,125 $118,828
Audit Fees are for professional services rendered by McGladrey T& Pullen,
LLP ("McGladrey") for the audit of the Company's annual financial statements and
review of the interim financial statements included in quarterly reports and
services that are normally provided by McGladrey in connection with statutory
and regulatory filings or engagements. Fiscal Year 2007 included the re-audit of
the Company's annual financial statements.
Audit-Related Fees are for assurance and related services that are
reasonably related to the performance of the audit or review of the Company's
financial statements and are not reported under "Audit Fees." These services
include accounting consultations in connection with acquisitions, consultations
concerning financial accounting and reporting standards. The Company did not pay
any fees for such services in Fiscal Year 2008 or Fiscal Year 2007.
Tax Fees are for professional services rendered by RSM McGladrey, Inc., an
affiliate of McGladrey, for tax compliance, tax advice and tax planning and
include preparation of federal and state income tax returns, and other tax
research, consultation, correspondence and advice.
All Other Fees are for services other than the services reported above. The
Company did not pay any fees for such other services in Fiscal Year 2008 or
2007.
The Audit Committee has concluded the provision of the non-audit services
listed above is compatible with maintaining the independence of McGladrey.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditors
The Audit Committee pre-approves all audit and permissible non-audit
services provided by the Company's independent auditors. These services may
include audit services, audit-related services, tax services and other
63
services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. The independent auditors and
management are required to periodically report to the Audit Committee regarding
the extent of services provided by the independent auditors in accordance with
this pre-approval, and the fees for the services performed to date. The Audit
Committee may also pre-approve particular services on a case-by-case basis.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Documents filed as part of this Report:
(1) Balance Sheets at September 30, 2008 and September 30, 2007
Statements of Operations for the years ended September 30, 2008 and
September 30, 2007 and
Date of Inception (March 28, 2005 to September 30, 2008)
Statements of Members' Equity as of September 30, 2008
Statement of Cash Flows for the year ended September 30, 2008
and September 30, 2007 and Date of Inception (March 28, 2005 to
September 30, 2008)
Notes to Financial Statements
(b) See (a)(1) above
(c) The following exhibits are filed herewith or incorporated by reference as
set forth below:
Exhibit numbers 10.36 and 10.37 are management contracts.
2 Omitted - Inapplicable.
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 the Company on January 28,
2008).
4(i) 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 the Company on March 21,
2008).
9 Omitted - Inapplicable.
10.1 Agreement dated October 13, 2006 with Bunge North America, Inc.
(incorporated by reference to Exhibit 10.1 of Registration Statement on
Form 10/A filed by the Company on October 23, 2008). Portions of the
Agreement have been omitted pursuant to a request for confidential
treatment.
10.2 Ethanol Merchandising Agreement dated November 1, 2006 with Lansing
Ethanol Services, LLC (incorporated by reference to Exhibit 10.2 of
Registration Statement on Form 10 filed by the Company on October 23,
2008). Portions of the Agreement have been omitted pursuant to a
request for confidential treatment.
10.3 Assignment of Ethanol Merchandising Agreement dated May 2, 2007 between
AgStar Financial Services, PCA and Southwest Iowa Renewable Energy, LLC
(incorporated by reference to Exhibit 10.3 of Registration Statement on
Form 10 filed by the Company on January 28, 2008).
10.4 Executed Steam Service Contract dated January 22, 2007 with MidAmerican
Energy Company (incorporated by reference to Exhibit 10.4 of
Registration Statement on Form 10/A filed by the Company on October 23,
2008). Portions of the Contract have been omitted pursuant to a request
for confidential treatment.
10.5 Assignment of Steam Service Contract dated May 2, 2007 in favor of
AgStar Financial Services, PCA (incorporated by reference to Exhibit
10.5 of Registration Statement on Form 10 filed by the Company on
January 28, 2008).
10.6 Electric Service Contract dated December 15, 2006 with MidAmerican
Energy Company (incorporated by reference to Exhibit 10.6 of
Registration Statement on Form 10 filed by the Company on January 28,
2008).
10.7 Assignment of Electric Service Contract dated May 2, 2007 in favor of
AgStar Financial Services, PCA (incorporated by reference to Exhibit
10.7 of Registration Statement on Form 10 filed by the Company on
January 28, 2008).
64
10.8 Distillers Grain Purchase Agreement dated October 13, 2006 with Bunge
North America, Inc. (incorporated by reference to Exhibit 10.8 of
Registration Statement on Form 10 filed by the Company on January 28,
2008). Portions of the Agreement have been omitted pursuant to a
request for confidential treatment.
10.9 Assignment of Distillers Grain Purchase Agreement dated May 2, 2007 in
favor of AgStar Financial Services, PCA (incorporated by reference to
Exhibit 10.9 of Registration Statement on Form 10 filed by the Company
on January 28, 2008).
10.10 Grain Feedstock Agency Agreement dated October 13, 2006 with
AGRI-Bunge, LLC (incorporated by reference to Exhibit 10.10 of
Registration Statement on Form 10 filed by the Company on October 23,
2008). Portions of the Agreement have been omitted pursuant to a
request for confidential treatment.
10.11 Assignment of Grain Feedstock Agency Agreement dated May 2, 2007 with
AgStar Financial Services, PCA (incorporated by reference to Exhibit
10.11 of Registration Statement on Form 10 filed by the Company on
January 28, 2008).
10.12 Agreement between Owner and Design/Builder Based on The Basis of a
Stipulated Price dated September 25, 2006 with ICM, Inc. (incorporated
by reference to Exhibit 10.12 of Registration Statement on Form 10/A
filed by the Company on October 23, 2008). Portions of the Agreement
have been omitted pursuant to a request for confidential treatment.
10.13 Railcar Sublease Agreement dated June 25, 2007 with Bunge North
America, Inc. (incorporated by reference to Exhibit 10.13 of
Registration Statement on Form 10 filed by the Company on January 28,
2008). Portions of the Agreement have been omitted pursuant to a
request for confidential treatment.
10.14 Credit Agreement dated May 2, 2007 with AgStar Financial Services, PCA
(incorporated by reference to Exhibit 10.14 of Registration Statement
on Form 10 filed by the Company on January 28, 2008).
10.15 Security Agreement dated May 2, 2007 with AgStar Financial Services,
PCA (incorporated by reference to Exhibit 10.15 of Registration
Statement on Form 10 filed by the Company on January 28, 2008).
10.16 Mortgage, Security Agreement Assignment of Rents and Leases and Fixture
Filing dated May 2, 2007 in favor of AgStar Financial Services, PCA
(incorporated by reference to Exhibit 10.16 of Registration Statement
on Form 10 filed by the Company on January 28, 2008).
10.17 Environmental Indemnity Agreement dated May 2, 2007 with AgStar
Financial Services, PCA (incorporated by reference to Exhibit 10.17 of
Registration Statement on Form 10 filed by the Company on January 28,
2008).
10.18 Convertible Note dated May 2, 2007 in favor of Monumental Life
Insurance Company (incorporated by reference to Exhibit 10.18 of
Registration Statement on Form 10 filed by the Company on January 28,
2008).
10.19 Convertible Note dated May 2, 2007 in favor of Metlife Bank, N.A.
(incorporated by reference to Exhibit 10.19 of Registration Statement
on Form 10 filed by the Company on January 28, 2008).
10.20 Convertible Note dated May 2, 2007 in favor of Cooperative Centrale
Raiffeisen-Boerenleenbank, B.A. (incorporated by reference to Exhibit
10.20 of Registration Statement on Form 10 filed by the Company on
January 28, 2008).
10.21 Convertible Note dated May 2, 2007 in favor of Metropolitan Life
Insurance Company (incorporated by reference to Exhibit 10.21 of
Registration Statement on Form 10 filed by the Company on January 28,
2008).
10.22 Convertible Note dated May 2, 2007 in favor of First National Bank of
Omaha (incorporated by reference to Exhibit 10.22 of Registration
Statement on Form 10 filed by the Company on January 28, 2008).
10.23 Revolving Line of Credit Note in favor of Cooperative Centrale
Raiffeisen-Boerenleenbank, B.A. (incorporated by reference to Exhibit
10.23 of Registration Statement on Form 10 filed by the Company on
January 28, 2008).
10.24 Revolving Line of Credit Note in favor of Metropolitan Life Insurance
Company (incorporated by reference to Exhibit 10.24 of Registration
Statement on Form 10 filed by the Company on January 28, 2008).
10.25 Revolving Line of Credit Note in favor of First National Bank of Omaha
(incorporated by reference to Exhibit 10.25 of Registration Statement
on Form 10 filed by the Company on January 28, 2008).
10.26 Term Revolving Note in favor of Metlife Bank, N.A. (incorporated by
reference to Exhibit 10.26 of Registration Statement on Form 10 filed
by the Company on January 28, 2008).
10.27 Term Revolving Note in favor of Cooperative Centrale
Raiffeisen-Boerenleenbank, B.A. (incorporated by reference to Exhibit
10.27 of Registration Statement on Form 10 filed by the Company on
January 28, 2008).
65
10.28 Term Revolving Note in favor of Metropolitan Life Insurance Company
(incorporated by reference to Exhibit 10.28 of Registration Statement
on Form 10 filed by the Company on January 28, 2008).
10.29 Term Revolving Note in favor of First National Bank of Omaha
(incorporated by reference to Exhibit 10.29 of Registration Statement
on Form 10 filed by the Company on January 28, 2008).
10.30 Lien Subordination Agreement dated May 2, 2007 among Southwest Iowa
Renewable Energy, LLC, AgStar Financial Services, PCA and Iowa
Department of Economic Development (incorporated by reference to
Exhibit 10.30 of Registration Statement on Form 10 filed by the Company
on January 28, 2008).
10.31 Value Added Agricultural Product Marketing Development Grant Agreement
dated November 3, 2006 with the United States of America (incorporated
by reference to Exhibit 10.31 of Registration Statement on Form 10
filed by the Company on January 28, 2008).
10.32 Engineering Services Agreement dated November 27, 2006 with HGM
Associates, Inc. (incorporated by reference to Exhibit 10.32 of
Registration Statement on Form 10 filed by the Company on January 28,
2008). Portions of the Contract have been omitted pursuant to a request
for confidential treatment.
10.33 Fee Letter dated May 2, 2007 with AgStar Financial Services, PCA
(incorporated by reference to Exhibit 10.33 of Registration Statement
on Form 10 filed by the Company on January 28, 2008).
10.34 Design-Build Agreement dated December 18, 2006 with Todd T& Sargent,
Inc. (incorporated by reference to Exhibit 10.34 of Registration
Statement on Form 10 filed by the Company on January 28, 2008).
10.35 Master Contract dated November 21, 2006 with Iowa Department of
Economic Development (incorporated by reference to Exhibit 10.35 of
Registration Statement on Form 10 filed by the Company on January 28,
2008).
10.36 Employment Agreement dated January 31, 2007 with Mark Drake
(incorporated by reference to Exhibit 10.36 of Registration Statement
on Form 10 filed by the Company on January 28, 2008).
10.37 Letter Agreement dated July 23, 2007 with Cindy Patterson
(incorporated by reference to Exhibit 10.37 of Registration Statement
on Form 10 filed by the Company on January 28, 2008).
10.38 First Amendment to Credit Agreement dated March 7, 2008 with AgStar
Financial Services, PCA (incorporated by reference to Exhibit 10.38 of
Amendment No. 1 to Registration Statement on Form 10 filed by the
Company on March 21, 2008).
10.39 Amended and Restated Disbursing Agreement dated March 7, 2008 with
AgStar Financial Services, PCA (incorporated by reference to Exhibit
10.39 of Amendment No. 1 to Registration Statement on Form 10 filed by
the Company on March 21, 2008).
10.40 Promissory Note dated March 7, 2008 in favor of Commerce Bank, N.A
(incorporated by reference to Exhibit 10.40 of Amendment No. 1 to
Registration Statement on Form 10 filed by the Company on March 21,
2008).
10.41 Irrevocable Standby Letter of Credit No. S500381 made by UMB Bank,
N.A., for the account of Bunge North America, Inc. in favor of Commerce
Bank, N.A. dated March 10, 2008 (incorporated by reference to Exhibit
10.41 of Amendment No. 1 to Registration Statement on Form 10 filed by
the Company on March 21, 2008).
10.42 Irrevocable Standby Letter of Credit No. 08SBLC0345 made by INTRUST
Bank, N.A. for the account of ICM Inc. in favor of Commerce Bank, N.A.
dated March 7, 2008 (incorporated by reference to Exhibit 10.42 of
Amendment No. 1 to Registration Statement on Form 10 filed by the
Company on March 21, 2008).
10.43 Allonge to Revolving Line of Credit Note in favor of First National
Bank of Omaha dated March 7, 2008 (incorporated by reference to Exhibit
10.43 of Amendment No. 1 to Registration Statement on Form 10 filed by
the Company on March 21, 2008).
10.44 Allonge to Revolving Line of Credit Note in favor of Cooperative
Centrale Raiffeisen-Boerenleenbank, B.A., dated March 7, 2008
(incorporated by reference to Exhibit 10.44 of Amendment No. 1 to
Registration Statement on Form 10 filed by the Company on March 21,
2008).
10.45 Allonge to Revolving Line of Credit Note in favor of Metropolitan Life
Insurance Company, dated March 7, 2008 (incorporated by reference to
Exhibit 10.45 of Amendment No. 1 to Registration Statement on Form 10
filed by the Company on March 21, 2008).
10.46 Allonge to Convertible Note in favor of First National Bank of Omaha,
dated March 7, 2008 (incorporated by reference to Exhibit 10.46 of
Amendment No. 1 to Registration Statement on Form 10 filed by the
Company on March 21, 2008).
66
10.47 Allonge to Convertible Note in favor of Metlife Bank, N.A., dated
March 7, 2008 (incorporated by reference to Exhibit 10.47 of Amendment
No. 1 to Registration Statement on Form 10 filed by the Company on
March 21, 2008).
10.48 Allonge to Convertible Note in favor of Metropolitan Life Insurance
Company, dated March 7, 2008 (incorporated by reference to Exhibit
10.48 of Amendment No. 1 to Registration Statement on Form 10 filed by
the Company on March 21, 2008).
10.49 Allonge to Convertible Note in favor of Cooperative Centrale
Raiffeisen-Boerenleenbank, B.A., dated March 7, 2008 (incorporated by
reference to Exhibit 10.49 of Amendment No. 1 to Registration
Statement on Form 10 filed by the Company on March 21, 2008).
10.50 Allonge to Term Revolving Note in favor of First National Bank of
Omaha, dated March 7, 2008 (incorporated by reference to Exhibit 10.50
of Amendment No. 1 to Registration Statement on Form 10 filed by the
Company on March 21, 2008).
10.51 Allonge to Term Revolving Note in favor of Cooperative Centrale
Raiffeisen-Boerenleenbank, B.A., dated March 7, 2008 (incorporated by
reference to Exhibit 10.51 of Amendment No. 1 to Registration Statement
on Form 10 filed by the Company on March 21, 2008).
10.52 Allonge to Term Revolving Note in favor of Metlife Bank, N.A., dated
March 7, 2008 (incorporated by reference to Exhibit 10.52 of Amendment
No. 1 to Registration Statement on Form 10 filed by the Company on
March 21, 2008).
10.53 Allonge to Term Revolving Note in favor of Metropolitan Life Insurance
Company, dated March 7, 2008 (incorporated by reference to Exhibit
10.53 of Amendment No. 1 to Registration Statement on Form 10 filed by
the Company on March 21, 2008).
10.54 Allonge to Convertible Note in favor of Monumental Life Insurance
Company, dated March 7, 2008 (incorporated by reference to Exhibit
10.54 of Amendment No. 1 to Registration Statement on Form 10 filed by
the Company on March 21, 2008).
10.55 Term Revolving Note in favor of Amarillo National Bank (incorporated
by reference to Exhibit 10.55 of Amendment No. 1 to Registration
Statement on Form 10 filed by the Company on March 21, 2008).
10.56 Allonge to Term Revolving Note in favor of Amarillo National Bank,
dated March 7, 2008 (incorporated by reference to Exhibit 10.56 of
Amendment No. 1 to Registration Statement on Form 10 filed by the
Company on March 21, 2008).
10.57 Convertible Note dated May 2, 2007, in favor of Amarillo National Bank
(incorporated by reference to Exhibit 10.57 of Amendment No. 1 to
Registration Statement on Form 10 filed by the Company on March 21,
2008).
10.58 Allonge to Convertible Note in favor of Amarillo National Bank, dated
March 7, 2008 (incorporated by reference to Exhibit 10.58 of Amendment
No. 1 to Registration Statement on Form 10 filed by the Company on
March 21, 2008).
10.59 Revolving Line of Credit Note in favor of Amarillo National Bank
(incorporated by reference to Exhibit 10.59 of Amendment No. 1 to
Registration Statement on Form 10 filed by the Company on March 21,
2008).
10.60 Allonge to Revolving Line of Credit Note in favor of Amarillo National
Bank, dated March 7, 2008 (incorporated by reference to Exhibit 10.60
of Amendment No. 1 to Registration Statement on Form 10 filed by the
Company on March 21, 2008).
10.61 Series C Unit Issuance Agreement dated March 7, 2008 with ICM, Inc.
(incorporated by reference to Exhibit 10.61 of Amendment No. 1 to
Registration Statement on Form 10 filed by the Company on March 21,
2008).
10.62 Series E Unit Issuance Agreement dated March 7, 2008 with Bunge North
America, Inc. (incorporated by reference to Exhibit 10.62 of Amendment
No. 1 to Registration Statement on Form 10 filed by the Company on
March 21, 2008).
10.63 Support Services Agreement dated January 30, 2008 with Bunge North
America, Inc. (incorporated by reference to Exhibit 10.63 of Amendment
No. 1 to Registration Statement on Form 10 filed by the Company on
March 21, 2008).
10.64 Amendment No. 01 dated March 9, 2007 with Iowa Department of Economic
Development (incorporated by reference to Exhibit 10.2 of Form 8-K
filed by the Company on June 10, 2006).
10.65 Amendment No. 02 dated May 30, 2008 with Iowa Department of Economic
Development (incorporated by reference to Exhibit 10.1 of Form 8-K
filed by the Company on June 10, 2006).
10.66 Industrial Track Agreement dated as of June 18, 2008 with CBEC
Railway, Inc. (incorporated by reference to Exhibit 10.1 of Form 8-K
filed by the Company on June 25, 2006).
67
10.67 Base Agreement dated August 27, 2008 between Southwest Iowa Renewable
Energy, LLC and Cornerstone Energy, LLC (incorporated by reference to
Exhibit 10.1 of Form 8-K filed by the Company on September 2, 2008).
10.68 Lease Agreement dated December 15, 2008 with Bunge North America, Inc.
(incorporated by reference to Exhibit 10.2 of Form 8-K filed by the
Company on December 22, 2008).
10.69 Ethanol Purchase Agreement dated December 15, 2008 with Bunge North
America, Inc. Portions of the Agreement have been omitted pursuant to
a request for confidential treatment (incorporated by reference to
Exhibit 10.3 of Form 8-K filed by the Company on December 22, 2008).
10.70 Risk Management Services Agreement dated December 15, 2008 with Bunge
North America, Inc. (incorporated by reference to Exhibit 10.4 of Form
8-K filed by the Company on December 22, 2008).
10.71 Base Agreement with Cornerstone Energy, LLC d/b/a Constellation Energy
dated August 27, 2008 (incorporated by reference to Exhibit 10.1 of
Report on Form 8-K filed by the Registrant on September 2, 2008).
10.72 Grain Feedstock Supply Agreement dated December 15, 2008 with
AGRI-Bunge, LLC. Portions of the Agreement have been omitted pursuant
to a request for confidential treatment (incorporated by reference to
Exhibit 10.1 of Form 8-K filed by the Company on December 22, 2008)..
11 Omitted - Inapplicable.
12 Omitted - Inapplicable.
13 Omitted - Inapplicable.
14 Omitted - Inapplicable.
16 Omitted - Inapplicable.
18 Omitted - Inapplicable.
21 Omitted - Inapplicable.
22 Omitted - Inapplicable.
23 Omitted - Inapplicable.
24 Omitted - Inapplicable.
31.1 Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of
2002) executed by Chief Executive Officer.
31.2 Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of
2002) executed by Chief Financial Officer.
32.1 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of
2002) executed by the Chief Executive Officer.
32.2 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of
2002) executed by the Chief Financial Officer.
68
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: December 29, 2008 /s/ Mark Drake
-----------------------------------
Mark Drake, President and Chief
Executive Officer
Date: December 29, 2008 /s/ Cindy Patterson
-----------------------------------
Cindy Patterson, Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Date
/s/ Karol King
- ---------------------------------- December 29, 2008
Karol King, Chairman of the Board
/s/ Ted Bauer
- ---------------------------------- December 29, 2008
Ted Bauer, Director
/s/ Hubert Houser
- ---------------------------------- December 29, 2008
Hubert Houser, Director
/s/ Michael Guttau
- ---------------------------------- December 29, 2008
Michael Guttau, Director
/s/ Bailey Ragan
- ---------------------------------- December 29, 2008
Bailey Ragan, Director
/s/ Michael Scharf
- ---------------------------------- December 29, 2008
Michael Scharf, Director
/s/ Greg Krissek
- ---------------------------------- December 29, 2008
Greg Krissek, Director
