We have audited the balance sheets of Front Range Energy, LLC (the “Company”) as of December 31, 2005 and 2004 and the related statements of operations, members’ equity and cash flows for the year ended December 31, 2005 and for the period from July 29, 2004 (date of inception) to December 31, 2004. 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. 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 Front Range Energy, LLC, as of December 31, 2005 and 2004 and the results of its operations and its cash flows for the year ended December 31, 2005 and for the period from July 29, 2004 (date of inception) to December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
of these financial statements.
of these financial statements.
FRONT RANGE ENERGY, LLC
Windsor, Colorado
NOTES TO FINANCIAL STATEMENTS
(Information subsequent to December 31, 2005 is unaudited)
The principal business of Front Range Energy, LLC (the "Company") is distillation and production of fuel grade ethanol and distillers grains. The Company was formally organized as a limited liability company on July 29, 2004 and is expected to produce approximately 40 million gallons of ethanol per year and 325,000 tons of wet distillers grains (“WDG”) annually. The Company began its principal operations in June 2006.
1. Summary of Significant Accounting Policies
Basis of Presentation - These financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America and include all the accounts of Front Range Energy, LLC.
Cash Equivalents: For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Restricted Cash - The restricted cash balance at September 30, 2006 of $317,240 was the balance of deposits held in escrow that were to be used to pay outstanding construction retainage invoices. (See Note 5.)
Investments: Investments consist of amounts held in money market funds with original maturity dates greater than three months.
Receivables: Receivables are presented at face value, net of the allowance for doubtful accounts. The allowance for doubtful accounts is established through provisions charged against income and is maintained at a level believed adequate by management to absorb estimated bad debts. The Company considers accounts receivable to be fully collectible; accordingly, the allowance for doubtful accounts is zero.
The Company’s policy is to charge simple interest on trade receivable past due balances. Accrual of interest is discontinued when management believes collection is doubtful. Receivables are considered past due based upon payment terms set forth at the date of the related sale. The Company had no receivables considered past due at September 30, 2006.
Inventories: Inventories are stated at the lower of cost or replacement market. Cost is determined by the "first-in, first-out" method.
Deferred Financing Costs - Deferred financing costs are costs incurred to obtain debt financing, including all related fees, and are included in the accompanying balance sheets and are amortized as interest expense over the term of the related financing, using the straight-line method which approximates the interest rate method.
Derivative Instruments and Hedging Activities - The Company utilizes risk management strategies to minimize the Company’s exposure to commodity price risk with certain anticipated commodity purchases and sales and interest rate risk associated with anticipated corporate borrowings. The Company accounts for its derivative transactions in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. Derivative transactions, which can include forward contracts and futures positions on the Chicago Board of Trade (“CBOT”), New York Mercantile Exchange (“NYMEX”) and interest rate caps are recorded on the balance sheet as assets and liabilities based on the derivative’s fair value. Changes in the fair value of the derivative contracts are recognized currently in earnings unless specific hedge accounting criteria are met.
Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation is computed over the estimated useful life of each asset using the straight-line method. Water rights are amortized over the 99 year term of the related agreement. There was no depreciation and amortization expense during 2005 and 2004 and $1,624,642 for the nine months ended September 30, 2006. Estimated useful lives generally used in computing depreciation are:
| | | Buildings and improvements | | 15 to 40 years |
| | | Equipment | | 10 to 15 years |
| | | Office Equipment | | 3 to 10 years |
| | | Vehicles | | 5 years |
The cost of normal maintenance and repairs is charged to operations as incurred. Material expenditures that increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of fixed assets sold, or otherwise disposed of, and the related accumulated depreciation or amortization are removed from the accounts, and any resulting gains or losses are reflected in current operations.
Impairment of Long-Lived Assets - The Company evaluates impairment of long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company assesses the impairment of long-lived assets, including property and equipment and purchased intangibles subject to amortization, which are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The asset impairment review assesses the fair value of the assets based on the future cash flows the assets are expected to generate. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from the disposition of the asset (if any) are less than the related asset's carrying amount. Impairment losses are measured as the amount by which the carrying amounts of the assets exceed their fair values. Estimates of future cash flows are judgments based on management's experience and knowledge of the Company's operations and the industries in which the Company operates. These estimates can be significantly affected by future changes in market conditions, the economic environment and capital spending decisions of the Company's customers and inflation.
Financial Instruments - SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value. This statement defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of December 31, 2005 and 2004, the fair value of all financial instruments approximated carrying value.
The carrying amount of cash and cash equivalents, investments, accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items. The Company believes the carrying amounts of its notes payable and long-term debt approximate fair value because the interest rates on these instruments are variable. The Company believes the carrying amount of derivative instruments approximates fair value based on quote market prices.
Revenue Recognition: The Company derives revenue primarily from sales of ethanol and WDG. The Company’s net sales are based upon written agreements or purchase orders that identify the amount of ethanol or WDG to be purchased and the purchase price. Shipments are made to customers from the Company’s inventory by truck or rail. Revenues are recognized when the ethanol has been delivered to a customer, provided that appropriate signed documentation of the arrangement, such as a signed contract, purchase order or letter of agreement, has been received, the fee is fixed or determinable and collectibility is reasonably assured.
The Company has qualified for the federal U.S. Department of Agriculture Bio Energy Program. The federal program is managed by the Commodity Credit Corporation and is designed to expand the production of fuel grade ethanol by offering incentives for incremental production compared to the same quarter of the prior year. The annually funded program runs through fiscal year 2006 and incentive payments are pro-rated if applications for incentives exceed the annual funding. The Company has included federal incentives of $75,085 in revenue for the period ended September 30, 2006.
Income Taxes: Since it is a limited liability company, the owners of Front Range Energy, LLC report individually the taxable income of the Company, based upon each owner's proportionate share of ownership. Therefore, no income tax provision has been made in the financial statements.
Advertising: Advertising costs are charged to expense as incurred. There were no advertising costs incurred during 2005 and 2004. Advertising costs for the period ended September 30, 2006 were $7,889.
Shipping and Handling: The Company includes shipping and handling costs with the cost of the item purchased and these costs are included in the cost of sales.
Estimates and Assumptions: 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. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses. Significant estimates are required as part of determining allowance for doubtful accounts, estimated lives of property, plant and equipment and long-lived asset impairments. It is at least reasonably possible that the actual results could differ from the estimates used.
Recently Issued Accounting Pronouncements: In September 2005, the Financial Accounting Standards Board ("FASB") reached a final consensus on Emerging Issues Task Force (“EITF”) Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty. EITF Issue No. 04-13 concludes that two or more legally separated exchange transactions with the same counterparty should be combined and considered as a single arrangement for purposes of applying Accounting Principles Board Opinion No. 29, Accounting for Nonmonetary Transactions, when the transactions were entered into "in contemplation" of one another. The consensus contains several indicators to be considered in assessing whether two transactions are entered into in contemplation of one another. If, based on consideration of the indicators and the substance of the arrangement, two transactions are combined and considered a single arrangement, an exchange of finished goods inventory for either raw material or work-in-process should be accounted for at fair value. The provisions of EITF Issue No. 04-13 are applied to transactions completed in reporting periods beginning after March 15, 2006. The Company does not expect this statement to have a material impact on its financial condition or its results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This new statement provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS No. 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. The required effective date of SFAS No. 157 is the first quarter of 2008. The Company is currently evaluating the impact this statement may have on its financial statements.
In September 2006, the FASB Issued FASB Staff Position (“FSP”) AUG AIR-1, Accounting for Planned Major Maintenance Activities. The principal source of guidance on the accounting for planned major maintenance activities is the Airline Guide. The Airline Guide permitted four alternative methods of accounting for planned major maintenance activities: direct expense, built-in overhaul, deferral, and accrual (accrue-in-advance). FSP AUG AIR-1 amended the Airline Guide by prohibiting the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods. The required effective date of FSP AUG AIR-1 is the first quarter of 2007. The Company does not anticipate FSP AUG AIR-1 to have a material impact on its financial statements.
2. Inventories
Inventories at September 30, 2006 (unaudited) are summarized as follows:
| Unprocessed grain and chemicals | | $ | 1,908,429 | |
| Work in process | | | 439,041 | |
| Finished products | | | 739,983 | |
| | | | | |
| Total | | $ | 3,087,453 | |
3. Property, Plant and Equipment
In March 2005, the Company entered into a design-build agreement (the “Design-Build Agreement”) with ICM, Inc. (“ICM”), a shareholder of the Company, for the design and construction of its Windsor Colorado production facility ("Windsor Plant"). In the Design-Build Agreement, ICM provided the Company with a contract price of $37,693,000 for construction of the facility. The Design-Build Agreement excludes the cost of site preparation, utilities, rail construction, fire safety systems, various equipment and vehicles, start-up inventory, working capital, and financing costs.
As of December 31, 2005 and 2004, the Company had incurred costs of $32,406,804, and $107,775, respectively, in connection with the construction of the Windsor Plant which has been included in construction in progress. Included in this amount is a total of $23,973,106, and $107,775 respectively, related to amounts incurred under the contract with ICM. The Windsor Plant achieved final completion in June 2006, at a total cost of $50,962,960. Included in this amount is a total of $38,047,903 related to amounts incurred under the contract with ICM.
As of December 31, 2005 and September 30, 2006, the Company had accounts payable due to ICM of $2,982,778 and $250,000, respectively, related to the construction in progress of an ethanol plant. Included in property, plant and equipment at September 30, 2006 and construction in progress at December 31, 2005 is capitalized interest of $772,525 and $16,858, respectively.
4. Notes Payable
In December 2005, the Company obtained a line of credit of $3,500,000 with First National Bank of Omaha which may be used to purchase inventory and support accounts receivable. The line of credit matures November 30, 2006 and bears an interest rate that will float at a rate equal to the 30-day London Interbank Offered Rate ("LIBOR") plus 3.50%. As of December 31, 2005, the interest rate was 7.89%. The line of credit is secured by substantially all the assets of the Company. The Company had no outstanding balance on this line of credit as of December 31, 2005 and September 30, 2006. The line of credit was renewed until November 30, 2007.
5. Long-Term Obligations
Long-term obligations consist of the following:
| | | (Unaudited) September 30, | | December 31, | |
| | | 2006 | | 2005 | | 2004 | |
| Note Payable - GMAC | | $ | 9,459 | | $ | 29,214 | | $ | - | |
| Water Rights | | | 1,213,098 | | | 1,613,098 | | | - | |
| Notes Payable - Bank | | | 30,927,256 | | | 5,248,800 | | | - | |
| | | | | | | | | | | |
| | | | 32,149,813 | | | 6,891,112 | | | - | |
| Less current maturities | | | 3,395,430 | | | 1,392,682 | | | - | |
| | | | | | | | | | | |
| Total Long-Term Obligations | | $ | 28,754,383 | | $ | 5,498,430 | | $ | - | |
Note payable - GMAC, is a non-interest bearing note to GMAC for a 2004 Chevrolet Silverado truck. The note is payable in monthly installments of $679, maturing June 16, 2009. The note is secured by the truck.
Water rights obligation relates to a lease agreement with the Town of Windsor for augmentation water in an amount of 500 acre-feet annually to use in the Company's production processes. The lease requires an initial payment of $400,000 and annual payments of $160,000 per year for the next ten years. The future payments were discounted using a 5.25% interest rate, comparable to available borrowing rates upon execution of the agreement. The obligation has been recorded as a capital lease and included in long-term obligations and the related asset included in property, plant and equipment.
Notes payable - bank - On December 1, 2005, the Company entered into a Construction Note (the "Construction Note") with First National Bank of Omaha (the “Lender”) for a debt financing (the "Debt Financing") in the aggregate amount of up to $35.9 million. The Debt Financing provided a portion of the total financing necessary for the completion of the Company's Windsor Plant. (See Note 3.)
The Debt Financing was initially in the form of a Construction Note that matured on the Final Completion Date, after which the Debt Financing was converted to a term loan (the "Term Loan"), that matures on the fifth anniversary of the closing of the Term Loan. The Construction Note interest rate floated at a rate equal to the 30-day LIBOR, plus 3.50%. The Company was required to pay the Construction Note interest monthly during the term of the Construction Note. The Term Loan amount is to be the lesser of (i) $35.9 Million or (ii) 60% of the total Project Cost.
Loan repayments on the Term Loan are to be due quarterly in arrears for a total of 20 payments beginning on the closing of the Term Loan and ending on its maturity date. The Debt Financing will be the only indebtedness permitted on the Windsor Plant. The Debt Financing will be senior to all obligations of the Company other than direct operating expenses and expenses incurred in the ordinary course of business.
The Debt Financing is secured by: (a) a perfected first priority security interest in all of the assets of the Company, including inventories and all right title and interest in all tangible and intangible assets of the Company; (b) a pledge of 100% of the ownership interest in the Company; (c) an assignment of all revenues produced by the Company; (d) the pledge and assignment of the Company’s material contracts and documents, to the extent assignable; (e) all contractual cash flows associated with such agreements; and (f) any other collateral security as Lender may reasonably request. In addition, the Construction Note is secured by a completion bond provided by ICM.
On August 10, 2006, the construction loan was converted into three separate loans consisting of swap, variable and revolving loans. The swap, variable and revolving loans mature in 5 years but are on a 10 year amortization. The terms of the converted loans are as follows:
| · | Swap loan is comprised of a term note in the amount of $17,963,618, with an interest rate that floats at a rate equal to the 90-day LIBOR, plus 3.00%. The Company entered into a Swap Contract with the Lender to provide a fixed rate of 8.16%. (See Note 6.) The swap loan matures in five years, but has required principal payments due based on a ten year amortization schedule. Quarterly payments are approximately $678,000, including interest, with final payment due August 10, 2011. |
| · | Variable loan is comprised of a term note in the amount of $12,963,618 and carries an interest rate that will float at a rate equal to the 90-day LIBOR, plus 3.50%. As of September 30, 2006, the interest rate was 8.87%. The variable loan matures in five years, but has required principal payments due based on a ten year amortization schedule. Quarterly payments are approximately $781,000, including interest, with final payment due August 10, 2011. |
| · | Revolving loan is comprised of a revolving note in the amount of $5,000,000 and carries an interest rate that will float at a rate equal to the 30-day LIBOR, plus 3.50%. On September 7, 2006, the Company paid off the revolving loan in the amount of $5,000,000. |
Upon conversion of the construction loan an escrow account was funded with the remaining loan proceeds. The account is restricted and available to pay outstanding construction retainage invoices. The Company submits the invoices to the title company for approval and payment, the escrow funds can only be released through the title company.
Commencing on August 11, 2007 and continuing quarterly thereafter until the fifth anniversary of the construction loan termination date or payment in full of the obligation, the Company is required to pay the bank an annual servicing fee in quarterly payments of $7,500. In addition, the Company shall make quarterly payments to the bank for an unused commitment fee equal to .000375% of the average unused portion of the long term revolving note and operating note.
The Company has available a letter of credit of up to $1,500,000. Upon issuance of any letter of credit, the Company shall pay the bank a commitment fee equal to a rate of 1.75% per annum on the stated amount of the letter of credit along with the bank fees associated with the issuance of such letter of credit.
The Company is subject to certain loan covenants, which are effective beginning in the fourth quarter of 2006. Under these covenants, the Company is required to maintain a certain fixed charge coverage ratio, a minimum level of working capital, and a minimum level of net worth, and the covenants set a maximum amount of additional debt that may be incurred by the Company. The covenants also limit the annual distributions made to members based on the Company’s leverage ratio.
During the year ending December 31, 2005, the Company incurred related debt issuance costs of $575,211. In addition, the Company incurred additional costs of $90,592 during the nine month period ended September 30 2006. These costs were capitalized and are being amortized over the term of the loan.
The aggregate maturities of all long-term obligations are as follows:
Year Ending September 30, | | (unaudited) | |
| 2007 | | $ | 3,395,430 | |
| 2008 | | | 3,674,424 | |
| 2009 | | | 3,990,315 | |
| 2010 | | | 4,331,627 | |
| 2011 | | | 4,702,504 | |
| Thereafter | | | 12,055,513 | |
| | | | | |
| Total | | $ | 32,149,813 | |
6. Derivatives
Commodity Risk - Non-Designated Hedges - As part of the Company’s risk management strategy, the Company occasionally execute futures contract or option combination strategies on forecasted corn purchase commitments. As of September 30, 2006, the Company had entered into futures contracts on corn that will settle in December 2006, giving it the right to purchase 50,000 bushels at $2.43 per bushel and sell 100,000 bushels at $2.70 per bushel. There were no material gains or losses associated with this futures contracts as of September 30, 2006.
Interest Rate Risk - Non-Designated Hedges - As part of the Company’s interest rate risk management strategy, the Company uses derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from rising variable interest rate costs associated with existing and anticipated borrowings. To meet these objectives the Company entered into a swap contract with First National Bank of Omaha, the Company’s construction and term loan lender, to provide a fixed rate of 8.16% on its swap loan. (See Note 5.)
7. Members Equity
As specified in the Company’s Operating Agreement, the Company has two classes of Units (Class A Units and Class B Units). Each outstanding Unit is entitled to one (1) vote on matters submitted to a vote of all members or submitted to a vote of a particular class of members.
Income and losses of the Company are to be allocated among the members in proportion to each member’s respective percentage of Units when compared with the total Units issued.
8. Profit Sharing
In February 2006, the Company started a 401(k) retirement plan for eligible employees. The Company makes discretionary contributions. There were no Company contributions for the period ended September 30, 2006 (unaudited).
9. Operating Equipment Leases
During 2006, the Company began leasing equipment under various operating leases. Total rent expense was $160,328 for the period ended September 30, 2006. There was no rent expense incurred during the nine months ended September 30, 2005 or during the years ending December 31, 2005 and 2004. Future minimum lease payments required by such operating leases are as follows for the years ending September 30 (unaudited):
| 2007 | | $ | 67,637 | |
| 2008 | | | 67,637 | |
| 2009 | | | 67,637 | |
| 2010 | | | 67,637 | |
| 2011 | | | 37,236 | |
| | | $ | 307,784 | |
10. Concentration of Credit Risk
Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions described below.
The Company maintains cash balances at financial institutions in its trade area. Accounts are secured by the Federal Deposit Insurance Corporation up to $100,000. The Company's bank balances may exceed $100,000. The Company also maintains a balance in a money market mutual fund that is not secured by Federal Deposit Insurance Corporation.
Sales to significant customers were as follows for the period ended September 30, 2006:
| Kinergy Marketing, LLC | | $ | 25,950,215 | |
| Pacific Ag Products | | | 2,820,813 | |
Both of the above companies are wholly owned subsidiaries of Pacific Ethanol, Inc. (See Notes 11 and 12.)
11. Commitments and Contingencies
On March 2, 2004, the Company entered into an Energy Management Agreement with US Energy Services, Inc. to provide energy infrastructure advisory services to the Company during the construction period and on-going energy management services following the completion of the plant. The initial term of this Agreement began on March 1, 2004 and will continue until six months after the Plant’s completion date (which occurred on June 9, 2006) with a month-to-month renewal option thereafter. For its services, the Company will pay US Energy Services, Inc. $2,500 per month plus pre-approved travel expenses.
On March 28, 2005, the Company entered into an Agreement with the Town of Windsor for augmentation water in an amount of 500 acre-feet annually to use in the Company's production processes. The term of the agreement is for ninety-nine (99) years. Commencing in year eleven, the Company agrees to reimburse the Town of Windsor its proportional share of maintenance expenses related to the Kern Reservoir storage facility not to exceed $100,000 in any single year and $200,000 in any seven-year period, as adjusted over time by changes in the Denver-Boulder consumer price index.
On August 19, 2005, the Company entered into a Wet Distillers Grains Marketing and Services Agreement with Pacific Ethanol California, Inc., a wholly-owned subsidiary of Pacific Ethanol, Inc., pursuant to which Pacific Ethanol California, Inc. will assist the Company in marketing Wet Distillers Grains for a term of at least three years. (See Note 12.) The Company is responsible for supplying all labor and equipment to load or unload trucks without charge to Pacific Ethanol California, Inc. and is required to provide storage for at least 72 hours of wet distiller grains production. Pacific Ethanol California, Inc. will use its best efforts to achieve the highest resale price available under prevailing market conditions. Pacific Ethanol California, Inc. will withhold a straight handling and market fee of 5%, with a minimum fee of $2.00 per ton, of the gross product charge to Pacific Ethanol California, Inc.’s customers. Pacific Ethanol California, Inc. will also withhold all reimbursable freight and transportation service costs.
On August 20, 2005, the Company entered into a Grain Delivery Agreement with Pacific Ag Products. (See Notes 10 and 12.) The Grain Delivery Agreement provides that the Company will receive corn necessary for ethanol production for a period of at least three years. Pursuant to the agreement, Pacific Ag Products will negotiate with supplying railroads on behalf of the Company to secure all shuttle incentives that are currently being offered to the market, negotiate all grain purchase contracts, facilitate train logistics to the Company’s terminal, provide risk management services for grain purchased, and provide market data and help in developing grain pricing forecasts. Pacific Ag Products is acting as an agent for the Company, and will be purchasing grain on behalf of the Company. Payment for grain will be directly paid by the company to the origin supplier and will be subject to industry standard payment terms for shuttle trains. For its service, the Company will pay Pacific Ag Products a fee of $1.00 per ton of corn.
On August 30, 2005, the Company entered into a Management Agreement with Pacific Ethanol, Inc., in which Pacific Ethanol, Inc. will provide management services to the Company with respect to general construction management support and general operations support for an anticipated period of at least three years. (See Note 12.) The Company has agreed to pay Pacific Ethanol, Inc. an annual fee of $150,000 for these services payable in monthly installments of $12,500.
On August 31, 2005, the Company entered into an Ethanol Marketing Agreement with Kinergy Marketing, LLC. The agreement is effective for three years with automatic renewals for additional one-year periods thereafter. (See Notes 10 and 12.) Pursuant to the terms of the agreement, Kinergy has the exclusive right to market and sell all of the Company’s ethanol production. The Company is to receive from Kinergy the gross payments received by Kinergy from third parties for forward sales of ethanol less certain transaction costs and fees. Kinergy may also deduct and retain an amount equal to 1.0% of the difference between the gross payments received by Kinergy and the transaction costs and fees. On August 9, 2006, the Company entered into an amendment and restatement of the Ethanol Marketing Agreement with Kinergy, which among other things, allows the Kinergy to make direct purchases from the Company.
On June 2, 2006, the Company entered into a Memorandum of Understanding with Windsor-Severance Fire Protection District. The Company agreed to install an aboveground storage tank, with equipment, for a storage capacity of 250,000 gallons of water by September 30, 2006. Windsor-Severance Fire Protection District has issued the Company a temporary certificate of occupancy. Upon completion of the above ground storage tank a permanent certificate of occupancy will be issued.
12. Subsequent Events
Acquisition of Member Interest - On October 17, 2006, Pacific Ethanol California, Inc., a wholly-owned subsidiary of Pacific Ethanol, Inc., purchased from Eagle Energy, LLC 10,095 Class B Voting Units of Front Range Energy, LLC and thereby acquired approximately 42% of the outstanding membership interest of the Company.
Extension of Agreements - On October 17, 2006, the Company amended its various agreements with Pacific Ethanol California, Pacific Ag Products, and Kinergy Marketing. The WDG Marketing and Services Agreement between the Company and Pacific Ethanol California was amended to extend the term until May 31, 2009. The Amended and Restated Ethanol Marketing Agreement between the Company and Kinergy Marketing was amended to extend the term until May 31, 2013. The Grain Delivery Agreement between the Company and Pacific Ag Products was amended to extend the term until May 31, 2009. No amendments were made to the Management Agreement.
