Southwest Iowa Renewable Energy (SWIOU) 10-Q 2018 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

ý	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending June 30, 2018
o	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 incorporation or organization)	(I.R.S. Employer Identification No.)
10868 189th Street, Council Bluffs, Iowa	51503
(Address of principal executive offices)	(Zip Code)
Registrant’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 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 o

Indicate by check mark whether the registrant has submitted electronically on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o       Accelerated filer (do not check if a smaller reporting company) o         Non-accelerated filer o       Smaller reporting company x

Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No x

As of June 30, 2018, the Company had 8,993 Series A, 3,334 Series B and 1,000 Series C Membership Units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE—None

TABLE OF CONTENTS

Item No.	Item Matter	PAGE NO.
	PART 1 – FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS	2
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	14
Item 3.	QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISKS	25
Item 4.	CONTROLS AND PROCEDURES	25
	PART II – OTHER INFORMATION	25
Item 1.	LEGAL PROCEEDINGS	25
Item 1A.	RISK FACTORS	25
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	26
Item 3.	DEFAULTS UPON SENIOR SECURITIES	26
Item 4.	MINE SAFETY DISCLOSURES	26
Item 5.	OTHER INFORMATION	26
Item 6.	Exhibits	26
	SIGNATURES	28
	CERTIFICATIONS	SEE EXHIBITS 31 AND 32

PART I – FINANCIAL STATEMENTS

Item 1. Financial Statements

SOUTHWEST IOWA RENEWABLE ENERGY, LLC Balance Sheets (Dollars in thousands)
ASSETS	June 30, 2018			September 30, 2017
	(Unaudited)
Current Assets
Cash and cash equivalents	$	1,207		$	1,487
Accounts receivable	774			1,826
Accounts receivable, related party	13,810			11,469
Derivative financial instruments	361			23
Inventory	13,547			13,214
Prepaid expenses and other	541			441
Total current assets	30,240			28,460
Property, Plant and Equipment
Land	2,064			2,064
Plant, building and equipment	229,091			225,651
Office and other equipment	1,617			1,511
	232,772			229,226
Accumulated depreciation	(119,043		)	(111,000		)
Net property, plant and equipment	113,729			118,226
Other assets	2,102			2,143
Total Assets	$	146,071		$	148,829
Notes to Financial Statements are an integral part of this statement

3

SOUTHWEST IOWA RENEWABLE ENERGY, LLC Balance Sheets (Dollars in thousands)
LIABILITIES AND MEMBERS' EQUITY	June 30, 2018		September 30, 2017
	(Unaudited)
Current Liabilities
Accounts payable	$	2,229	$	3,387
Accounts payable, related party	6		165
Derivative financial instruments	1,453		911
Accrued expenses	7,347		6,943
Accrued expenses, related parties	534		168
Current maturities of notes payable	6,554		6,538
Total current liabilities	18,123		18,112
Long Term Liabilities
Notes payable, less current maturities	19,819		13,026
Other long-term  liabilities	5,700		5,700
Total long term liabilities	25,519		18,726
Members' Equity
Members' capital, 13,327 units issued and outstanding	87,165		87,165
Accumulated earnings	15,264		24,826
Total members' equity	102,429		111,991
Total Liabilities and Members' Equity	$	146,071	$	148,829
Notes to Financial Statements are an integral part of this statement

4

SOUTHWEST IOWA RENEWABLE ENERGY, LLC Statements of Operations (Dollars in thousands except for net income per unit) (Unaudited)
	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Revenues	$	53,611		$	54,052		$	157,708		$	162,190
Cost of Goods Sold
Cost of goods sold-non hedging	55,252			52,132			156,638			148,883
Realized & unrealized hedging (gains)	(470		)	(1,380		)	(823		)	(665		)
	54,782			50,752			155,815			148,218
Gross Profit (Loss)	(1,171		)	3,300			1,893			13,972
General and administrative expenses	1,809			1,070			4,243			3,663
Operating Income (Loss)	(2,980		)	2,230			(2,350		)	10,309
Interest and other (income) expense, net	265			301			549			683
Net Income (Loss)	$	(3,245	)	$	1,929		$	(2,899	)	$	9,626
Weighted average units outstanding - basic	13,327			13,327			13,327			13,327
Weighted average units outstanding - diluted	13,327			14,384			13,327			14,423
Income (loss) per unit - basic	$	(243.49	)	$	144.74		$	(217.53	)	$	722.29
Income (loss) per unit - diluted	$	(243.49	)	$	134.11		$	(217.53	)	$	667.41
Distributions per unit - basic	$	—		$	—		$	500.00		$	340.00
Distributions per unit - diluted	$	—		$	—		$	500.00		$	314.16
Notes to Financial Statements are an integral part of this statement

5

SOUTHWEST IOWA RENEWABLE ENERGY, LLC Statements of Cash Flows (Dollars in thousands)
(Unaudited)
	Nine Months Ended			Nine Months Ended
	June 30, 2018			June 30, 2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(2,899	)	$	9,626
Adjustments to reconcile to net cash provided by operating activities:
Depreciation	8,753			9,020
Amortization	54			53
Loss on disposal of property and equipment	526			—
Change in other assets, net	41			(2		)
(Increase) decrease in current assets:
Accounts receivable	(1,289		)	(2,556		)
Inventories	(333		)	(2,926		)
Prepaid expenses and other	(100		)	(1,041		)
Derivative financial instruments	(338		)	(100		)
Increase (decrease) in current liabilities:
Accounts payable	(1,317		)	(1,152		)
Derivative financial instruments	542			(1,238		)
Accrued expenses	770			2,126
(Decrease) in other long-term liabilities	—			(75		)
Net cash provided by operating activities	4,410			11,735
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment	(4,832		)	(5,455		)
Proceeds from sale of property and equipment	50			—
Net cash (used in) investing activities	(4,782		)	(5,455		)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions paid to members	(6,663		)	(4,531		)
Proceeds from debt	101,292			67,221
Payments on debt	(94,537		)	(70,631		)
Net cash provided by (used in) financing activities	92			(7,941		)
Net (decrease) in cash and cash equivalents	(280		)	(1,661		)
CASH AND CASH EQUIVALENTS
Beginning	1,487			3,139
Ending	$	1,207		$	1,478
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest	$	687		$	800
Notes to Financial Statements are an integral part of this statement

6

SOUTHWEST IOWA RENEWABLE ENERGY, LLC

Notes to Financial Statements

Note 1:  Nature of Business

Southwest Iowa Renewable Energy, LLC (the “Company”), located in Council Bluffs, Iowa, was formed in March, 2005 and began producing ethanol in February, 2009.   The Company is permitted to produce up to 140 million gallons of ethanol per year. The Company sells its ethanol, distillers grains, corn syrup and corn oil in the continental United States, Mexico, and the Pacific Rim.

Note 2:  Summary of Significant Accounting Policies

Basis of Presentation and Other Information

The accompanying financial statements as of and for the three and nine months ended June 30, 2018 and 2017 are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto, for the fiscal year ended September 30, 2017 contained in the Company’s Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.

Revenue Recognition

The Company sells ethanol and related products pursuant to marketing agreements.  Revenues are recognized when the marketing company has taken title to the product, prices are fixed or determinable and collectability is reasonably assured. 

The Company’s products are generally shipped FOB loading point, and recorded as a sale upon delivery of the applicable bill of lading.  The Company’s ethanol sales are handled through an ethanol purchase agreement (the “Ethanol Agreement”) with Bunge North America, Inc. (“Bunge”).  Syrup and distillers grains (co-products) are sold through a distillers grains agreement (the “DG Agreement”) with Bunge, based on market prices. The Company markets and distributes all of the corn oil it produces directly to end users at market prices.   Carbon dioxide is sold through a Carbon Dioxide Purchase and Sale Agreement (the “CO2 Agreement”) with Air Products and Chemicals, Inc. Marketing fees, agency fees, and commissions due to the marketer are calculated separately from the settlement for the sale of the ethanol products and co-products and are included as a component of cost of goods sold.  Shipping and handling costs incurred by the Company for the sale of ethanol and co-products are included in cost of goods sold.

Accounts Receivable

Accounts receivable are recorded at original invoice amounts less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis.  Most of the accounts receivable are with Bunge. Management determines the allowance for doubtful accounts by regularly evaluating customer receivables and considering the customer’s financial condition, credit history and current economic conditions.  As of June 30, 2018 and September 30, 2017, management had determined no allowance was necessary.  Accounts receivables are written off when deemed uncollectable and recoveries of receivables written off are recorded when received.

Investment in Commodities Contracts, Derivative Instruments and Hedging Activities

The Company’s operations and cash flows are subject to fluctuations due to changes in commodity prices.  The Company is subject to significant market risk with respect to the price and availability of corn, the principal raw material used to produce ethanol and ethanol by-products.  Exposure to commodity price risk results from its dependence on corn in the ethanol production process.  In general, rising corn prices result in lower profit margins and, therefore, represent unfavorable market conditions.  This is especially true when market conditions do not allow the Company to pass along increased corn costs to customers. The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.

7

To minimize the risk and the volatility of commodity prices, primarily related to corn and ethanol, the Company uses various derivative instruments, including forward corn, ethanol, and distillers grains purchase and sales contracts, over-the-counter and exchange-traded futures and option contracts.  When the Company has sufficient working capital available, it enters into derivative contracts to hedge its exposure to price risk related to forecasted corn needs and forward corn purchase contracts.  

Management has evaluated the Company’s contracts to determine whether the contracts are derivative instruments. Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales.  Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.  Gains and losses on contracts that are designated as normal purchases or normal sales contracts are not recognized until quantities are delivered or utilized in production.

The Company applies the normal sale exemption to forward contracts relating to ethanol, distillers grains, and corn oil and therefore these forward contracts are not marked to market. As of June 30, 2018, the Company was committed to sell 2.3 million gallons of ethanol, 0.1 million tons of wet and dried distillers grains and 2.5 million pounds of corn oil.

Corn purchase contracts are treated as derivative financial instruments. Changes in market value of forward corn contracts, which are marked to market each period, are included in costs of goods sold.  As of June 30, 2018, the Company was committed to purchasing 4.9 million bushels of corn on a forward contract basis resulting in a total commitment of $18.6 million. In addition, the Company was committed to purchase 0.2 million bushels of corn on basis contracts.

In addition, the Company enters into short-term cash, options and futures contracts as a means of managing exposure to changes in commodity prices.  The Company enters into derivative contracts to hedge the exposure to volatile commodity price fluctuations.  The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market volatility.  The Company’s specific goal is to protect itself from large moves in commodity costs.  All derivatives are designated as non-hedge derivatives and the contracts will be accounted for at fair value.  Although the contracts will be effective economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.

Derivatives not designated as hedging instruments along with cash held by brokers at June 30, 2018 and September 30, 2017 at market value are as follows:

	Balance Sheet Classification	June 30, 2018			September 30, 2017
		in 000's			in 000's
Futures and option contracts
In gain position		$	960		$	190
In loss position		(93		)	(100		)
Cash due to broker		(506		)	(67		)
	Current asset	361			23
Forward contracts, corn		1,453			911
	Current liability	1,453			911
Net futures, options, and forward contracts		$	(1,092	)	$	(888	)

8

The net realized and unrealized gains and losses on the Company’s derivative contracts for the three and nine months ended June 30, 2018 and 2017 consist of the following:

		Three Months Ended						Nine Months Ended
	Statement of Operations Classification	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
		in 000's			in 000's			in 000's			in 000's
Net realized and unrealized (gains) losses related to:
Forward purchase corn contracts	Cost of Goods Sold	$	1,803		$	(816	)	$	2,121		$	515
Futures and option corn contracts	Cost of Goods Sold	(2,272		)	(564		)	(2,944		)	(1,180		)

Inventory

Inventory is stated at the lower of weighted average cost or net realizable value. In the valuation of inventories and purchase commitments, net realizable value is defined as estimated selling price in the ordinary course of business less reasonable predictable costs of completion, disposal and transportation.  

Put Option liability

The put option liability consists of an agreement between the Company and ICM, Inc. that contains a conditional obligation to repurchase feature. In accordance with accounting for put options as a liability, the Company calculated the fair value of the put option under Level 3, using a valuation model called the Monte Carlo Simulation. Using this model, the estimated value did not change significantly from September 30, 2017 to June 30, 2018.

Income Per Unit

Basic income per unit is calculated by dividing net income by the weighted average units outstanding for each period. Basic earnings and diluted per unit data were computed as follows (in thousands except per unit data):

	Three Months Ended					Nine Months Ended
	June 30, 2018			June 30, 2017		March 31, 2018			June 30, 2017
Numerator:
Net income (loss) for basic earnings per unit	$	(3,245	)	$	1,929	$	(2,899	)	$	9,626
Net income (loss) for diluted earnings per unit	$	(3,245	)	$	1,929	$	(2,899	)	$	9,626
Denominator:
Weighted average units outstanding - basic	13,327			13,327		13,327			13,327
Weighted average units outstanding - diluted	13,327			14,384		13,327			14,423
Income (loss) per unit - basic	$	(243.49	)	$	144.74	$	(217.53	)	$	722.29
Income (loss) per unit - diluted	$	(243.49	)	$	134.11	$	(217.53	)	$	667.41

Recently Issued Accounting Pronouncements

Revenue Recognition

9

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The new standard will be effective for us on October 1, 2018, the start of our new fiscal year. The Company expects to have enhanced disclosures, but does not expect the new standard to have a material impact on the Company's financial statements.

Leases

In February 2016, FASB issued ASU 2016-02 "Leases” ("ASU 2016-02"). ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for all leases greater than one year in duration and classified as operating leases under previous GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and for interim periods within that fiscal year. We will not implement ASU 2016-02 until October 2019, when Fiscal 2020 starts. The Company does not expect the new standard to have a material impact on the Company's financial statements.

Note 3:  Inventory

Inventory is comprised of the following:

	June 30, 2018		September 30, 2017
	(000's)		(000's)
Raw Materials - corn	$	4,248	$	4,010
Supplies and Chemicals	4,723		4,149
Work in Process	1,635		1,486
Finished Goods	2,941		3,569
Total	$	13,547	$	13,214

Note 4:   Revolving Loan/Credit Agreements

FCSA/CoBank

The Company has a credit agreement with Farm Credit Services of America, FLCA (“FCSA”) and CoBank, ACB, as cash management provider and agent (“CoBank”) which provides the Company with a term loan in the original amount of $30.0 million (the “Term Loan”) and a revolving term loan in the original amount of up to $36.0 million (the “Revolving Term Loan”), together with the Term Loan, the “ FCSA Credit Facility ”). The FCSA Credit Facility is secured by a security interest on all of the Company’s assets.

The Term Loan provides for quarterly payments by the Company to FCSA of $1.5 million, with a maturity date of September 20, 2019. The Revolving Term Loan has a maturity date of June 1, 2023 and requires reductions in principal availability in increments of $6.0 million each June 1 commencing on June 1, 2020. Under the FCSA Credit Facility, the Company has the right to select from several LIBOR based interest rate options with respect to each of the Term Loan and the Revolving Term Loan.

As of June 30, 2018, there was $20.2 million available under the Revolving Term Loan.

Notes payable

10

Notes payable consists of the following:

	June 30, 2018		September 30, 2017
	(000's)		(000's)
Term Loan bearing interest at LIBOR plus 3.35% (5.46% at June 30, 2018)	$	7,500	$	12,000
Revolving Term Loan bearing interest at LIBOR plus 3.35% (5.46% at June 30, 2018)	15,756		4,100
Other debt with interest rates ranging from 3.50% to 4.15% and maturities through 2022	3,265		3,666
	26,521		19,766
Less Current Maturities	6,554		6,538
Less Financing Costs, net of amortization	148		202
Total Long Term Debt	19,819		13,026

The approximate aggregate maturities of notes payable as of June 30, 2018 are as follows:

2019	$	6,554
2020	2,077
2021	584
2022	608
2023	16,698
Total	$	26,521

Note 5:  Fair Value Measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company used various methods including market, income and cost approaches.  Based on these approaches, the Company often utilized certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market corroborated, or generally unobservable inputs.  The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  Based on the observable inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy.

The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.  Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1 - Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuations for assets and liabilities traded in less active dealer or broker markets.  Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.

Level 3 - Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

11

A description of the valuation methodologies used for instruments measured at fair value, including the general classifications of such instruments pursuant to the valuation hierarchy, is set below.

Put Option liability. The put option liability consists of an agreement between the Company and ICM that contains a conditional obligation to repurchase feature. In accordance with accounting for put options as a liability, the Company calculated the fair value of the put option under Level 3, using a Monte Carlo Simulation model.

Derivative financial instruments.  Commodity futures and exchange traded options are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Mercantile Exchange (“CME”) market.  Ethanol contracts are reported at fair value utilizing Level 2 inputs from third-party pricing services.  Forward purchase contracts are reported at fair value utilizing Level 2 inputs.   For these contracts, the Company obtains fair value measurements from local grain terminal values.  The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based on the CME market.

The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2018 and September 30, 2017, categorized by the level of the valuation inputs within the fair value hierarchy (in '000s):

	June 30, 2018
	Level 1		Level 2		Level 3
Assets:
Derivative financial instruments	$	960	$	—	$	—
Liabilities:
Derivative financial instruments	93		1,453		—
Put option liability	—		—		5,700
	September 30, 2017
	Level 1		Level 2		Level 3
Assets:
Derivative financial instruments	$	190	$	—	$	—
Liabilities:
Derivative financial instruments	100		911		—
Put option liability	—		—		5,700

The following table summarizes the assumptions used in computing the fair value of the put options subject to fair value accounting at June 30, 2018 and September 30, 2017

	June 30, 2018		September 30, 2017
Put option assumptions:
Risk-free interest rate	1.34	%	1.34	%
Expected volatility	26	%	26	%
Expected life (years)	1.25		1.25
Exercise price	$10,897		$10,897
Company unit price	$5,670		$5,670

The following table reflects the activity for liabilities measured at fair value using Level 3 inputs during the three months ended June 30, 2018 and for Fiscal 2017 that ended September 30, 2017:

12

	June 30, 2018		September 30, 2017
Beginning Balance	$	5,700	$	6,100
Change in Value	—		(400		)
Ending Balance	$	5,700	$	5,700

Note 6:   Related Party Transactions

Bunge

Under the Ethanol Agreement, the Company sells Bunge all of the ethanol produced by the Company, and Bunge purchases the same.  The Company pays Bunge a percentage fee for ethanol sold by Bunge, subject to a minimum and maximum annual fee.  The initial term of the Ethanol Agreement expires on December 31, 2019, however it will automatically renew for one five-year term unless Bunge provides the Company with notice of election not to renew no later than 180 days prior to the expiration of the initial term. The Company incurred ethanol marketing expenses of $0.4 million during both of the three months ended June 30, 2018 and 2017, and $1.1 million during both of the nine months ended June 30, 2018 and 2017, under the Ethanol Agreement.

Under the DG Purchase Agreement, Bunge purchases all distillers grains produced by the Company, and receives a fee based on the net sale price of distillers grains, subject to a minimum and maximum annual fee.  The initial term of the DG Purchase Agreement expires on December 31, 2019  and will automatically renew for one additional five year term unless Bunge provides the Company with notice of election not to renew no later than 180 days prior to the expiration of the initial term. The Company incurred distillers grains marketing expenses of $0.3 million during both of the three months ended June 30, 2018 and 2017, and $0.9 and $0.8 million during the nine months ended June 30, 2018 and 2017, respectively.

The Company and Bunge entered into an Amended and Restated Grain Feedstock Agency Agreement on December 5, 2014 (the “ Agency Agreement ”).  The Agency Agreement provides that Bunge procure corn for the Company and that the Company pay Bunge a per bushel fee, subject to a minimum and maximum annual fee.  The initial term of the Agency Agreement expires on December 31, 2019 and will automatically renew for one additional five year term unless Bunge provides the Company with notice of election not to renew no later than 180 days prior to the expiration of the initial term. Expenses for corn procurement by Bunge were $0.2 million during both of the three months ended June 30, 2018 and 2017, and $0.5 million during both of the nine months ended June 30, 2018 and $2017.

Starting with the 2015 crop year, the Company began using corn containing Syngenta Seeds, Inc.’s proprietary Enogen® technology (“ Enogen Corn ”) for a portion of its ethanol production needs.  The Company contracts directly with growers to produce Enogen Corn for sale to the Company.  The Company has contracted for 28,900 acres of Enogen corn for the fiscal year ending September 30, 2018. Concurrent with the Agency Agreement, the Company and Bunge entered into a Services Agreement regarding Enogen Corn purchases (the “ Services Agreement ”).  Under this Services Agreement, the Company originates all Enogen Corn contracts for its facility and Bunge assists the Company with certain administrative matters related to Enogen Corn, including facilitating delivery to the facility.  The Company pays Bunge a per bushel service fee.  The initial term of the Services Agreement expires on December 31, 2019 and will automatically renew for one additional five year term unless Bunge provides the Company with notice of election not to renew no later than 180 days prior to the expiration of the initial term. Expenses under the Services Agreement are included as part of the Amended and Restated Grain Feedstock Agency Agreement discussed above.

On June 26, 2009, the Company executed a Railcar Agreement with Bunge for the lease of 325 ethanol cars and 300 hopper cars which are used for the delivery and marketing of ethanol and distillers grains (in November of 2016, the number of ethanol cars was reduced to 323, which is in addition to the hopper car reductions of one each in November 2013 and January 2015 to 298).  Under the Railcar Agreement, the Company leases 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 November 1, 2016, the agreement was amended to provide for 96 hopper cars to be side-leased back to Bunge. Expenses under the Railcar Agreement were $1.0 million during both of the three months ended June 30, 2018 and 2017, net of subleases and accretion, and were $2.9 million and $3.5 million for the nine months ended June 30, 2018 and 2017, respectively. The Company has subleased 92 hopper cars to two unrelated third parties, which sublease expires March 25, 2019. In June 2018, one of the third party customers entered into an assignment agreement for their 52 hopper cars with the Company and Bunge which will be phased in over the fourth quarter, and the start of the first quarter in our fiscal year ending September 30, 2019. SIRE will receive an up front assignment payment, and the net result will be financially neutral, and the number of side-leased railcars by SIRE remains the same. The Company will continue to work with Bunge to determine the need for ethanol and hopper cars in light of current market conditions, and the expected conditions in the fiscal year ending September 30, 2018 ("Fiscal 2018") and future fiscal years.

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ICM

On February 26, 2018, the Company executed an Equipment Purchase and Installation Agreement with ICM, Inc for plant equipment totaling $3.9 million. As of June 30, 2018, the full value of the contract had been paid for the equipment and installation services. The project will be completed during the fourth quarter of Fiscal 2018.

Note 7: Major Customer

The Company is party to the Ethanol and Distillers Grain Purchase Agreements with Bunge for the exclusive marketing, selling, and distributing of all the ethanol, distillers grains, and syrup produced by the Company. Revenues from Bunge were $51.2 million and $51.3 million for the three months ended June 30, 2018 and 2017, respectively, and $150.3 million and $154.4 million for the nine months ended June 30, 2018 and 2017, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

General

The following management discussion and analysis provides information which management believes is relevant to an assessment and understanding of our financial condition and results of operations. This discussion should be read in conjunction with the financial statements included herewith and notes to the financial statements and our Annual Report on Form 10-K for the year ended September 30, 2017 including the financial statements, accompanying notes and the risk factors contained herein.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q of Southwest Iowa Renewable Energy, LLC (the "Company," "SIRE," "we," or "us")contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions.  In some cases, you can identify forward-looking statements by terminology such as “may,” “will”, “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,”  “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions.  These forward-looking statements are only our predictions based on current information 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 reasons described in this report.  While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, without limitation:

• Changes in the availability and price of corn, natural gas, and steam;

• Negative impacts resulting from reductions in, or other modifications to, the renewable fuel volume requirements under the Renewable Fuel Standard issued by the Environmental Protection Agency;

• Our inability to comply with our credit agreements required to continue our operations;

• Negative impacts that our hedging activities may have on our operations;

• Decreases in the market prices of ethanol, distillers grains, and corn oil;

• Ethanol supply exceeding demand and corresponding ethanol price reductions;

• The potental for additional ethanol demand as a result of increased adoption of higher level blends of ethanol including E15 and E85;

• Changes in the environmental regulations that apply to our plant operations;

• Changes in plant production capacity or technical difficulties in operating the plant;

• Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;

• Changes in other federal or state laws and regulations relating to the production and use of ethanol;

• Changes and advances in ethanol production technology;

• Competition from larger producers as well as competition from alternative fuel additives;

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• Changes in interest rates and lending conditions of our loan covenants;

• Volatile commodity and financial markets;

• Disruptions, failures or security breaches relating to our information technology infrastructure;

• Negative impacts resulting from recent tax reform legislation; and

• Decreases in export demand due to the imposition of duties and tariffs by foreign governments on ethanol and distiller grains produced in the United States.

These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include various assumptions that underlie such statements.  Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the management discussion and analysis, in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017 under the section entitled “Risk Factors” and in our other prior Securities and Exchange Commission filings. These and many other factors could affect our future financial condition and operating results and could cause actual results to differ materially from expectations set forth in the forward-looking statements made in this document or elsewhere by Company or on its behalf.  We undertake no obligation to revise or update any forward-looking statements.  The forward-looking statements contained in this quarterly report on Form 10-Q are included in the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Overview

The Company is an Iowa limited liability company, located in Council Bluffs, Iowa, formed in March, 2005 to construct and operate a 140 million gallon capacity ethanol plant (the "Facility").  We began producing ethanol in February, 2009 and sell our ethanol, distillers grains, corn oil and corn syrup in the continental United States, Mexico, and the Pacific Rim.

Recent Regulatory Developments

Tax Cuts and Jobs Act

On December 22, 2017, the H.R. 1, originally known as the Tax Cuts and Jobs Act (the “2017 Tax Reform Act”), was signed into law. The 2017 Tax Reform Act includes significant changes to the taxation of business entities, including a permanent reduction in the federal corporate income tax rate from 35% to 21%, effective in 2018 and changes in the deductibility of interest on debt obligations. The Company is currently evaluating the impact of the 2017 Tax Reform Act, as well as potential future regulations implementing the new tax law and interpretations of the new tax law with its professional advisers.

Renewable Fuel Standard

The ethanol industry receives support through the Federal Renewable Fuels Standard (the “RFS”) which has been, and will continue to be, a driving factor in the growth of ethanol usage. The RFS requires that in each year a certain amount of renewable fuels must be used in the United States. The RFS is a national program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective.   The U.S. Environmental Protection Agency (the “EPA”) is responsible for revising and implementing regulations to ensure that transportation fuel sold in the United States contains a minimum volume of renewable fuel.

The RFS original volume requirements increased incrementally each year through 2022 when the mandate requires that the United States use 36 billion gallons of renewable fuels.  Starting in 2009, the RFS required that a portion of the RFS must be met by certain “advanced” renewable fuels. These advanced renewable fuels include ethanol that is not made from corn, such as cellulosic ethanol and biomass based biodiesel. The use of these advanced renewable fuels increases each year as a percentage of the total renewable fuels required to be used in the United States.

Annually, the EPA is supposed to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligation. On November 30, 2017, the EPA issued the final rule for 2018 which varied only slightly from the Proposed 2018 Rule with the annual volume requirement for renewable fuel set at 19.29 billion gallons of renewable fuels per year (the "Final 2018 Rule"). Although the volume requirements set forth

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in the Final 2018 Rule are slightly higher than the 19.28 billion gallons required under the final 2017 renewable fuel volume requirements, the 2018 volume requirements are still significantly below the 26 billion gallons statutory mandate for 2018 with significant reductions in the volume requirements for advanced biofuels. However, the Final 2018 Rule does maintain the number of gallons which may be met by conventional renewable fuels such as corn-based ethanol at 15.0 billion gallons, excluding any waivers granted by the EPA to small refiners for "hardship". At the end of June 2018, it has been estimated the impact of EPA hardship waivers has been almost 2.25 billion gallons.

On June 26, 2018, the EPA released a preliminary proposal for 2019 setting the blending requirements at 19.88 billion gallons, a slight increase from the prior year (the "Proposed 2019 Rule"). Corn-based ethanol levels were left at 15.0 billion gallons. The EPA did not address reallocating lost blending volumes, nor mention the impact of the "hardship" waivers on the 2019 ethanol levels.

Under the RFS, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. Since 2018 is the first year the total proposed volume requirements are more than 20% below statutory levels, the EPA Administrator directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. If 2019 volume requirements are also more than 20% below statutory levels, the reset will be triggered under the RFS and the EPA will be required to modify statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the volume requirements post-2022. The Proposed 2019 Rule is more than 20% below the original 2019 level of 28.0 billion gallons, and if finalized as proposed will fulfill the two consecutive year requirements and require a reset of the RFS.

On October 19, 2017, EPA Administrator Pruitt issued a letter to several U.S. Senators representing states in the Midwest reiterating his commitment to the text and spirit of the RFS, among other topics, he stated the EPA is actively exploring its authority to remove arbitrary barriers to the year-rounds use of E15 and other mid-level ethanol blends so that E15 may be sold throughout the year without disruption and that the EPA will be not pursue regulations to allow ethanol exports to generate renewable identification numbers (“RINs”). These statements represents actions that would likely have a positive impact on the ethanol industry either directly or indirectly. On April 12, 2018, as part of a series of meetings focused on RIN prices and E15 year-round sales attended by President Trump, Senators, key federal agencies and industry leaders. The Administration indicated that the EPA would be moving forward to authorize year-round sales of E15. This was designed to address the waiver that currently inhibits sales of E15 in certain markets during summer driving months. The letter and these statements represent actions that would likely have a positive impact on the ethanol industry either directly or indirectly. However, the EPA did not initiate any action before June 1, 2018, so the summer ozone control season which prevents E15 from being sold in more than 2/3 of the U.S. gasoline markets through September 15, 2018 went into effect. Congress also did not act to initiate any legislation that would allow year round sale of E15. In June 2018, EPA Administrator Pruitt resigned, and to date no replacement has been initiated by President Trump.

The letter also stated that the EPA would soon finalize a decision to deny the request to change the point of obligation for renewable identification numbers, or RINs, from refiners and importers to blenders. The EPA assigns individual refiners, blenders and importers the volume of renewable fuels they are obligated to use based on their percentage of total fuel sales. Obligated parties use RINs to show compliance with RFS-mandated volumes. RINs are attached to renewable fuels by producers and detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached RINs affects the price of ethanol in certain markets and influences purchasing decisions by obligated parties. Consistent with the position in his letter, on November 22, 2017, the EPA issued a Notice of Denial of Petitions seeking to change the RFS point of obligation in which the EPA confirmed that the point of obligation will not change.

Legal challenges are underway to the RFS, including the EPA's recent reductions in the RFS volume requirements and the Final 2018 Rule as well as the denial of petitions to change the RFS point of obligation. If the EPA's decision to reduce the volume requirements under the RFS is allowed to stand, if the volume requirements are further reduced, or if the RFS point of obligation were changed, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

On May 18, 2018, the Advanced Biofuel Association initiated a legal challenge to the EPA’s process for granting exemptions from compliance under the RFS to small refineries. In its petition, the Advanced Biofuel Association seeks judicial review of the EPA’s decision to modify criteria to lower the threshold by which the agency determines whether to grant small refineries an exemption for the RFS for reasons of disproportionate economic hardship.

Additionally, on May 29, 2018, the National Corn Growers Association, National Farmers Union, and the Renewable Fuels Association filed a petition challenging the EPA’s grant of waivers to three specific refineries seeking that the court reject the waivers granted to the three as an abuse of EPA authority.  These waived gallons are not redistributed to obligated parties, and in

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effect, reduce the aggregate RVOs under the RFS. If the specific waivers granted by the EPA and/or its lower criteria for granting small refinery waivers under the RFS are allowed to stand, or if the volume requirements are further reduced, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

Related to the recent lawsuits, the Renewable Fuels Association, American Coalition for Ethanol, Growth Energy, National Biodiesel Board, National Corn Growers Association, Biotechnology Industry Organization, and National Farmers Union petitioned the EPA on June 4, 2018 to change its regulations to account for lost volumes of renewable fuel resulting from the retroactive small refinery exemptions. This petition to the EPA seeks a broader, forward-looking remedy to account for the collective lost volumes caused by the recent increase in retroactive small refinery RVO exemptions. It is unclear what regulatory changes, if any, will emerge from the petition to the EPA.

Although the maintenance of the 15 billion gallon threshold for volume requirements that may be met with corn-based ethanol in the Final 2018 Rule and the Proposed 2019 Rule together with the letter issued by Administrator Pruitt and the resulting actions taken by the EPA consistent with Administrator Pruitt’s letter signals support from the EPA and the Trump administration for domestic ethanol production, the Trump administration could still elect to materially modify, repeal or otherwise invalidate the RFS and it is unclear what regulatory framework and renewable volume requirements, if any, will emerge as a result of any such reforms; however, any such reform could adversely affect the demand and price for ethanol and the Company's profitability.

Further uncertainty results from the recently revealed EPA grants of a number of small refiner exemptions from the RFS renewable volume obligations (the "RVOs") based upon the grounds of economic hardship, as well as an exemption granted to a refiner as part of bankruptcy proceedings. The joint impact of large increases in small refiner waivers granted by the EPA and the expected reduction in Chinese imports has had a very negative impact on ethanol D6 RINS prices. RINS prices have fallen from just over $1.00 down to $0.30 per RIN biofuel credit, the lowest level since September 2015, largely removing a powerful blending incentive from the ethanol marketplace.

Industry Factors Affecting our Results of Operations

Ethanol prices decreased 3.8% during the three months ended June 30, 2018 as compared to the same period in the previous fiscal year. Compounding the price reduction was a 1.1% decrease in ethanol shipments during the three months ended June 30, 2018 as compared to the prior year. Ethanol prices decreased 7.8% for the nine months ended June 30, 2018 as compared to the nine months ended June 30, 2017. Offsetting the price reduction was a 3.5% increase in the ethanol shipments during the corresponding nine month period.

Management currently believes that despite ethanol price changes, the ethanol outlook for the fourth quarter of our fiscal year ending September 30, 2018 ("Fiscal 2018") as well as the outlook for certain of our co-products will be maintained due to the following factors:

• The latest estimates of supply and demand provided by the U.S. Department of Agriculture (the "USDA") reduced the estimate for 2017/18 ending corn stocks to 2.1 billion bushels, as area planted was reduced 4% from the 2016/2017 levels; however such reduction was basically offset by improved yields per acre. For 2018/19, the USDA increased corn consumption slightly for ethanol and co-products to 5.7 billion bushels and adjusted their forecast for the corn supply to 14.6 billion bushels. On June 12, 2018, the USDA estimates for 2018/19 that the area of corn planted will fall by 2.2% compared to last year, with the yield per acre also reduced by 1.5%. The industrial use for corn ethanol is forecast to increase by 1.8%, while foreign exports are expected to be lower by almost 4.5% resulting in a lower carry-out at the end of the season. The USDA forecast a bushel of corn to be $3.90, up from last years level of $3.35.

• The U.S. Energy Information Administration (the "EIA") released in its Short Term Energy Outlook report of June 12, 2018 that U.S. gasoline demand was 9.3 million bpd in 2017, and is expected to stay at that same level in 2018. The EIA forecast regular gasoline prices to average $2.87/gallon, an increase of almost 20% versus last summers' average $2.41/gal. The EIA estimates the summer peak price in June will be $2.92/gal, and then decline gradually to $2.84/gal in September, A rise in the average gallon cost to the public could have a negative impact on this forecast.

• Global ethanol demand as reported by the EIA continues to increase with increased exports to various foreign markets, including Brazil, Canada, China and India, in response to higher blending mandates and octane demand

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within the foreign countries. Net ethanol exports of U.S. ethanol in calendar year 2017 were 33% higher than exports during 2016 and the industry forecasts that U.S. ethanol net exports in 2018 will likely surpass 2017 by another 25%. Year to date exports through April 2018 (the latest available figures) have increased 43% compared to the first four months of 2017. Despite the imposition of a 20% tariff on U.S. ethanol imports above a specified quota effective September 1, 2017, Brazilian demand has remained high due to inter-harvest sugar shortages. However, given the ethanol supply struggles Brazil is currently facing, the government of Brazil has indicated it may reverse the tariff but no action to implement such a reversal has occurred. As a result, management currently anticipates, at least in the short term, exports to Brazil will remain greater than originally forecasted despite the tariff as a result of the high gasoline prices and low ethanol supplies within Brazil. Exports to Canada and India also remained strong in the September 2017 to April 2018 time period. In September 2017, China’s National Development and Reform Commission, the National Energy Board and 15 other state departments issued a joint plan to expand the use and production of biofuels containing up to 10% ethanol by 2020. China, the number three importer of U.S. ethanol in 2016, imported negligible volumes during calendar year 2017 due to a 30% tariff imposed on imports of U.S. and Brazil fuel ethanol, which took effect in January 2017. China has announced possible increased tariffs on ethanol in response to President Trump's announcement of tariffs on Chinese steel. In spite of this, China has continued to receive ethanol imports and was the third largest importing country during the first four months of 2018. There is no assurance that the recently issued joint plan will lead to increased imports of U.S. ethanol by China but any increase in exports to China could have a positive impact on the ethanol market. In June 2018 China raised the import duty on U.S. denatured ethanol to 70% from 45% starting in July, as part of a retaliation against the U.S. imposing import tariffs on Chinese goods.

However, despite certain favorable market conditions and the fairly flat outlook for ethanol, we believe that our margins will remain tight in light of mixed signals on support for the RFS and waivers of refiner RVOs by the Trump administration. Escalation in the price for crude oil and unleaded gasoline could have a negative impact on the demand for gasoline and impact the market price of ethanol, which could adversely impact our profitability during the balance of Fiscal 2018. This negative impact could worsen in the event that domestic ethanol inventories remain high, or if U.S. exports of ethanol decline. Unless additional demand can be found in foreign or domestic markets, a continued level of current ethanol stocks or any increase in domestic ethanol supply could further adversely impact the price of ethanol. The risk of an escalating trade war is a great threat to the U.S. agriculture economy in the short term. Almost 70% of U.S. agricultural exports are sold to destinations that are currently being negotiated or involved in trade disputes.

Our distiller grain margins have been negatively impacted as the split between dried distiller grains (DDG) and wet distiller grains (WDG) has been shifting towards WDG, which is priced significantly less than DDG. In the latter part of the quarter, we saw lower prices received for our distillers grains as a result of increased corn and soybean supplies. The increased supplies of corn and soybeans results in lower corn and soybean prices, adversely impacting the price and demand for distillers grains which are an animal feed substitute for corn and soybeans. Demand and prices for distillers grains have experienced significant decline due to decreased exports to China as a result of the substantial tariffs and duties imposed on imports into China of distillers grains produced in the U.S. as a result of the antidumping and countervailing investigations. However, in November 2017, the Chinese foreign ministry announced that it would be removing the 11% value-added tax on U.S. produced dried distiller grains initiated in January 2017 although no time line for such removal has been established. China announced the possibility of new tariffs in response to the Trump administrations policy to charge tariffs on Chinese steel products. China has historically been one of the largest importers of domestically produced distillers grains. Continued reduced demand from China combined with lower corn and soybean prices could lead to an oversupply of distillers grains in the domestic market which could adversely impact our margins and our financial performance.

Corn oil prices have also been adversely impacted by the oversupply of soybeans and the resulting lower price of soybean oil which competes with corn oil, primarily for biodiesel production. Although management anticipates our Fiscal 2018 corn oil production levels to be favorable compared to the prior fiscal year; corn oil prices will continue to be impacted by corn and soybean prices, soybean supply and market demand for corn oil which could decrease as a result of the expiration of the biodiesel blenders’ tax credit. Legislation has been passed in Congress in February 2018 that provided a retroactive extension of the biodiesel tax incentive for 2017 only. In the omnibus spending bill

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passed in March of 2018, this legislation does not include a reinstatement of the biodiesel tax credit. The unchanged mandates combined with producers carrying the risk of operation in 2018 without extension of the biodiesel blenders tax credit could decrease the demand for corn oil and soybean oil. The EPA released proposed 2019 biofuels volumes that were only up slightly from the 2018 levels. However, the impact of lower soybean oil prices and the current oversupply of corn oil due to the substantial increase in corn oil production during the last few years will likely continue to impact corn oil prices.

Results of Operations

The following table shows our results of operations, stated as a percentage of revenue for the three months ended June 30, 2018 and 2017.

	Three Months Ended June 30, 2018					Three Months Ended June 30, 2017
	Amounts			% of Revenues		Amounts		% of Revenues
	in 000's					in 000's
Income Statement Data
Revenues	$	53,611		100.0	%	$	54,052	100.0	%
Cost of Goods Sold
Material Costs	38,121			71.1	%	34,815		64.4	%
Variable Production Expense	7,748			14.5	%	7,727		14.3	%
Fixed Production Expense	8,913			16.6	%	8,210		15.2	%
Gross Profit (Loss)	(1,171		)	(2.2	)%	3,300		6.1	%
General and Administrative Expenses	1,809			3.4	%	1,070		1.9	%
Interest Expense and Other Income, net	265			0.5	%	301		0.6	%
Net Income (Loss)	$	(3,245	)	(6.1	)%	$	1,929	3.6	%

The following table shows our results of operations, stated as a percentage of revenue for the nine months ended June 30, 2018, and 2017:

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	Nine Months Ended June 30, 2018					Nine Months Ended June 30, 2017
	Amounts			% of Revenues		Amounts		% of Revenues
	in 000's					in 000's
Income Statement Data
Revenues	157,708			100.0	%	162,190		100.0	%
Cost of Goods Sold
Material Costs	109,172			69.2	%	103,417		63.8	%
Variable Production Expense	23,746			15.1	%	22,752		14.0	%
Fixed Production Expense	22,897			14.5	%	22,049		13.6	%
Gross Profit	1,893			1.2	%	13,972		8.6	%
General and Administrative Expenses	4,243			2.7	%	3,663		2.3	%
Interest Expense and Other Income, net	549			0.3	%	683		0.4	%
Net Income (Loss)	$	(2,899	)	(1.8	)%	$	9,626	5.9	%

Revenues

Our revenue from operations is derived from three primary sources: sales of ethanol, distillers grains, and corn oil.  The chart below displays statistical information regarding our revenues. The decrease in revenue was attributable to the overall decrease in commodity prices for ethanol and corn oil, somewhat offset by an increase in prices for distillers grains. During the three months ended June 30, 2018, the average price per gallon of ethanol decreased by 3.8% as compared to the same period in 2017, and this decrease was compounded by a 1.1% decrease in gallons of ethanol sold. The net effect was a 4.8% reduction in ethanol revenue for the three months ended June 30, 2018. During the nine months ended June 30, 2018 , the average price per gallon of ethanol decreased by 7.8% as compared to the first nine months ended June 30, 2017, but the decrease was partially offset by a 3.5% increase in gallons of ethanol sold The net effect was a 4.5% reduction in ethanol revenue for the nine months ended June 30, 2018. The decrease in ethanol prices resulted principally from a surge in industry production expanding at a faster rate than ethanol use, which resulted in higher inventories causing ethanol prices to fall.

A increase in the average price per ton of distillers grains of approximately 21.9%, was coupled with a 6.1% increase in volume sold that resulted in a increase of 29.3% in revenue for this category in the three months ended June 30, 2018 as compared to the same three month period in 2017. A increase in the average price of distillers grains of 0.3% coupled with an increase of 7.2% in volume sold, resulted in an increase of 7.5% in revenue for this category in the nine months ended June 30, 2018. Distillers grain revenue increased as prices dropped due to higher corn prices and decreased export market demand principally relating to the decreased demand from China resulting from the antidumping and countervailing duties imposed on distillers grains produced in the United States.

Corn oil revenue decreased 18.8% in the three months ended June 30, 2018 compared to the three months ended June 30, 2017 with lower volume of 0.7% coupled with a decrease in corn oil prices of 18.2% per pound. The corn oil yield decreased 2.2% in the three months ended June 30, 2018 as compared to the three months ended June 30, 2017. Corn oil revenue decreased 6.7% for the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017, with the higher volume of 8.1% offset by a decrease in corn oil prices of 13.6% per pound. Our corn oil yield increased 6.2% for the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017 due to improved operating efficiencies. Our market is primarily local middlemen that compete for our available supply.

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	Three Months Ended June 30, 2018				Three Months Ended June 30, 2017
	Amounts in 000's		% of Revenues		Amounts in 000's		% of Revenues
Product Revenue Information
Denatured and Undenatured Ethanol	$	42,124	78.6	%	$	44,260	81.9	%
Distillers Grains	9,017		16.8	%	6,972		12.9	%
Corn Oil	2,109		3.9	%	2,597		4.8	%
Other	361		0.7	%	223		0.4	%

	Nine Months Ended June 30, 2018			Six Months Ended March 31, 2017
	Amounts in 000's	% of Revenues		Amounts in 000's	% of Revenues
Product Revenue Information
Denatured and Undenatured Ethanol	124,863	79.2	%	130,789	80.6	%
Distillers Grains	25,130	15.9	%	23,371	14.4	%
Corn Oil	6,822	4.3	%	7,309	4.5	%
Other	893	0.6	%	721	0.5	%

Cost of Goods Sold

Our cost of goods sold as a percentage of our revenues was 102.2% and 93.9% for the three months ended June 30, 2018 and 2017, respectively.  Our two primary costs of producing ethanol and distillers grains are corn and energy, with steam and natural gas as our primary energy sources.   Cost of goods sold also includes net (gains) or losses from derivatives and hedging relating to corn.   The average price of corn used in ethanol production per bushel increased 11.5% in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The amount of bushels of corn used in ethanol sold decreased by 2.0% in the three months ended June 30, 2018 from 2017 on essentially flat production. Our cost of goods sold as a percentage of our revenues for the nine months ended June 30, 2018 and 2017 was 98.8% and 91.4%, respectively. The average price of corn used in ethanol production per bushel increased 2.7% in the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017. The amount of bushels of corn used in ethanol sold increased by 1.5% in the nine months ended June 30, 2018 from 2017 due to increased production of 2.8%.

Realized and unrealized gains (losses) related to our derivatives and hedging related to corn resulted in a $(0.5) million decrease to our cost of goods sold for the three months ended June 30, 2018, compared to a decrease of $(1.4) million for the three months ended June 30, 2017.  Realized and unrealized gains (losses) to our derivatives and hedging related to corn resulted in a $(0.8) million decrease to our cost of goods sold for the nine months ended June 30, 2018 compared to an decrease of $(0.7) million for the nine months ended June 30, 2017. We recognize the gains or losses that result from the changes in the value of our derivative instruments related to corn in cost of goods sold as the changes occur.  As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance.  We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged.

Variable production expenses showed an increase of 0.3% when comparing the three months ended June 30, 2018 to the three months ended June 30, 2017 due to higher chemical costs which was partially offset by lower energy costs. Our average steam and natural gas energy cost decreased 12.7% comparing the three months ended June 30, 2018 to the three months ended June 30, 2017 principally due to lower energy prices. Variable production expenses showed an increase of 4.4% when comparing the nine months ended June 30, 2018 to the nine months ended June 30, 2017 due to higher chemical costs partially offset by

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lower energy costs. Our average steam and natural gas energy costs decreased 6.0% comparing the nine months ended June 30, 2018 to the nine months ended June 30, 2017 due to lower energy cost prices, which reduced costs were partially offset by higher electricity costs.

Fixed production expenses increased 8.6% for the three months ended June 30, 2018 compared to the three months ended June 30, 2017. Increased repair and maintenance costs for the shutdown related expenses were the primary reason for the increased expenses in this category, partially offset by lower depreciation expenses for 10 year equipment that matured during the quarter. For the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017, fixed production expenses increased 3.8%. Increased repairs and maintenance charges for shutdown related expenses, were somewhat offset by lower lease costs and lower depreciation expenses discussed above.

General & Administrative Expense

General and administrative expenses include salaries and benefits of administrative employees, professional fees and other general administrative costs.  Our general and administrative expenses for the three months ended June 30, 2018 increased 69.1% compared to the three months ended June 30, 2017, primarily due to a loss on retirement of fixed assets for capital improvement upgrades made during the shutdown, and increases in consulting and legal services and office expenses. Our general and administrative expenses for the nine months ended June 30, 2018 increased 15.8% as compared to the nine months ended June 30, 2017, primarily due to the loss on fixed assets discussed above and increased consulting and professional fees.

Other Expense

Our other expenses were  $0.3 million in each of the three months ended June 30, 2018 and 2017. . Our other expenses were $0.5 million and $0.7 million for the nine months ended June 30, 2018 and nine months ended June 30, 2017, respectively, due to lower interest expense.

Change in fair value of put option liability

There was no change in the fair value of the put option liability with ICM during the nine months ended June 30, 2018. This is a non-cash charge, and is re-evaluated quarterly for significant changes in value.

Selected Financial Data

Modified EBITDA is defined as net income plus interest expense net of interest income, plus depreciation and amortization, or EBITDA, as adjusted for unrealized hedging losses (gains).  Modified EBITDA is not required by or presented in accordance with generally accepted accounting principles in the United States of America ("GAAP"), and should not be considered as an alternative to net income, operating income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity.

We present modified EBITDA because we consider it to be an important supplemental measure of our operating performance and it is considered by our management and Board of Directors as an important operating metric in their assessment of our performance.

We believe modified EBITDA allows us to better compare our current operating results with corresponding historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by variations in capital structures (affecting relative interest expense, including the impact of write-offs of deferred financing costs when companies refinance their indebtedness), the amortization of intangibles (affecting relative amortization expense), unrealized hedging losses (gains) and other items that are unrelated to underlying operating performance.  We also present modified EBITDA because we believe it is frequently used by securities analysts and investors as a measure of performance.   There are a number of material limitations to the use of modified EBITDA as an analytical tool, including the following:

• Modified EBITDA does not reflect our interest expense or the cash requirements to pay our principal and interest.  Because we have borrowed money to finance our operations, interest expense is a necessary element of our costs and our ability to generate profits and cash flows.  Therefore, any measure that excludes interest expense may have limitations.

• Although depreciation and amortization are non-cash expenses in the period recorded, the assets being depreciated and amortized may have to be replaced in the future, and modified EBITDA does not reflect the cash requirements for such replacement.   Because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate profits.  Therefore, any measure that excludes depreciation and amortization expense may have limitations.

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We compensate for these limitations by relying heavily on our GAAP financial measures and by using modified EBITDA as supplemental information.  We believe that consideration of modified EBITDA, together with a careful review of our GAAP financial measures, is the most informed method of analyzing our operations.  Because modified EBITDA is not a measurement determined in accordance with GAAP and is susceptible to varying calculations, modified EBITDA, as presented, may not be comparable to other similarly titled measures of other companies.  The following table provides a reconciliation of modified EBITDA to net income (in thousands except per unit data):

	Three months ended			Three months ended		Nine months ended			Nine months ended
	June 30, 2018			June 30, 2017		June 30, 2018			June 30, 2017
EBITDA
Net Income (Loss)	$	(3,245	)	$	1,929	$	(2,899	)	$	9,626
Interest Expense	299			291		771			862
Depreciation	2,535			3,015		8,753			9,020
EBITDA	(411		)	5,235		6,625			19,508
Unrealized Hedging Loss (Gain)	653			8		(235		)	(660		)
Modified EBITDA	$	242		$	5,243	$	6,390		$	18,848

Liquidity and Capital Resources

The Company has certain loan agreements with FCSA and CoBank (the "FCSA Credit Facility"). The FCSA Credit Facility provides the Company with a term loan of $30 million, due in 2019, and a revolving term loan of $36 million, due in 2023. The interest rate on the FCSA Credit Facility is LIBOR plus 3.35%.

As of June 30, 2018, we had a cash balance of $1.2 million, $20.2 million available under the Revolving Term Loan and working capital of $12.1 million.

During the fourth quarter of Fiscal 2018, we estimate that we will require cash of approximately $38.5 million for our primary input of corn and $4.7 million for our energy sources of electricity, steam, and natural gas.

Management expects to have sufficient cash available to fund operations for the next twelve months generated by cash from our continuing operations and available cash under our Revolving Term Loan. We cannot estimate the availability of funds for hedging in the future.

Commodity Price Risk 

Our operations are highly dependent on commodity prices, especially prices for corn, ethanol and distillers grains and the spread between them (the "crush margin"). 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 through adjustments in prices for ethanol.  We continue to monitor corn and ethanol prices and manage the "crush margin" to affect our longer-term profitability.

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We enter into various derivative contracts with the primary objective of managing our exposure to adverse price movements in the commodities used for, and produced in, our business operations and, to the extent we have working capital available and available market conditions are appropriate, we engage in hedging transactions which involve risks that could harm our business. We measure and review our net commodity positions on a daily basis.  Our daily net agricultural commodity position consists of inventory, forward purchase and sale contracts, over-the-counter and exchange traded derivative instruments.  The effectiveness of our hedging strategies is dependent upon the cost of commodities and our ability to sell sufficient products to use all of the commodities for which we have futures contracts.  Although we actively manage our risk and adjust hedging strategies as appropriate, there is no assurance that our hedging activities will successfully reduce the risk caused by market volatility which may leave us vulnerable to high commodity prices. Alternatively, we may choose not to engage in hedging transactions in the future. As a result, our future results of operations and financial conditions may also be adversely affected during periods in which price changes in corn, ethanol and distillers grain to not work in our favor.

In addition, as described above, hedging transactions expose us to the risk of counterparty non-performance where the counterparty to the hedging contract defaults on its contract or, in the case of over-the-counter or exchange-traded contracts, where there is a change in the expected differential between the price of the commodity underlying the hedging agreement and the actual prices paid or received by us for the physical commodity bought or sold.  We have, from time to time, experienced instances of counterparty non-performance but losses incurred in these situations were not significant.

Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match any gain or loss on our hedge positions to the specific commodity purchase being hedged.  We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in the current period (commonly referred to as the “mark to market” method). The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.  As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments.  Depending on market movements, crop prospects and weather, our hedging strategies may cause immediate adverse effects, but are expected to produce long-term positive impact.

In the event we do not have sufficient working capital to enter into hedging strategies to manage our commodities price risk, we may be forced to purchase our corn and market our ethanol at spot prices and as a result, we could be further exposed to market volatility and risk. However, during the past year, the spot market has been advantageous.

Credit and Counterparty Risks

Through our normal business activities, we are subject to significant credit and counterparty risks that arise through normal commercial sales and purchases, including forward commitments to buy and sell, and through various other over-the-counter (OTC) derivative instruments that we utilize to manage risks inherent in our business activities.  We define credit and counterparty risk as a potential financial loss due to the failure of a counterparty to honor its obligations.  The exposure is measured based upon several factors, including unpaid accounts receivable from counterparties and unrealized gains (losses) from OTC derivative instruments (including forward purchase and sale contracts).   We actively monitor credit and counterparty risk through credit analysis (by our marketing agent). 

Impact of Hedging Transactions on Liquidity

Our operations and cash flows are highly impacted by commodity prices, including prices for corn, ethanol, distillers grains and natural gas. We attempt to reduce the market risk associated with fluctuations in commodity prices through the use of derivative instruments, including forward corn contracts and over-the-counter exchange-traded futures and option contracts. Our liquidity position may be positively or negatively affected by changes in the underlying value of our derivative instruments. When the value of our open derivative positions decrease, we may be required to post margin deposits with our brokers to cover a portion of the decrease or we may require significant liquidity with little advanced notice to meet margin calls. Conversely, when the value of our open derivative positions increase, our brokers may be required to deliver margin deposits to us for a portion of the increase.  We continuously monitor and manage our derivative instruments portfolio and our exposure to margin calls and while we believe we will continue to maintain adequate liquidity to cover such margin calls from operating results and borrowings, we cannot estimate the actual availability of funds from operations or borrowings for hedging transactions in the future.

The effects, positive or negative, on liquidity resulting from our hedging activities tend to be mitigated by offsetting changes in cash prices in our business. For example, in a period of rising corn prices, gains resulting from long grain derivative

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positions would generally be offset by higher cash prices paid to farmers and other suppliers in local corn markets. These offsetting changes do not always occur, however, in the same amounts or in the same period.

We expect that a $1.00 per bushel fluctuation in market prices for corn would impact our cost of goods sold by approximately $48 million, or $0.34 per gallon, assuming our plant operates at 100% of our capacity.  We expect the annual impact to our results of operations due to a $0.50 decrease in ethanol prices will result in approximately a $70 million decrease in revenue.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

SIRE's  management,  under the supervision and with  the  participation  of  SIRE's president and chief executive officer and SIRE's chief financial officer,  is responsible for establishing and maintaining adequate disclosure  controls  and  procedures  (as defined in Rule  13a-15(e) under the Securities  Exchange  Act of 1934) that are designed to insure that information required to be disclosed in the reports that the Company files is recorded, processed, summarized and reported as of the end of the  period covered by this quarterly report.  Based on that evaluation,  SIRE's president and chief executive officer and SIRE's chief financial officer have concluded  that, as of the end of the period covered by this quarterly report, SIRE's disclosure controls and procedures are effective to provide  reasonable  assurance that the information required to be disclosed in the reports SIRE  files or submits under the Securities Exchange  Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and (ii) accumulated and communicated to management, including SIRE's principal executive and principal financial officers or persons performing such functions, as appropriate, to allow timely decisions regarding  disclosure.  SIRE believes that a control system, no matter how well designed and operated, cannot provide absolute  assurance that the  objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

No Changes in Internal Control Over Financial Reporting

No change in SIRE's internal control over financial reporting occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, SIRE's internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.   Legal Proceedings.

From time to time the Company is involved in various litigation matters arising in the ordinary course of its business. None of these matters, either individually or in the aggregate, currently is material to the Company except as reported in the Company’s annual report on Form 10-K for the year ended September 30, 2017 and there were no material developments to such matters.

Item 1A.   Risk Factors.

There have been no material changes to the risk factors disclosed in Item 1A of our Form 10-K for the fiscal year ended September 30, 2017 or in Item 1A of our Forms 10-Q for the quarters ended December 31, 2017 and March 31, 2018 other than as provided below. Additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.

Recent trade actions by the Trump Administration, particularly those affecting the agriculture sector and related industries, could adversely affect our operations and profitability.

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Government policies and regulations significantly impact domestic agricultural commodity production and trade flows and governmental policies affecting the agricultural industry, such as taxes, trade tariffs, duties, subsidies, import and export restrictions on commodities and commodity products, can influence industry profitability, the planting of certain crops, the location and size of crop production, whether unprocessed or processed commodity products are traded, and the volume and types of imports and exports. International trade disputes can also adversely affect trade flows by limiting or disrupting trade between countries or regions. Future governmental policies, regulations or actions affecting our industry may adversely affect the supply of, demand for and prices of our products, restrict our ability to do business and cause our financial results to suffer.

As a result of recent trade actions announced by the Trump administration and responsive actions announces by our trading partners, including by China, we may experience negative impacts of higher ethanol tariffs and other disruptions to international agricultural trade. On April 2, 2018, the Chinese government increased the tariff on U.S. ethanol impacts into China from 30% to 45%. The increased tariff is expected to reduce overall U.S. ethanol export demand, which could have a negative effect on U.S. domestic ethanol prices, especially given the current oversupply in domestic ethanol inventories

.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None

Item 6.   Exhibits

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31.1	Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) executed by the Principal Executive Officer.
31.2	Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) executed by the Principal Financial Officer.
32.1***	Rule 15d-14(b) Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) executed by the Principal Executive Officer.
32.2***	Rule 15d-14(b) Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) executed by the Principal Financial Officer.
101.XML*	XBRL Instance Document
101.XSD*	XBRL Taxonomy Schema
101.CAL*	XBRL Taxonomy Calculation Database
101.LAB*	XBRL Taxonomy Label Linkbase
101.PRE*	XBRL Taxonomy Presentation Linkbase
***	This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.
*	Furnished, not filed.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		SOUTHWEST IOWA RENEWABLE ENERGY, LLC
Date:	August 8, 2018	/s/ Brian T. Cahill
		Brian T. Cahill, President and Chief Executive Officer
Date:	August 8, 2018	/s/ Brett L. Frevert
		Brett L. Frevert, CFO and Principal Financial Officer

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